Understanding the role of the loan guarantor will help you better understand how strong our group is financially when it comes to acquiring large, institutional level assets. Between our three managing partners we sign the loans on all our acquisitions and do not use any outside person or group to help us meet the stringent requirements to signing our own loans. In other words, we don’t need mommy or daddy to help us get a loan.
What is a Loan Guarantor?
A loan guarantor is someone that the bank has underwritten with a loan and has done a full background check on in order to determine their credit worthiness. The credit worthiness is determined based on the size of the loan and the size of the asset being acquired.
In the case of a recourse loan, in the event of a loan default, the bank will try to recuperate most of the money from the asset. However, if the amount of money recouped from the asset is not enough to fully satisfy the loan balance, then the bank may seek additional funds directly from the borrower and his/her personal assets in order to make the lender whole. Many institutional lenders including Fannie Mae, Freddie Mac, CMBS, Bridge, LifeCo, et cetera all provide non-recourse financing.
Loan Guarantor Requirements
The lender requirements to become a loan guarantor, especially non-recourse loans, are quite stringent as these are the highest risk for the lender. The guarantor must be very strong financially as the guarantor must have the financial means to ensure the property’s income is used for the property.
There are generally three requirements for a loan guarantor that must be met:
– Net worth: The loan guarantor(s) must have a combined net worth of the overall loan balance for each loan. This net worth must be maintained during the entire duration of the loan period.
– Liquidity: The loan guarantor(s) must currently have a combined cash liquidity of 10% of the overall loan balance for each loan. This cash liquidity must also be maintained during the entire duration of the loan period.
– Experience: The loan guarantor(s) must be experienced borrowers and have experience managing assets in the current asset size as the property for the loan.
The loan guarantor(s) are typically compensated by receiving a portion of the GP-equity in an offering and also a guarantor fee equal to 1-3% of the overall transaction. This allows them to maintain the net worth and liquidity requirements throughout the duration of the loan.
What is a non-recourse loan?
Non-recourse loans are hard to get due to the strict borrower requirements discussed earlier. A non-recourse loan is a loan from an institution lender (Fannie Mae, Freddie Mac, CMBS, Bridge, LifeCo, et cetera) on a very well qualified asset with a typical value over $5-10 million. The non-recourse part of the loan is very attractive to well-qualified borrowers and helps to reduce the liability of the borrower.
However, there are certain scenarios which could cause the loan to be converted from non-recourse to a full recourse loan which continues to open the loan guarantor up to future liability depending on the performance of the asset.
Can a non-recourse loan be converted to full recourse?
All non-recourse loans come with what are called “bad-boy carve-outs,” which could cause the loan to be converted from a non-recourse loan to a recourse loan.
These bad-boy carve-outs include any negligence from the borrower or anything that could be considered fraudulent, like falsifying financial statements or tax returns so as to represent the borrower or property are stronger than they actually are.
Why is this important to you as a passive investor?
Understanding the requirements of a loan guarantor allows you to better understand the financial strength of the sponsor/operator where you are investing your hard-earned cash.
Many groups must rely on an outside person or group in order to acquire large, institutional quality assets since they do not have the strength internally to be a loan guarantor. In other words, they need to ask mommy or daddy to sign on their loan. This is a great question to ask a potential operator where you are looking to place your own cash.
