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By Jerry Sager
Senior managing director
Chase Capital Advisors
continued on page 62 »
Save the Deal With a Show of Faith
A personal-guarantee compromise helps bridge the gap between borrower and lender
Risk versus reward
Consider the implications of a scenario
where you approach a lender with a
loan currently in default or with a new
construction loan for a hotel, and you
tell the lender that your client has invested 25 percent equity and will not be
putting any more money into the deal.
The borrower is asking for the lender
to fund the remaining needed capital:
75 percent of the cost of the project.
The bottom line is that the lender
will have more money in the deal than
anyone else, yet stands to benefit only
from the outstanding balance of the
loan, while your client — the borrower or
developer — will reap the greatest rewards from the deal. The client is in for
25 percent of the cash and the lender is
in for 75 percent of the cost. The developer gets the majority of the return from
profits, but the lender must make do
with, say, 8 percent on the investment
for the construction period and until the
deal begins to show positive cash flow.
In a deal such as this, the lender is
taking on the clear majority of the risk
in the deal at the time when that risk
is the greatest. This brings us back to
the original question: If the borrower
does not believe in the deal enough
to offer the guarantee during its high-risk stage, what is the incentive for the
lender to believe that the risk is worth
taking and thus close the loan?
In some cases, lenders do see the incentive for doing such a deal. After all,
there are deals in which the given borrowers are high-net-worth developers
with a proven track record and who are
likely to be a solid bet, but wish to protect their accumulated wealth. They are
opposed to risk and want their lenders
to essentially be their partners.
But often, the question of whether the
deal will get done comes down to the
sensitive issue of borrowers and lenders
disagreeing about personal guarantees.
How do you, as a broker, bridge the gap?
After all, banks are here to close deals.
As a commercial mortgage bro- ker, imagine telling a potential ender that you simply do not
have any faith in your deal and that
you’re not sure it will be successful.
It’s not exactly confidence-inspiring,
is it? But that is exactly the message
borrowers send to lenders when they
state that they are not willing to offer
their personal guarantee.
The reality of life in the lending world
is simple. In many states, it’s difficult
for lenders to pursue a personal guarantee, but they want to know that their
borrowers are fully behind their deals
and committed to the success of the
business they’re financing. Given today’s more conservative loan-to-value
(LTV) requirements and lenders’ focus
on the quality of appraisals, it may
seem that a borrower should be willing
to provide a personal guarantee, unless, of course, your client wants to borrow and run. But sometimes borrowers
do not want to put up such a guarantee.
As is often the case, with a bit of creativity and open minds on both sides of the
table, a solution is possible.
Find middle ground
The first possible solution may be
simple: Offer to limit the lender’s
exposure. An example of this is to
convince your client to provide a guarantee that will be called on only in the
event of a default and the liquidation
of the deal’s assets.
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Jerry Sager is senior managing director of
Chase Capital Advisors, a leading principal
lender to hospitality, golf-course and special-asset owners. With more than 25 years of
history of lending to owners and management
companies, his team has provided financing
for the acquisition, construction, expansion and refinancing of specialized assets
throughout the United States. Reach Sager at
(212) 244-7400 or JSager@Chase-Ca.com. Find
additional information about Chase Capital
Advisors at Chase-Ca.com.