Real estate investors and developers understand and embrace risk, but don’t always judge it well. When the market is hot, many developers, investors and owners sign personal guarantees. Now that the market is cooling down and may be further hammered by the increase in interest rates of a possible recession, many are worried about what will happen with the guarantees that they have signed. Are the loans coming up?
Yes, almost certainly, as we have seen in many past economic recessions. Lenders will sue for performance, use personal guarantees to obtain judgments and then use those judgments to collect against the debtors’ personal assets.
Our law firm has represented a multitude of clients over the years who have faced claims on their personal guarantees. These may be guarantees to borrowers or homeowners, but they carry the same fear – will I lose my home and my life savings? Are my other investments at risk?
For example, before this we represented Tom, a successful developer. Tom has completed several large projects across the country and has more than quadrupled his net worth since 2008. He has three projects close to completion, but now he is not sure which projects will be profitable. It is not yet certain that he will be able to finish the construction, because he may lose the financing before the end.
Tom would like to be able to walk away from these projects, if necessary, but his personal guarantees total about $ 20 million. Tom’s assets include his homes in Los Angeles and Aspen, four apartment buildings in Texas and bank and brokerage accounts. He is in his early 60s, and he doesn’t think he has enough time to rebuild his fortune if he is wiped out by personal guarantees.
Is it possible to protect Tom’s assets when he is already anticipating a default and is concerned about his personal exposure? What about someone like Tom, where the default loan or lease is already done? The answer is yes, but with the caveat that there is no bulletproof solution.
Asset protection is rarely asset protection in reality. We are not trying to make Tom’s assets inaccessible, and that may not be in the cards anyway. We are trying to establish asset ownership structures that will make Tom’s assets more difficult and expensive to obtain. That will change the lender’s economics and make them more willing to settle with Tom.
In this case, Tom chose a combination of asset protection structures. An asset protection trust for his Los Angeles and Aspen homes, transferring the LLCs that own the apartments in Texas to a Wyoming LLC partially owned by a separate asset protection trust and an offshore structure for liquid assets, with some assets transferred to Europe and others remaining. in the United States, Tom also considered transferring some of the assets to his spouse, but we advised him against it. He should not put his spouse in the crosshairs of litigation.
With more than 20 years of experience in creating asset protection structures, we can comfortably say that the lender will not take from Tom everything he has. They will choose to settle, and Tom will be happy with the settlement.
As the recession deepens, many more real estate developers and investors find themselves in the same position as Tom. Asset protection may be their only hope of keeping the wealth they’ve built, but they have to be realistic about what that really means.
Jacob Stein is an asset protection attorney and the global chair of the private client practice at AllianceLLP.