Non-recourse question - Posted by Ben (OH)

Posted by Frank Chin on May 03, 2001 at 08:54:12:

Hi Eric:

You raised a few good points.

When the subject of “Personal Guaranties” can up on this board several weeks ago, my wife and I reminiced about the time she did RE financing, and when I was in Project financing field. She indicated that while they obtained these guaranties in both places she worked, she couldn’t recall one time it was invoked.

In the case of the smaller developers and small businesses in general, the business is all the business onwer has. So if the lender forecloses on the ABC company, and try to get more from Mr. Owner by calling the Personal Guranty, usually, the only thing Mr. Owner has is the ownership of ABC company.

It his case, it makes more sense to work with Mr. Owner to minimize losses at ABC company, or even settle with him.

Then what if the lender decides to play hardball? I tried that in one case.

Our company had a client in Irving, Texas, who owed close to 150K on receivable financing. We had credit insurance, and the insurer required a Personal Guaranty. This guy was real slick.

A little background. This guy owned a number of businesses, and a beautiful house. While we had the his Personal Guaranty on the ABC company, paperwork sent to him under ABC was signed by him and accepted by the XYZ company.

Now he claims we don’t have a guaranty on the XYZ company. When I called my local rep about this, the conversation somehow got to this guy’s home, that everyone is Irving is talking about it. Why ??

He said it was featured in Architectural Digest - and according to the article, millions were spent on Italian Marble.

So I decided to sue ABC, XYZ, and call the personal guaranty. I called around and finally found a large law firm in Dallas, Texas to handle the case.

First thing the lawyer said - not so fast. We have to first subpeona all his books and records for XYZ, ABC, and perhaps other entities to analyze where the money went for the last several years. Then we go to court??

“Not yet” says the lawyer. We have to take depositions from him asking him about different transactions which may be construed as fraudulent. Then we’ll see if we have a court case.

Then NINE months went by. I have two drawers full of papers from our attornies and bills were coming in at a rate of $2000 a month. When the tab passed $15,000 my boss wanted to know whats going on.

I then spoke to my rep who also advised me that when his personal guaranty was called once before, he filed personal bankruptcy to thwart it. In our case, we haven’t even gone to court to sue ABC and XYZ yet.

So my boss asked me to come up with a plan before we go broke suing this guy.

I called my local rep again to find out the name of the attorney who sued him previously. I got this gentlemen’s name, called him, and found him to be a folksy “Matlock” type attorney. He enjoyed giving me all the gory details of that previous court case.

His bottom line - he can make these guys squeal and squrim in court and look like the sleazebags that they are. The defendent decided to settle and pay after the judge and jury laughed at the answers he gave.

So I called the client - and explained we got all the paperwork and we’re ready to go to trial. He said “I’ll see you in court and hung up.”

I called back and said “I was going to tell you my attorney’s name” He said “those guys in Dallas ??”. I said “NO NO, your old friend (attorney’s name). He’s looking forward to seeing you again”.

“I enjoyed the story where YOU got the judge and jury laughing” I told him. He answer was “OK - what do you want ??”

To make a long story short, I made a deal with him, and we took 50 cents on the dollar. Because me had inurance, we took a 25% loss and the insurer took a 25% loss.

Needless to say, my boss was pleased that we’re not going broke suing this guy.


Non-recourse question - Posted by Ben (OH)

Posted by Ben (OH) on May 02, 2001 at 06:57:30:

Anyone have much success with signing loan docs with non-recourse? That is the collateral for the loan is security and not the borrower personally. Any help is appreciated.

Ben Spofford

Re: Non-recourse question - Posted by Frank Chin

Posted by Frank Chin on May 02, 2001 at 09:16:01:

Hi Ben:

I think you’re talking about is personally guarrantying loans that the Bank is making to your corporate entities LLC’s etc.

There was a discussion regarding “Personal Guaranties” on this board a few weeks ago. Banks and financing institutions and agencies invariably asks for them as part of a financing package. Depending on how badly you need the financing, you can always try to say no.

When my wife was doing RE project financing some years back with major developers, she always asks for Personal Guaranties as standard policy. Even Donald Trump at the time.

Not to go into details, “The Donald” didn’t like it one bit.

Or you can make the guaranty limited and conditional. Ray Alcorn did a very good post on this board very recently on it. I did a post on that thread telling of how one customer severely limiting his exposure by limiting his guaranty.

Better yet, plan your finances such that even if you personally guaranty things, its OK. For instance, most of your IRA’s, Keoughs, annuities cannot be touched. I don’t know the homestead laws in your state, but in many jurisdictions, a good portion of your home is protected as well.

I’m currently looking into Asset Protection issues and some good courses on it.

Also, some big boys diversity so they have projects in other countries. That would make things awfully tough for a creditior to get their hands on.

In fact, I worked at a company where they extended loans to a developer, originally at 2 million. When he got into trouble, they gave him another two. To make a long story short, the developer owed Forty million when they finally gave up on him. This guy had projects in Canada and Israel.

I find that for large developers, the tendency is to give him more and more money to bail him out rather than to see the project fail and make everyone look bad, the bankers included.

Re: Non-recourse question - Posted by Ben (OH)

Posted by Ben (OH) on May 03, 2001 at 06:35:32:

Great stuff.

BTW, Frank. I am reading a book you will appreciate. It is “The Real Estate Game” by William Poorvu. Poorvu teaches real estate at Harvard. His book is great examinatin of BOE (back of the envelope calculations) to the subsequent close or walk. Very good analysis. It is IMHO, the best book i have read, so far.

Ben Spofford
Freedom Home & Land, LLC

Re: Non-recourse question - Posted by Eric C

Posted by Eric C on May 02, 2001 at 14:39:23:

Hi Frank -

Good post!

A couple of things.

Ray’s earlier post on the subject (and his approach) is far more useful than most people imagine. Personally, I think his strategy represents one of the very best methods to protect yourself against unreasonable claims.

I’m not sure that I would loan money to “the Donald” with, or without the guaranty. He has this disturbing habit of not paying his bills. Kinda of an “all for him and none for all” approach to investing.

Projects in other countries may or may not be out of reach of creditors. What’s interesting is how few creditors make the effort to actually check out those “foreign holdings”.

You will never get the highest level of personal attention from a large financial institution until you owe them a lot of money. More is better. Much, much more is better still.

And if they think you may not be able to pay… well, I’ve seen that situation turned into a gold mine for the investor/borrower and the institution often ends up with the shaft. Have I mentionned Donald Trump yet?

A word to the wise here. If you’re going to play this game be very aware of mergers with larger institutions. You may be the “big cheese” (with or without the stink) at a local or regional smaller financial entity, only to have the truly big dogs sit down to chew on you at their table.

I once knew a guy who had borrowed over $400 million (which he could not repay). Talk about red carpet treatment!

That is, until one of the multi-nationals arrived on the scene and decided that even $400 mil could be classified as a bad loan (since they weren’t the ones responsible for it anyway).

How ironic to be $400 mil in the hole and realize that you didn’t borrow enough!

Take care,

Eric C

PS - I liked your analysis of the buy/sell decision. It sounded like you made it a personal decision which it should be. Unfortunately (or otherwise), if you add a zero or two to the number of properties in question, you begin to realize the true scope of the problem. Cycles then become something you have to “weather” 'cause you just can’t get out that quickly.

Re: Non-recourse question - Posted by Frank Chin

Posted by Frank Chin on May 03, 2001 at 09:14:44:

Hi Ben:

Thanks - Sounds like a book I should get a hold of.

BTW,I posted an answer below on how Lenders handle guaranties that you might find interesting.