NUTS & BOLTS
RISK MITIGATION
A personal guarantee can take several forms: UNLIMITED , when the real estate investor borrowing the money guarantees the entire loan amount, all legal fees, accrued interest, and costs associated with collecting on the loan even if the collateral and additional assets belonging to the borrower and unrelated to the loan must be sold in order to do so. LIMITED , when there is some limit set on the amount of liability that the borrower will assume if the debt cannot be paid according to the initial terms of the loan. CONDITIONAL , when a certain series of events “triggers” the guarantee. For example, if a borrower fails to meet certain requirements during repayment, then the lender may step in and take over the deal. Note: Full-recourse loan terms are easily confused with personal guarantees because they essentially put many of the same assets “at risk” if a borrower fails to meet the terms of the loan. A full-recourse loan allows the lender to sue the borrower personally for loss not recovered by liquidation of the collateral. However, if the borrower is an LLC owned by an investor, then a full-recourse loan that does not have a personal guarantee only enables the
lender to pursue the assets owned by the LLC to compensate for a loss, not the personal assets of the borrower.
A NEWLEVEL OF TEAMWORK While a full-recourse loan or a personal guarantee on a loan might sound intimidating at first, many investors actually prefer to work with hard-money lenders who offer personal guarantees on their loans. The guarantee can create a team atmosphere by putting everyone involved in the loan on the same side, so to speak. “When there is a personal guarantee involved, every investor knows that they are looking at the same due diligence that we are,” explained Rob Barney, president of DHLC Investments Inc., a hard- money lender based in Texas. “That lets them look at the transaction and say, ‘Hey, I’ve got questions, would you please address them so that I can feel more comfortable with the transaction?’ On the other side, we make sure that our borrowers are only buying properties that make sense because I don’t make loans on properties that I don’t want to own myself because my personal guarantee requires me to potentially do just that if the loan goes south.” Barney’s personal guarantee takes the form of a commitment to “step into the borrower’s position in the event of a default and
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5 Insurance Takeaways from Oakland’s Ghost Ship Inferno
NEED FUNDING?
THE CRITICAL QUESTIONS AND ANSWERS THAT COULD HELP YOU PREVENT YOUR OWN DISASTER.
by BreAnn Stephenson
Members of the American Association of Private Lenders are the trend-setters in private real estate lending. From their voluntary adherence to a Code of Ethics to their knowledge of the private lending process, they are the gold standard for the industry. Find your next lender by visiting our Member Directory!
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ast year’s warehouse fire in the “Ghost Ship” building in Oakland, California, has been called the nation’s deadliest structure fire in more than 14 years. The fire was a three-alarm fire, requiring 52 firefighters to bring it under control. The fire caused 36 fatalities and building losses of more than $1 million (residents’ belongings excluded). The Oakland Fire Department’s 50-page Origin and Cause Report (O&C) makes it painfully clear how the 36 people who perished in the fire that night had little chance of escaping the blaze. The O&C details many fire hazards within the building and includes a thorough description of the building pre- and post-fire, statements from residents, and survivor’s accounts of their escape. We make no judgements of fault here, but examine a few key circumstances revealed in the O&C as they pertain to your real estate investing practices. These five critical questions and takeaways could help you prevent a tragedy at one of your own properties.
QUESTION 1 IS IT OK FOR MY FAMILY MEMBER TO MANAGE MY PROPERTY? The listed owner of the Ghost Ship building, Chor Nar Siu Ng, allowed her son, Kai Ng, to manage the property. Kai Ng stated his family had owned the warehouse and the adjoining structures for about 25 years. His understanding of the building’s use was that it was used for “several artists… working and hanging out.” The O&C mentions Ng hadn’t seen the inside of the property in over a year-and-a-half and claimed to be unaware their tenant, Derrick Ion Almena and other artists were living in the property. TAKE-AWAY #1: A lack of regular site visits can allow a hazardous or illegal condition to worsen. The real problem here is the absenteeism. The condition of a property can change literally overnight, so having a regular schedule for maintenance is crucial in preventing losses. Care may
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