So you are a new business or startup and ready to lease your first commercial real estate space, however with little track record and little to no revenue how will you be able to get the landlord comfortable with having you as a tenant?
Most landlords are hesitant to lease commercial space to startups as they have a high probability of going out of business and if they do will leave the landlord with an empty space and lost income. To ensure they get their rent in the event your business does not work out they may ask you to sign a personal guarantee.
For example when searching for retail space for rent in Austin Tx most landlords will require that you personally guarantee the lease for the entire term.
What is a Personal Guarantee?
A personal guarantee is a written promise from a guarantor (business owner or other person) guaranteeing commercial lease payments in the event the business does not pay. In the event of non-payment the landlord can go after the guarantor personally for payment. This is a very common request when the business is a startup with weak financials.
Do You Have to Sign a Personal Guarantee to Lease Commercial Space?
Well if you really want a space bad enough and the landlord won’t let you have it without one then you have no choice. If you are able to show a track record of paying rent elsewhere have have steady, strong company profit / loss statements and balance sheets then you might be able to get away with not having one. If you don’t have the financial track record and sign the personal guarantee then try asking for the guarantee to expire after a certain amount of time has passed (e.g. 12-24 months) as long as you pay rent payments on time.
How to Get Out of a Personal Guarantee Early
Your options for getting out of a commercial lease personal guarantee early are pretty limited, however if it’s important then try one of the following:
- Consult with an attorney on what your options are
- Show proof of consistent revenues and profits (P&L statements, balance sheets, etc)
- Ask for an amendment to the lease after 12-24 months
- Ask for the guarantee to expire after 12-24 months as long as you have paid rent payments on time
- Try to renegotiate the guarantee terms
- Offer to pay a large security deposit. The norm is typically equal to one months rent. If you can offer to give a security deposit of 4-12 months
- Offer to prepay the first 6-12 months of rent payments
- Offer to set up a letter of credit (LOC) with your bank. If you don’t pay rent then the landlord can take rent payments from there.