How do lenders structure loans to GPs?

teddythebear's picture
Rank: Neanderthal | 2,079

So I have been curious to know how loans are structured to GPs. The reason I ask is that we have a couple banks we do business with and they say they structure their deals where any owner with at least 20% or more ownership of the LLC must provide a guarantee. Now this confuses me because in a GP/LP structure, the LP provides pretty much most of the money but they dont put up any guarantee as thats the GP's job. So when the GPs go to a bank do they just tell them they want to be on the hook completely and the bank structures it that way?

Comments (10)

Mar 11, 2017

Its been a few months. Any one have a good answer to this?

Mar 11, 2017

From what I have seen on the development side, the loan agreements are between the bank and the ownership entity (the GP AND the LP).

Ownership Entity = Developer and Equity Partner LP

This partnership is made between:
GP = Developer LLC
LP = Institutional Equity Partner Inc.

Typically, the GP (Developer) has a large enough balance sheet to post the required loan guaranty, and I never heard of any LP (equtiy partners) putting up a guaranty. So, if shit hits the fan, the LP's risk is losing their investment. The GP's risk is losing their project investment, as well as any additional assets needed to cover the loan.

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Mar 11, 2017

The GP or sponsors of the deal always guaranty the loan. Anyone who owns 20% or more of the borrowing entity has to guaranty.

Mar 12, 2017

Right I understand the LP never puts up a guaranty. However, many banks require anyone with a 20% ownership of the borrowing entity to put up a guaranty. So lets say the LLC ownership is 10% GP owned, and the LP owns 90%. Would the GP just let the bank know that they want to be on the hook for everything?

Mar 12, 2017

Never say never. There are instances where LPs put up the guarantees as well, they are just not as common. The banks typically determine on each deal who they are comfortable with having on the guarantees. Sometimes the GP is enough, but sometimes it's not and the LP will step in. The GP can say what they want, but in the end, the bank will decide what it NEEDS and then it's up to the GP and LP to figure out how they want to work with it and whether or not to take a different deal altogether. For this reason, and as with everything in RE, it varies greatly and is usually a very big point of negotiations.

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Mar 13, 2017

Typically the GP lets the bank know they want to be on the hook for everything. Usually the LP is owned by lots of partners. So in most circumstances, although the LP owns 90%, no individual accounts for more than 10% of the LP so in your example, each individual LP only owns 9% of the total entity.

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Mar 13, 2017

Not too sure about this 20% thing, but as others said I've typically only seen GPs putting up guaranties. If the loan is a big one and there is a top GP on the deal, we'll typically see the GP try to (and many times succeed) setting up an entity with $20-50mm to serve as the carve-out/carry/completion guarantor.

I HAVE seen LPs putting up a guaranty in instances where the guaranty dollars clip at very high interest rate at the GPs expense.

Best Response
Mar 14, 2017

There are numerous types of guarantees that banks require, and typically the GP signs the majority of the guarantees. This does not mean that GPs are the only ones putting up guarantees... I'd imagine newer GPs without a track record will need to put up majority, if not all, guarantees. However, already established developers / GPs: who signs guarantees can potentially be used in negotiation when comparing which LP to select. Maybe an LP is willing to stand up pari-passu on certain guarantees?

Also, I want to point out that there are so many different types of guarantees, some more common than others for who stands behind them. Standard "Carve-out Guaranties" with respect to typical "bad boy" carve-out provisions such as fraud or Environmental Indemnity Agreement(s), these are typically signed by the GP.... They can fully control fraud from not occurring, and regarding environmental, they should have done thorough diligence to get comfortable there are no environmental issues (whether or not issues are discovered, GPs will get environmental insurance to protect their liability in the event something happens down the road... If you have a clean site, this shouldn't be super expensive to get).

Then there are others such as Completion Guarantees (for construction projects), Debt Service & carry Guarantee (guaranteeing you will pay set amount of interest... said another way is "Prepayment Penalty"). Re-Margin Guaranty etc. etc. etc.

I think the most important guarantee one needs to understand is a "Repayment Guaranty".... In my opinion, this guarantee essentially determines whether or not your loan is Recourse vs. Non-Recourse.... So when someone says 25% recourse, that literally means you are personally on the hook for guaranteeing that 25% of the loan is going to be paid off. Some of the other guarantees mentioned (Carry Guarantee / Interest Guarantee), people debate whether or not that loan is considered a recourse loan... Capital Markets Groups (groups hired to get capital for GPs) always try to argue that Interest Guarantees (and others) don't classify the the loan as recourse... Developers / GPs say f that, if the GP is guaranteeing some type of payment (if they prepay), then the GP would argue that this is a form of recourse.

In summary, the Repayment Guaranty (25%, 50% or full 100% recourse of the loan) is probably the most important Guarantee to understand from the GPs perspective. Some banks are willing to stand pari-passu with GPs (if the GP has a successful track record), sometimes they just can't because its a firm policy to never sign Guarantees.

Also, I haven't seen many (actually any) deals where banks will require any equity holder above a set % to sign guarantees... I'd imagine this would be due to a (newly established) GP that could be below the Net Worth / Liquidity Requirement(s), so at that point, the bank is looking for the larger equity players to step up & make them hole on these requirements.

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Mar 13, 2017

Great overview, take a SB

Mar 14, 2017