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Are Personal Guarantees for Commercial Leases Really Necessary?

Personal Guarantees and Commercial LeasesMost of us have heard the anecdotal advice that you should never mix your personal and business finances – which leaves many business owners (tenants) and property owners (landlords) uncertain of whether personal guarantees for commercial leases are acceptable.

The short answer is … absolutely!

In fact, personal guarantees are an incredibly important risk mitigation strategy for landlords – especially those smaller landlords who would be deeply impacted if a commercial tenant defaults on the lease.

What Are Personal Guarantees in Commercial Leases?

Just like in the residential rental market, commercial property owners want to rent to tenants who have great credit, a proven history of paying bills on time, reliable cash flow, and relatively low risk of suddenly being unable to meet their obligations.  However, that can be a difficult standard to meet for many small businesses, start-ups, new restaurants, and retail shops.  In fact, even something positive, like a recent growth spurt, can send red flags to a potential landlord.  This is where personal guarantees come into play.

Just as it sounds, personal guarantees for commercial leases are contractual agreements that hold the business owner(s) or executive(s) financially liable for the lease in the event that the business entity defaults.

For example: if a company goes out of business four years into its five-year lease, the business owner’s personal guarantee means he or she will be personally responsible for paying that last year’s rent to the landlord.

It may sound like that is a good deal for landlords but a bad one for tenants.  However, that’s not actually the case.

How Do Personal Guarantees Help Commercial Tenants?

Without personal guarantees for commercial leases, many companies would be stuck in a “chicken or the egg” scenario.  They need to have great credit and reliable cash flow to lease their ideal space but can’t generate consistent revenue if they aren’t in the right location.  In other words, they need that ideal commercial space in order to grow into an “established” company with steady sales and reliable customers.  Personal guarantees give those businesses a way to get approved despite not yet being able to meet the high standards of commercial landlords.

Why Are Personal Guarantees Important for Commercial Landlords?

There’s a reason commercial leases often have personal guarantee clauses.  Before the 2008 recession, they were less common but at the peril of the many landlords who were left with vacant spaces, mounting bills, and financial losses when their tenants went bankrupt.

Realistically, personal guarantees aren’t necessary in all types of commercial leasing.  There’s a different level of investment for landlords who rent office space compared to those who rent retail storefronts, restaurant locations, and industrial properties.

Here are some questions to consider when weighing the pros and cons of personal guarantees and commercial leases:

  • Are there tenant improvement costs to consider, and at what point in the tenant’s lease will I recover those costs?
  • What level of demolition and renovation would be required for the space to be ready for a new tenant?
  • Based on the local real estate market, how difficult would it be to find new tenants?

Whether you own large commercial properties or a smaller one, it’s important that you understand how to protect yourself, what can be negotiated, and what should be non-negotiable.

Get the Representation You Need for Commercial Lease Negotiations

Your Southern California real estate specialists.  Allwest Properties, Inc. offers a full range of real estate services for commercial, industrial, and multi-family residential properties throughout Los Angeles, Orange, San Diego, Riverside, and San Bernardino counties.

With more than 25 years of industry experience, we offer a comprehensive suite of solutions, including sales, leasing, tenant representation, landlord representation, leased investments, site selection, and consulting services.  Our goal is to exceed our clients’ expectations with each and every transaction.

Contact us today by calling 888-400-2966 or emailing info@allwestproperties.com.

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  • Client Testimonials

    Paul M.

    “Craig, I would like to thank you for your expertise in helping me along with the Mies Family Trust in selling the rental properties located in Long Beach and Costa Mesa. These transactions went very smoothly and professionally.” I would also like to thank you for assisting the Mies Family Trust in the acquisition of the 8 unit apartment building in Santa Ana. Every year this building has proven to be a winner for the Trust with some great cash flow. Since acquiring this building, we have been able to refinance and pull out some built up equity and purchase a 10 unit building in Long Beach in which you assisted.

    All of our transactions over the years have gone very smoothly and I look forward to working with you again in my next real estate transaction. I will also continue to recommend you to my clients.”
    2016-10-29T19:08:21-07:00
    “Craig, I would like to thank you for your expertise in helping me along with the Mies Family Trust in selling the rental properties located in Long Beach and Costa Mesa. These transactions went very smoothly and professionally.” I would also like to thank you for assisting the Mies Family Trust in the acquisition of the 8 unit apartment building in Santa Ana. Every year this building has proven to be a winner for the Trust with some great cash flow. Since acquiring this building, we have been able to refinance and pull out some built up equity and purchase a 10 unit building in Long Beach in which you assisted. All of our transactions over the years have gone very smoothly and I look forward to working with you again in my next real estate transaction. I will also continue to recommend you to my clients.”

    Ken E.

    “Craig Wise did a great job in selling my rental property. He provided me with quality information about pricing it correctly, advertised and marketed it effectively, and provided solid guidance in negotiating a sales price. Craig was extremely professional in handling all aspects of my sale and got me top dollar for my property after only being on the market a few weeks. Craig will be my realtor for any future real estate needs.”
    2016-10-29T19:08:59-07:00
    “Craig Wise did a great job in selling my rental property. He provided me with quality information about pricing it correctly, advertised and marketed it effectively, and provided solid guidance in negotiating a sales price. Craig was extremely professional in handling all aspects of my sale and got me top dollar for my property after only being on the market a few weeks. Craig will be my realtor for any future real estate needs.”

    Estella G

    “I have known Craig Wise for over twenty years on both a personal and business level. Craig has done a phenomenal job in building a loyal list of clients and a very professional image. Craig’s success stems from his ability to keep his client’s needs a high priority and consistently meeting expectations, even in the toughest markets.

