Secured Investments: Why Investors Need More Than Just a Personal Guarantee (PG)
I recently sat down with a developer (i’ll refer to him as Ben) to discuss his forthcoming project. I’ve known Ben a while and have previously invested with him, together with my circle of investors, obtaining returns of 30-40% pa on equity. And we score them highly on our developer ratings matrix (8.4 out of 10).
Given this, I was excited to hear about Ben’s forthcoming project. This one would bea loan opportunity for investors, returning a fixed 10.5%pa, 18-month duration, straightforward build-out of 12 apartments in a liquid location, targeting first time buyers. So far, so good … until I asked about security. Investors receive a PG but, to my disappointment, no fixed charge (1st or 2nd) on the property. This is where i lost interest and declared “i’m out”!
The risk for investors
For an investor/lender, a PG might sound fine. After all, if something went wrong, the developer’s personal assets would be claimed. Supported by a legally-binding document that was certified by an accountant.
Here are the risks when we rely solely on a PG for security:
1. There is no central record of PGs. The borrower could have issued numerous PGs, to many different investors/lenders, to fund various projects. So, it may be hard to establish the extent of the borrower’s TOTAL liabilities and whether his/her assets would be suffcient.
2. A borrower’s assets can be veri’ed easily. With liabilities, however, that is not always the case. There might be o-balance sheet obligations or less formal debts and liabilities that go unrecorded. This would under-represent total liabilities and, therefore, the means to honour the PG.
3. One PG does not usually have priority over any other. If several of the developer’s projects defaulted at once, in which order do PGs get satis’ed? It would be unclear which lenders get priority in their claim over the borrower’s assets.
This is no reflection on the integrity of borrowers or property developers. Rather, it isabout investors identifying the main risks and scenarios that could risk their capital. This is a critical aspect of DD when deciding where to invest.
At InvestLikeAPro, we insist on a fixed property charge for all loan investments. That way, we can clearly quantify the security backing our investments. PGs are fine as an additional form of security but relying exclusively upon them is not prudent.
This article was written by Manish Kataria, who will be appearing live at the National Development Summit 2019. Manish will be on the Build to Rent Panel joined by: Thomas Knust and Charles Rose.
Further details about Manish Kataria visit: