If you are applying for a commercial real estate loan, there is a good chance your lender will ask you to sign a personal guarantee. This requirement catches many borrowers off guard, especially those who assumed the property itself would serve as sufficient collateral. Understanding what a personal guarantee means, when it is required, and how to negotiate better terms can save you significant financial exposure.
A personal guarantee on a commercial real estate loan makes you individually responsible for repaying the debt if your business entity defaults. According to the NCUA Examiner's Guide, lenders use personal guarantees as a risk mitigation tool that ensures borrowers have skin in the game beyond the collateral property. For borrowers, this means your personal assets, including your home, savings, and investments, could be at risk.
This guide breaks down everything you need to know about personal guarantees in commercial lending, from the different guarantee structures to negotiation strategies and non-recourse alternatives.
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What Is a Personal Guarantee on a Commercial Real Estate Loan?
A personal guarantee is a legal agreement in which an individual borrower pledges their personal assets to secure a commercial mortgage held by a business entity such as an LLC or corporation. If the borrowing entity defaults on the loan, the lender can pursue the guarantor's personal assets to recover the outstanding debt.
Most commercial real estate loans are made to business entities rather than individuals. Without a personal guarantee, the lender's only recourse in a default scenario would be to seize and sell the collateral property. If the property value has declined or the sale proceeds fall short of the outstanding balance, the lender absorbs the loss. A personal guarantee closes that gap by giving the lender a secondary source of repayment.
The key components of a personal guarantee include:
- Guarantor identification , naming the individual(s) personally responsible
- Scope of liability , defining whether the guarantee covers the full loan amount or a limited portion
- Triggering events , specifying the conditions under which the guarantee becomes enforceable
- Duration , establishing how long the guarantee remains in effect
- Waiver provisions , outlining any rights the guarantor waives by signing
For borrowers with strong financials and stabilized properties, the personal guarantee may feel like a formality. But as Restructuring Matters documented in a recent case study, what starts as a "formality" can become a multi-million dollar personal liability when market conditions shift.
What Is the Difference Between Limited and Unlimited Personal Guarantees?
Not all personal guarantees carry the same level of risk. The distinction between limited and unlimited guarantees is one of the most important concepts for commercial borrowers to understand before signing any loan documents.
Unlimited Personal Guarantees
An unlimited personal guarantee makes you liable for the entire outstanding loan balance, plus accrued interest, late fees, legal costs, and any other expenses the lender incurs during collection. There is no cap on your exposure. If you default on a $5 million loan and the property sells for $3 million at foreclosure, you would owe the remaining $2 million plus all associated costs from your personal assets.
Unlimited guarantees are the most common type required by traditional banks and credit unions for commercial real estate loans. According to Harbour Capital, lenders favor unlimited guarantees because they provide full recourse against the borrower's personal wealth.
Limited Personal Guarantees
A limited personal guarantee caps your personal liability at a specific dollar amount or percentage of the loan balance. For example, a 25% limited guarantee on a $4 million loan would cap your personal exposure at $1 million regardless of the total deficiency after foreclosure.
Limited guarantees are more common in partnership structures where multiple sponsors share the guarantee obligation. Each partner may guarantee a portion proportional to their ownership stake.
Joint and Several Guarantees
In a joint and several guarantee structure, each named guarantor is individually responsible for the full loan amount. The lender can pursue any single guarantor for the entire balance, not just their proportional share. This structure gives lenders maximum flexibility in collection and is commonly required when multiple partners are involved in a deal.
Springing Guarantees
A springing guarantee is not active at loan origination but "springs" into effect when certain triggering events occur. These triggers typically include borrower fraud, voluntary bankruptcy filing, environmental violations, or other "bad boy" acts. Springing guarantees are the standard carve-out structure used in CMBS and conduit loans that are otherwise non-recourse.
Can You Get a Commercial Loan Without a Personal Guarantee?
