Guarantee Gamble: Developers Dread Return of Recourse


June 18, 2008

By Lingling Wei – Wall Street Journal

After a decade of easy lending, the dreaded personal guarantee is making a comeback in the real-estate industry, bringing back the kind of tough terms that borrowers hoped not to see again.

As loans for commercial projects have become difficult to come by in this credit crunch, borrowers are being forced to consider loans that would give the lenders “recourse” to the borrowers’ personal fortunes — terms that led many a developer, including Donald Trump and William Zeckendorf Jr., to near ruin in the real-estate crash of the early ’90s. More recently, New York developer Harry Macklowe found himself in a bind after he signed a personal guarantee on a $1.2 billion loan.

Despite Mr. Macklowe’s experience, these recourse loans — once a staple of commercial lending — had largely fallen by the wayside during the past decade as banks found ways to minimize their risk.

Now, with the securities market for commercial loans still anemic, recourse loans are popping up again — and striking fear in the hearts of developers.

Dale Anne Reiss, global director of real estate for Ernst & Young, recalls the efforts involved in restructuring recourse loans, with some people losing numerous properties including their own homes: “Some of the workouts were extremely painful,” she said. “You were tearing apart people’s lives.”

Yet commercial investors who can’t wait out the credit crisis may have little choice but take a deep breath and sign a recourse loan. “Oftentimes, it’s either sign personally or you don’t get the loan,” said Donald Isken, a real-estate attorney at Morris, Nichols, Arsht & Tunnell LLP. “The tide has changed.”



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