A Fresh Take on CRE

The "Good Guy Guarantee" and Why It's Not so Bad

Any smart landlord will do whatever he/she can to insure that they won't be left "high and dry" by a tenant that doesn't pay their rent. The most common means of protection is through the use of a Security Deposit or Letter of Credit. The amount of this Security Deposit or Letter of Credit is inversely correlated with the credit worthiness of a tenant. To keep it simple, the worse the credit, the more security needed. Of course, certain companies with lots of money and a good track record may still be considered risky. Perhaps the best example are hedge funds. Virtually all of the billions that many hedge funds have is "tied up." The money they invest is tied up in investments, and the management fees are generally funneled directly to the partners. So, even though most hedge funds can afford expensive space in the best areas, they'll have to put up a lot of security to get it.

Now, to the heart of this post. In addition to, or in lieu of a security deposit, many landlords will insist on a "Good Guy Guarantee." I have found that there is a lot of misinformation out there on exactly what a "Good Guy Guarantee" is, so I'd like to set the record straight.

A "Good Guy Guarantee" is very simple. It says, that in the event that the tenant has to break the lease, the tenant will notify the landlord, pay their rent up until the date they vacate the space, vacate the space and return the keys. If, and only if the tenant does not abide by this guarantee, a principal of the tenant's organization will be held personally responsible. In this respect, the "Good Guy Guarantee" is a form of a limited personal guarantee. When the principal of a firm hears the words "personal guarantee," this often scares them off. The truth is, that once you realize what this guarantee is all about, it's not something to be afraid of. Truth be told, a "good guy" would not allow their company to stay in a space and not pay the rent.

I generally advise my tenants to sign a "Good Guy" (after using it as a bargaining chip of-course)and here's why. The Landlord's goal is simply to protect his or herself whenever possible. Using a "Good Guy" is a great way to prove to the landlord that you're worth the risk while reducing the amount of security that your company will have to provide. However, it's important to remember that corporate executives come and go, so your company should retain the right to substitute the guarantor at any time.

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