Alternatives to Lease Guaranties

You’re a landlord who is about to sign a lease with a tenant that is a corporation or limited liability company with no long-term operating history or few assets, and you want to be able to reach the principal of the tenant in the event of a default. The easiest way is to ask for a Lease Guaranty.

But if you’re the principal being asked to give the Lease Guaranty you don’t want to subject your personal assets to the risks associated with the possible failure of your business so you are reluctant to give the Landlord the Lease Guaranty. A failed business venture – especially in these times – should not necessarily result in a significant reduction of your lifestyle or possible loss of your house or other significant assets.

How do you resolve these conflicting interests in a manner that provides security for the landlord and is a reasonable but not life-changing risk to the tenant?

There are several alternatives to the Lease Guaranty. The simplest is for the tenant to provide more than the customary one month security deposit and one month advance rent. Looking at the local rental market, the landlord should “guestimate” how long it would take to relet the premises following a termination of the lease for default. If, for example, the landlord thinks it will take six months, then the landlord should ask for a security deposit equal to six – or maybe even seven – months’ basic rent. If the tenant defaults and the landlord relets the premises in less than the six (or seven) month time frame it will earn an unexpected windfall; if it takes longer, then the landlord can chalk that up to the typical risk of doing business.

Another alternative to a Lease Guaranty is a letter of credit in an amount equal to a prescribed number of months of rent. But, given that there are fees associated with the issuance of a letter of credit and that most issuers will require a significant amount of collateral to back up the letter of credit, this may not be as attractive to the tenant as posting the cash with the landlord.

Whether cash or a letter of credit is used, the landlord could also agree that after an agreed default-free period, a portion of the security will be released. For example, if the term of the lease is five years, then after two years the landlord could agree to reduce the security deposit by an amount equal to one month’s rent; after three years, the security deposit could be further reduced by an amount equal to two months’ rent leaving the landlord with a security deposit equal to two months of rent. In a ten-year lease the reduction might be one month after two years, one month after three years, one month after four years and two months after five years.

If the security deposit is paid in cash and it is a significant amount (e.g., equal to four months basic rent), the tenant should insist – and the landlord should agree – that the security deposit be held in a separate interest bearing escrow account. For small amounts, it is not typical that the security deposit will be segregated or bear interest but, in such cases, the landlord should be obligated to transfer the security deposit to any subsequent owner of the property and should not be released from liability until that occurs.

These are some examples of how we work with parties to address legitimate but sometimes competing interests. We are skilled in working with clients – in this example, landlords and tenants – to solve legal problems and balance the needs of all parties to a transaction.

Keywords: small business, loan, financing, small business loan, lease, commercial lease, commercial real estate, lease guarantee, guarantee

Free Money? SBA Offers Help for Small Businesses

You may have read the recent Washington Post article (July 11, 2009) about the White House proposal to use bailout funds to increase the amount of “working-capital” loans the Small Business Administration (SBA) provides small businesses under its popular 7(a) loan program.

However, a program is already in place at the SBA which aims to offer relief to small businesses in the total amount of $35,000.00. If a firm is eligible to receive the loan from a commercial bank, then the SBA will fully guarantee the loan and waive its typical fees. These “ARC loans” are interest-free to the borrower for the life of the loan. Repayment of the principal can be deferred for 12 months after the last disbursement of proceeds. Repayment of the total balance of the loan can extend for up to five years.

To be eligible, the borrower must have been in business for at least two years and be able to show that it was profitable at least one of the two years. If the firm was open for less than two years, it needs to have been profitable all of the time it was open.

You may ask, “Why would a business need a loan if it was “profitable?” Well, the answer is that the SBA is offering to help businesses with a bit of “relief funding” to help them get over the hump due to slowing sales that may make it harder to meet existing loan payments, vendor payments or even payroll.

So, if you think this may be of interest to you or a small business owner you may know, contact Barbara Berschler at Press, Potter & Dozier, LLC, (301) 913-5200. She will give you more particulars and put you in contact with a local bank that is interested in participating in this special loan program.

Keywords: small business, loan, financing, small business loan, sba, sba 7(a) loan, sba 7(a), 7(a) loan

Is now a good time to start a business? Yes!

Is now a good time to start a business? Yes, it is!

At Press, Potter & Dozier, LLC, we've seen an uptick in recent months of entrepreneurs seeking help in starting new businesses. This might be a surprise to some, given the dour economic news in the newspapers, especially the perception that the "credit crunch" for new and existing businesses getting access to credit is still an insurmountable obstacle.

Our clients tell us, and our experience bears this out, that now is a great time to successfully start a business. Our bank clients have told us that they are looking for new lending opportunities. The key is having a good product or service that meets a currently-unfulfilled need. For example, this past week's Washington Post Magazine (June 28, 2009), highlights two local women who started a business helping organizations use social networks like LinkedIn, Facebook and Twitter to keep in touch with their members.

A key in starting any business is to control upfront costs. And legal costs in particular can be dramatic for a new start-up. Businesses must be registered and licensed, trade names need protection, employment agreements must be drafted, independent contractor agreements must be created/or reviewed and leases negotiated. While an entrepreneur may be a great "idea" person, it can be especially daunting to wade through all the requirements that must be met before a new business can open its door.

PP&D's manual, Starting A Business In Montgomery County, Maryland (written by my colleague Susan Potter and me) identifies all the steps that must be taken in forming a business. In easy-to-read language, we describe those items that can be done independently compared to other tasks where it would be more appropriate to seek outside help. The Manual has links to sites that have forms for many steps of the start-up process, such as registering businesses, selecting a name, securing licenses, and others. We also provide directions for obtaining insurance, opening a bank account, hiring employees, and choosing a location. It is a must-read for all new business owners in Montgomery County, Maryland.

You can preview an excerpt (in PDF form) of Starting A Business In Montgomery County, Maryland. Ordering information is here. In some future posts, Susan or I (or our colleagues Fred Press or Cecilia Jones) will highlight particular parts of the Manual and the start-up process that we feel deserve more attention. And we'd appreciate hearing your comments about the Manual as well!

Keywords: startup, starting a business, starting your own business, starting a business in maryland