Yes, but your options are more limited and the qualification requirements are stricter. Non-recourse commercial loans do not require a personal guarantee, meaning the lender's only recourse in a default is the collateral property itself.
According to Commercial Real Estate Loans, the following loan types are generally available on a non-recourse basis:
- CMBS/Conduit loans , the most common source of non-recourse commercial financing, available for stabilized properties with loan amounts typically above $2 million. Learn more about conduit loan structures.
- Fannie Mae multifamily loans , available for apartment properties with 5+ units through Fannie Mae's DUS (Delegated Underwriting and Servicing) program
- Freddie Mac multifamily loans , similar to Fannie Mae programs, targeting stabilized apartment communities
- HUD/FHA multifamily loans , government-insured loans offering non-recourse terms with some of the longest fixed-rate periods available
- Life insurance company loans , portfolio lenders that often provide non-recourse terms for high-quality, stabilized commercial properties
To qualify for non-recourse financing, borrowers typically need:
- A stabilized property with strong occupancy (usually 85%+ for at least 90 days)
- Debt service coverage ratios of 1.25x or higher (use our DSCR calculator to check your numbers)
- Experienced sponsorship with a proven track record
- A property located in a primary or strong secondary market
- Loan-to-value ratios at or below 65-75%
Even non-recourse loans include "bad boy" carve-outs that can convert the loan to full recourse if the borrower commits fraud, files a voluntary bankruptcy petition, or violates specific loan covenants. For a full comparison of these structures, read our guide on recourse vs non-recourse commercial loans.
Are Personal Guarantees on Commercial Loans Negotiable?
Personal guarantees are almost always negotiable to some degree. The extent of your negotiating leverage depends on your financial strength, the property's performance, the loan-to-value ratio, and the competitive lending environment. According to the Bench & Bar of Minnesota, early-stage negotiation of guarantee terms is critical because borrowers have far less bargaining power once a commitment letter is signed.
Here are proven strategies for negotiating more favorable guarantee terms:
1. Request a limited guarantee instead of unlimited. Ask the lender to cap your personal exposure at a specific dollar amount or percentage of the loan balance. A common starting point is requesting a guarantee limited to 25-50% of the loan amount.
2. Negotiate a burn-down provision. A burn-down (or burn-off) provision reduces your guarantee obligation over time as you demonstrate consistent loan performance. For example, the guarantee might reduce by 25% each year for the first four years, eventually reaching zero.
3. Set a time limit on the guarantee. Request that the personal guarantee expire after a set period, such as the first 24-36 months of the loan term, provided all payments have been made on time.
4. Offer additional collateral instead. Rather than a personal guarantee, propose pledging a specific asset such as a certificate of deposit, another property, or a securities account. This limits your exposure to a defined asset rather than your entire net worth.
5. Reduce the guarantee through principal paydown. Negotiate terms where the guarantee amount decreases in proportion to the outstanding loan balance as you make principal payments.
6. Exclude specific assets. If a full guarantee is unavoidable, negotiate to exclude certain assets such as your primary residence or retirement accounts from the guarantee's reach.
Your negotiating position is strongest when you bring a stabilized, well-performing asset with strong cash flow, a low loan-to-value ratio, and a track record of successful commercial real estate investments. Review the details in your commercial loan term sheet carefully before signing.
Ready to explore your options? Contact Clearhouse Lending to discuss guarantee structures and find the right loan program for your situation.
What Happens If You Default on a Personal Guarantee?
Defaulting on a personally guaranteed commercial loan triggers a series of consequences that extend well beyond losing the property. Understanding the full scope of what can happen will help you appreciate why guarantee negotiation matters.
Immediate Consequences
When a default occurs, the lender will typically pursue the collateral property first through foreclosure. If the foreclosure sale does not fully satisfy the outstanding debt, the lender will pursue a deficiency judgment against the guarantor. This means the lender obtains a court order requiring you to pay the remaining balance from your personal assets.
