Title and Ownership Issues
Trust Deed Investors Should Understand
Part 2
Hello,
For any Investor who did not yet read Part 1 of this series, here is the easy link to that newsletter: https://pacificdirectmortgage.com/title-and-ownership-issues/
As with title and ownership issues discussed in Part 1, understanding how an entity borrower and Personal Guaranty work together helps an investor better understand how many private money loans are structured. Thus Part 2 of this series, as follows:
Entity Borrowers and Personal Guarantors
It is very common in private lending for the owner and borrower of an investment property to be a Limited Liability Companies (LLCs), Corporation, Partnership, or other legal entity. This is especially true with investment properties, fix-and-flip projects, and business-purpose loans.
There are many reasons borrowers choose to own real estate through an entity. However, from a lender’s perspective, an important distinction exists: the entity and the individuals who own the entity are generally separate from one another.
If ABC Investments LLC owns a property and borrows $500,000, ABC Investments LLC is the borrower that is responsible for the loan. John Smith, however, owns 100% of ABC Investments LLC, but this does not necessarily make John personally responsible for the debt.
This is where a Personal Guaranty can become important.
A Personal Guaranty is a separate agreement in which an individual agrees to personally guarantee certain obligations of the entity.
For example, if ABC Investments LLC is the borrower and John Smith signs a Personal Guaranty, the loan remains an obligation of ABC Investments LLC, but John has also agreed to personally stand behind the entity’s obligations as provided in the guaranty.
This can provide an additional source of recovery if the entity fails to perform.
Should an entity borrowing on the loan get dissolved, this would be a big reason a Personal Guaranty would be important. An LLC may cease doing business, be dissolved, become insolvent, or simply have little or no remaining assets. The guaranty is a separate obligation and may continue according to its terms, even if the borrowing entity is no longer operating.
Without a Personal Guaranty, the lender would only have recourse against the property securing the loan and the borrowing entity, but not necessarily against the individual owner(s) behind the entity.
A Personal Guaranty doesn’t replace the real estate collateral. Even with a strong Personal Guaranty, the real estate securing the loan remains extremely important. A guarantor’s financial condition can change; Assets can be sold, businesses can fail and just general circumstances can look very different one or two years after a loan closes than they did on the day it funded.
A Personal Guaranty is therefore an additional form of support for the loan rather than a replacement for evaluating the underlying real estate and overall transaction.
It is also worth remembering that not every entity loan is identical. Some transactions may have one guarantor, while others may have multiple guarantors. The structure often depends on the ownership of the entity, the purpose of the loan, and the overall transaction.
The more familiar investors become with these common lending practices, the better equipped they are to evaluate each opportunity on its own merits.
Warm regards,
Ken Walker
Broker/Owner
Pacific Direct Mortgage & Real Estate, Inc
DRE #01858042 / NMLS #1221130
Phone: 707-708-0797
Address: 1400 N Dutton Ave #22 Santa Rosa, CA 95401
Disclaimer: This newsletter is provided for general educational purposes only. It is not intended as legal, tax, or investment advice, and should not be relied upon as such. Every transaction is unique, and applicable laws may vary depending on the specific facts and circumstances. Investors should perform their own independent due diligence and consult their own legal, tax, or financial advisors before making any investment decision.
