Are All Lease Guarantees Guaranteed?

By Michael Moreno & Rahul Chhajed

If you’re a medical real estate owner, broker or developer that has ever been in involved in selling a medical building, you’ve probably been asked some iteration of the following questions:

-      Who guarantees the lease?

-      What is the lease guaranty?

-      How strong is the guarantor?

-      Can I see financials?

So, what really is a guaranty, and how important is a solid guaranty to the strength and marketability of your medical property? Many people would assume that simply put, the tenant in your building is the guarantor on the lease, therefore the tenant is fully responsible for your rent and all lease obligations moving forward. And while in some cases you’d be right to assume this, in many situations, a guaranty isn’t always what it seems to be and isn’t as straightforward as you’d think. Let me explain.

What is a Lease Guaranty?

First off, what is a lease guaranty? Officially, a lease guaranty is defined as, a covenant by the guarantor to be responsible for the obligations of the tenant. In simpler terms, a guaranty is the financial backing of your lease that ensures your rent will be paid throughout your lease term and additional tenant obligations will be fulfilled. When someone references a lease guaranty, they can either be referencing an official guaranty document in your lease (usually found in the exhibits) that says who the guarantor of the lease is, or they may be just asking how strong the tenant is that is named as the lessee. In either case, the stronger the lease guaranty is, the more valuable your lease and property are.

The Types of Guarantees – Personal, Corporate, Burn-off

The two most common types of guarantees a lease can have are personal guarantees and corporate guarantees. Most leases either feature one or the other, but some can include both.

A personal guaranty is a guaranty where one person or persons financially backs the obligations of the tenant with their personal holdings. In most cases the personal guarantor is also the main decision maker of the tenant or the tenant itself. Personal guarantees are typically found in leases that are structured with smaller healthcare operators, newer operators, or with an operator whose corporate financials alone aren’t strong enough to support rental obligations moving forward. The person or persons guaranteeing the lease are fully responsible for ensuring that the rent throughout the lease term is paid and that all tenant obligations fulfilled.

A corporate guaranty is a guaranty where an institution or corporation financially backs the obligations of the tenant with their corporate financial holdings. You’ll typically see a corporate guaranty in leases signed with mid to large sized healthcare operators. As with any guaranty, the larger the corporation guaranteeing the lease, the more valuable that lease is. With corporate guarantees, owners can receive lease security from a private regional company all the way to a publicly traded multi-unit healthcare operator with an investment grade credit rating. A corporate guaranty can be found by looking at who the designated lessee or tenant is in the lease, or as mentioned above, in a separate lease guaranty page or except in the lease.

The third type of guarantee, which really is a more of a modification to a personal or corporate guaranty, is a burn-off guaranty. While most guarantees provide a landlord or investor with a financial backing of the lease throughout the full base term and options, a burn-off guaranty (either personal or corporate) does what it implies, it burns off. Burn off guarantees do not last the full term of the lease but only for a limited window (typically 1, 3 or 5 years). Burn-off guarantees can add a level of risk to a deal as even though a lease term is 10 or 15 years, the tenant is only liable to satisfy its lease obligations up until that burn-off window expires.

Do all Leases have Guarantees? Are all Guarantees Created Equal?

While all leases do have some type of guaranty whether corporate or personal, those guarantees may not always be as robust as one would assume. Let’s look at an example. When leasing a building to large healthcare operator, let’s call it DaCheetah Dialysis, you’d assume that by signing a lease you’d be receiving the full backing from DaCheetah corporate. And you would, if you received a lease with a DaCheetah Dialysis Inc. as the tenant or DaCheetah Dialysis Inc. as the guarantor. And while operators like DaCheetah do sign full corporate guarantees when necessary, a full corporate guaranty isn’t always what a landlord receives. Many times, companies like this will instead guaranty the lease with a smaller subsidiary entity that they own. So, instead of DaCheetah Inc. backing your lease, your lease is backed by an entity such as, DaCheeta clinics of South Carolina. One may think that since DaCheeta is in the tenant name, it’s backed by the company, but this isn’t the case. If the lease is signed by a subsidiary entity, then the only backing on the lease is that subsidiary, or in this case, DaCheeta clinics of South Carolina. If there’s one location in that entity, then your lease is backed by just one location. If there are 50 locations contained in that entity, then your lease is backed by 50. Some may argue that if the tenant is a wholly-owned subsidiary of the parent company, the parent company essentially backs the lease. This isn’t the case though as the only backing would be DaCheeta clinics of South Carolina.

Does a Guaranty Really Matter?

Yes. A guaranty matters tremendously. On a healthcare real estate transaction, a large guaranty can mean the difference between hundreds of thousands if not millions of dollars in value. Including the correct guaranty language in your lease negotiation or being aware of what a guaranty means can make or break a deal.

Some may argue that if a tenant is large enough and performing well enough at a location, the guaranty really doesn’t matter. And although it’s true that when a practice performs well, there is a higher probability of them being able to sustain their rental payments and responsibilities, at the end of the day you’re then investing based off probabilities and not guarantees. In the healthcare world things can change quickly and these changes can affect a tenant’s profitability at a location. These can include changes in healthcare laws, entrance of new competitors in a market, change in reimbursement rates, changes in technology, etc. That’s why guarantees are important. Because in a world of real estate investing, the only thing guaranteed is the strength of your guaranty.