According to AllLaw, lenders can pursue the following personal assets to satisfy a deficiency judgment:
- Bank accounts and investment portfolios
- Real estate holdings, including your primary residence in many states
- Business interests and partnership shares
- Vehicles and other tangible personal property
- Wage garnishment in some jurisdictions
Credit and Financial Impact
A default on a personally guaranteed loan will severely damage your personal credit score. According to Business News Daily, this damage makes it significantly harder to obtain future financing for both personal and business purposes. Even when you do qualify for new credit, you will likely face higher interest rates and more restrictive terms for years afterward.
Bankruptcy Considerations
Filing personal bankruptcy can discharge a personal guarantee obligation in many cases. However, as Justia explains, filing business bankruptcy alone does not eliminate your personal guarantee. The guarantee is your individual obligation, separate from the business entity. Only filing personal bankruptcy (Chapter 7 or Chapter 13) can potentially discharge the guarantee debt.
It is important to note that certain debts may be nondischargeable, particularly if fraud was involved in obtaining the loan.
Which Commercial Loan Types Do Not Require Personal Guarantees?
The requirement for a personal guarantee varies significantly by loan type, lender, and deal structure. Here is a breakdown of how different commercial loan programs treat personal guarantees:
CMBS/Conduit Loans
CMBS loans are the most widely available source of non-recourse commercial real estate financing. According to CMBS Loans, the vast majority of CMBS loans are structured as non-recourse with standard bad boy carve-outs. These loans are available for most stabilized commercial property types including office, retail, industrial, multifamily, and hospitality. Minimum loan amounts typically start at $2 million. Explore Clearhouse Lending's conduit loan programs for more details.
DSCR Loans
DSCR loans focus primarily on the property's income-generating ability rather than the borrower's personal finances. While DSCR loans from private lenders may not always require a full personal guarantee, many still require limited or springing guarantees. The emphasis on property cash flow, measured by the debt service coverage ratio, means borrowers with strong, stabilized assets may have more leverage to negotiate guarantee terms. Check your property's DSCR using our calculator.
Agency Multifamily Loans
Fannie Mae and Freddie Mac multifamily loan programs are generally non-recourse for qualifying apartment properties. These programs offer some of the most favorable terms in commercial lending, combining competitive rates with non-recourse structures for borrowers who meet occupancy, property condition, and financial requirements.
Life Insurance Company Loans
Life company permanent loans often provide non-recourse financing for institutional-quality commercial real estate. These lenders typically require lower leverage (50-65% LTV), strong property fundamentals, and experienced sponsorship. In return, they offer competitive rates and non-recourse terms without the complexity of CMBS servicing.
Bank Loans
Traditional bank loans almost always require a personal guarantee. Banks are portfolio lenders that keep loans on their balance sheet, and the personal guarantee is a standard risk management tool. Some banks may offer limited guarantees for established borrowers with strong banking relationships.
SBA Loans
SBA 7(a) and 504 loans require personal guarantees from anyone owning 20% or more of the borrowing entity. According to Bankrate, this requirement is mandated by the SBA and is generally not negotiable.
Not sure which loan program fits your deal? Contact Clearhouse Lending for a no-obligation consultation on non-recourse options.
How Do Personal Guarantees Affect Your Net Worth and Future Borrowing?
The impact of a personal guarantee extends beyond the immediate loan transaction. Guarantees create contingent liabilities that affect your overall financial profile and can limit your ability to pursue future investments.
Impact on Personal Financial Statements
When you sign a personal guarantee, you are required to disclose it as a contingent liability on your personal financial statement. Lenders evaluating you for future loans will factor these contingent liabilities into their underwriting analysis. A $10 million personal guarantee on an existing loan reduces your effective net worth by that amount in the eyes of most lenders.