    My house was recently sold by Craig in only 2 weeks. He thoroughly impressed me with his tenacity and dedication in finding me a single story home in this challenging market.

    Craig is an ideal realtor, he is a savvy yet humble individual, has a very energetic work ethic, is always eager to go above and beyond for his clients.”
    2016-10-29T19:10:18-07:00
    “I have known Craig Wise for over twenty years on both a personal and business level. Craig has done a phenomenal job in building a loyal list of clients and a very professional image. Craig’s success stems from his ability to keep his client’s needs a high priority and consistently meeting expectations, even in the toughest markets. My house was recently sold by Craig in only 2 weeks. He thoroughly impressed me with his tenacity and dedication in finding me a single story home in this challenging market. Craig is an ideal realtor, he is a savvy yet humble individual, has a very energetic work ethic, is always eager to go above and beyond for his clients.”

    Wally L.

    “I had the pleasure of working with Craig while searching for a rental home for my family in South Orange County. As this was a new process for my wife and I, it was great to finally find a real estate professional that genuinely cared about us and our needs. Craig went out of his way to answer questions, solve issues when they arose, and step us through the necessary paperwork. He was always on time and had a wealth of knowledge to share with us. I would highly recommend Craig and will be using his services in the future.”
    2016-10-29T19:06:51-07:00
    “I had the pleasure of working with Craig while searching for a rental home for my family in South Orange County. As this was a new process for my wife and I, it was great to finally find a real estate professional that genuinely cared about us and our needs. Craig went out of his way to answer questions, solve issues when they arose, and step us through the necessary paperwork. He was always on time and had a wealth of knowledge to share with us. I would highly recommend Craig and will be using his services in the future.”

    NTGTestimonial

    “I cannot tell you how happy I am to enthusiastically recommend the services of Allwest Properties.

    Allwest made it possible for our rapid expanding law firm to relocate to a much larger office space. We chose Allwest not only for their expertise in the industry, but the personal level of service they provide, as well as expert negotiation skills. They not only negotiated a cost effective lease rate for our new space but also received an allowance to cover the rent on the remaining lease term for our existing space -- well above our expectations.

    Their knowledge, extensive experience, responsiveness, familiarity with this areas commercial real estate and network of related professionals make them the ”go to professional” to get things done. The process could have not gone any better! I am fully convinced that if they have not been involved, none of this would happen.”

    - Newport Trial Group
    2016-10-29T19:02:51-07:00
    “I cannot tell you how happy I am to enthusiastically recommend the services of Allwest Properties. Allwest made it possible for our rapid expanding law firm to relocate to a much larger office space. We chose Allwest not only for their expertise in the industry, but the personal level of service they provide, as well as expert negotiation skills. They not only negotiated a cost effective lease rate for our new space but also received an allowance to cover the rent on the remaining lease term for our existing space -- well above our expectations. Their knowledge, extensive experience, responsiveness, familiarity with this areas commercial real estate and network of related professionals make them the ”go to professional” to get things done. The process could have not gone any better! I am fully convinced that if they have not been involved, none of this would happen.” - Newport Trial Group

    Gina G.- Chomp Chomp Nation

    Craig has a broad skill set which has resulted in successful site selection based on short and long term brand strategies. Craig is a superior negotiator and expert in commercial leasing which have a dramatic effect on the bottom line of any growing business. Craig’s business acumen and integrity are second to none.

     
    2016-10-29T19:03:36-07:00
    Craig has a broad skill set which has resulted in successful site selection based on short and long term brand strategies. Craig is a superior negotiator and expert in commercial leasing which have a dramatic effect on the bottom line of any growing business. Craig’s business acumen and integrity are second to none.  

    John T.

    “Craig is detail oriented and looks out to protect the interests of his clients. He’s professional, courteous and cooperative. He would be a great person to have on your side.”
    2016-10-29T19:05:54-07:00
    “Craig is detail oriented and looks out to protect the interests of his clients. He’s professional, courteous and cooperative. He would be a great person to have on your side.”

    Robert B.

    “I count it a great privilege to recommend Craig Wise for any of your Real Estate dealings. I first became acquainted with Craig as we worked side by side in the Real Estate Department of a major lender. During the fifteen years we have know each other we have gone from coworkers to good friends. I have always know Craig to deal with people with the utmost of character. This is the reason that when my son and daughter-in-law were first time buyers and I asked Craig to assist them through the entire process and he made sure the transaction went smoothly. You will not find someone who combines knowledge, skill and integrity to a greater degree than Craig.”
    2016-11-02T21:48:42-07:00
    “I count it a great privilege to recommend Craig Wise for any of your Real Estate dealings. I first became acquainted with Craig as we worked side by side in the Real Estate Department of a major lender. During the fifteen years we have know each other we have gone from coworkers to good friends. I have always know Craig to deal with people with the utmost of character. This is the reason that when my son and daughter-in-law were first time buyers and I asked Craig to assist them through the entire process and he made sure the transaction went smoothly. You will not find someone who combines knowledge, skill and integrity to a greater degree than Craig.”

    Chris Z

    Craig - thank you, I sincerely appreciate your dedication to getting things accomplished with the commercial association. You showed great fortitude given the difficult personalities over the years and I thank you for everything you have done

    2016-11-15T05:27:27-07:00
    Craig - thank you, I sincerely appreciate your dedication to getting things accomplished with the commercial association. You showed great fortitude given the difficult personalities over the years and I thank you for everything you have done