Borrowing Capacity Limitations
Multiple personal guarantees can quickly erode your borrowing capacity. If you have guaranteed three separate $5 million loans, you carry $15 million in contingent liabilities. Even if all three properties are performing well, future lenders will assess your ability to cover these obligations in a worst-case scenario.
Portfolio Growth Constraints
For active commercial real estate investors, personal guarantees can become the primary constraint on portfolio growth. Each new guarantee reduces the capital available for future deals and increases the risk concentration on a single individual.
Strategies to Manage Guarantee Exposure
- Use non-recourse financing for larger, stabilized properties through CMBS or agency programs
- Negotiate burn-down provisions to reduce exposure over time on recourse loans
- Bring in co-guarantors to share the guarantee obligation across multiple principals
- Maintain a diversified personal balance sheet with sufficient liquidity to cover potential shortfalls
- Consider guarantee insurance products that can offset personal exposure for a premium
- Build toward non-recourse eligibility by stabilizing properties and building a track record
What Should You Know Before Signing a Personal Guarantee?
Before you sign any personal guarantee, take these steps to protect yourself and make an informed decision:
Review Every Clause
Personal guarantees are dense legal documents that may contain provisions beyond basic repayment obligations. Look for clauses covering:
- Triggering events beyond simple payment default
- Cross-default provisions tying the guarantee to other loans
- Acceleration clauses that make the full balance due immediately
- Waiver of rights to notice, jury trial, or other legal protections
Get Legal Representation
Hire an attorney experienced in commercial real estate finance to review the guarantee before you sign. The cost of legal review is minimal compared to the potential exposure a guarantee creates.
Understand Your Total Exposure
Calculate your total guarantee obligations across all loans and compare that to your liquid net worth. A general guideline is to maintain liquid assets equal to at least 10-15% of your total guarantee exposure.
Document Everything
Keep copies of all guarantee documents, correspondence with the lender regarding guarantee terms, and any amendments or modifications. If a dispute arises, documentation of negotiated terms can be critical.
Have questions about your specific situation? Reach out to Clearhouse Lending to review your options with an experienced commercial lending advisor.
Frequently Asked Questions
Does an LLC protect me from a personal guarantee?
No. While an LLC protects you from general business liabilities, a personal guarantee is a separate agreement you sign as an individual. It specifically pierces the LLC's liability protection for that particular debt obligation. The guarantee creates a direct legal path from the lender to your personal assets regardless of the LLC structure.
Can a personal guarantee be removed after closing?
In some cases, yes. Some lenders will agree to release a personal guarantee after the borrower demonstrates a track record of consistent payments, typically over 12-36 months. This must usually be negotiated before closing and included in the loan documents. Refinancing into a non-recourse loan program is another common strategy for removing an existing guarantee.
What is a bad boy carve-out guarantee?
A bad boy carve-out is a type of springing guarantee included in non-recourse loans. It converts the loan from non-recourse to full recourse if the borrower commits specific prohibited acts such as fraud, misrepresentation, voluntary bankruptcy filing, unauthorized transfer of the property, or environmental contamination. These carve-outs are standard in CMBS lending.
How much net worth do lenders require for a personal guarantee?
Most lenders want to see the guarantor's net worth equal to or exceeding the loan amount. Liquid assets (cash, marketable securities) typically need to represent at least 10-15% of the loan balance. Requirements vary by lender, loan program, and deal specifics.
Can my spouse be required to sign a personal guarantee?
It depends on the state and the lender's requirements. In community property states, lenders may require spousal consent or signature to ensure the guarantee is enforceable against community assets. In separate property states, spousal guarantees are less common but may be requested if the spouse has significant assets the lender wants included as recourse.
What is the statute of limitations on a personal guarantee?
The statute of limitations varies by state, typically ranging from 4 to 10 years from the date of default or last payment. However, the guarantee document itself may include provisions that extend the enforcement period. Consult with a local attorney to understand the rules in your jurisdiction.