The guarantee caps the guarantor at the notice period; what the landlord gets for the concession is its space back, empty and early.
A good guy guarantee makes the guarantor liable only for rent up to the date the tenant hands back the keys, provided it gives the agreed notice and leaves the space empty and paid up. On an illustrative 6,000 square foot lease that defaults after four of ten years, a six-month good guy guarantee caps the guarantor at $202,592, 7.7 per cent of the $2,620,891 a full guaranty would put at stake. Against the landlord's real loss of $1,136,705 in present value, it covers 17.5 per cent.
Worked in full in How to Read a Commercial Lease by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A personal or parent guarantee is usually the only real credit behind a lease signed by a single-purpose tenant company. The three common forms differ in what they cap and in what triggers the cap.
Good guy exposure = unpaid rent from default to the surrender date (notice period, plus any arrears)
Landlord's loss = PV of rent to term end − PV of replacement rent + PV of re-letting costs (TI and commission)
Coverage = exposure / loss. In Excel, the PV of the remaining rent at a monthly rate: =NPV((1+7%)^(1/12)-1, rent_range)
| Input | Value |
|---|---|
| Area | 6,000 sq ft |
| Starting rent, annual increases | $60.00, 3% |
| Term, rent paid through month | 120 months, 48 |
| Good guy notice period | 6 months |
| Burn-down: months guaranteed, fall per year, floor | 12, 2, 4 |
| Void after surrender | 9 months |
| Replacement rent, flat; TI; commission | $58.00; $40.00; 5% |
| Landlord's discount rate | 7.0% |
Step 1, the rent schedule. $60.00 rising 3 per cent a year gives $67.53 a foot in year 5, $33,765 a month, and $78.29 in year 10, $39,143 a month. The tenant stops paying at the start of year 5 with 72 months left.
Step 2, the full guaranty's face. The 72 remaining monthly rents sum to $2,620,891, $2,135,607 discounted at 7.0 per cent.
Step 3, the good guy exposure. The tenant serves six months' notice on the day it stops paying and leaves at the end of month 54. The guarantor owes those six months at $33,765: $202,592, or $198,642 in present value. Once the keys are back and the rent to that date is paid, it owes nothing more.
Step 4, the burn-down. Twelve months less two for each of the four completed years reaches the floor of four months: $135,061.
Step 5, the landlord's loss. The space is empty for nine months, then let from month 64 at $58.00, $29,000 a month for the 57 months left, worth $1,295,386 today. The new tenant needs $240,000 of TI and an $82,650 commission, $296,484 in present value. The loss is $2,135,607 less $1,295,386 plus $296,484: $1,136,705.
| Guarantee | Guarantor pays, $ | Share of loss |
|---|---|---|
| Good guy, six months' notice (PV) | 198,642 | 17.5% |
| Burn-down, four months at the floor | 135,061 | 11.9% |
| Full guaranty, after re-letting credit | 1,136,705 | 100% |
| Left with the landlord under the good guy | 938,063 |
The good guy guarantee is not a credit enhancement in the ordinary sense. It does not pay for the loss of the lease; it pays for the landlord getting its space back quickly and empty. The $938,063 the landlord still loses is the price of the void, the lower replacement rent and the new tenant's TI, none of which the guarantor touches.
What the landlord buys is time. Without the guarantee, a tenant in difficulty has every reason to stay, unpaid, while the landlord litigates. With it, the guarantor's exposure keeps running until surrender, so it pushes the tenant out. If the tenant ignores the clause and is evicted only after 14 months unpaid, the guarantor owes $474,740, and the good guy protection is lost on the terms of most clauses.
| Default at start of | Notice 3 mo | Notice 6 mo | Notice 9 mo | Burn-down | Full face |
|---|---|---|---|---|---|
| Year 2 | 92,700 | 185,400 | 278,100 | 309,000 | 3,766,997 |
| Year 5 | 101,296 | 202,592 | 303,887 | 135,061 | 2,620,891 |
| Year 8 | 110,689 | 221,377 | 332,066 | 147,585 | 1,368,510 |
The good guy exposure barely moves with the timing of the default; it rises only with the escalations. The full guaranty's face falls as the term runs, and the burn-down falls fastest. Early in the lease, when the landlord's unamortised TI is largest, the burn-down is the better protection; from year 5 on, a six-month good guy is worth more to the landlord than a burn-down at its floor. The notice period is the variable to negotiate: each extra three months adds $101,296 at a year-5 default.
Good guy clauses differ on what counts as surrender: some require the keys and a vacant, broom-clean space; others require written acceptance by the landlord or payment of a fixed sum. Read the conditions, not the label, before relying on the figure.
Comparing the good guy exposure with the full guaranty's face. $202,592 against $2,620,891 makes the good guy look like a 92.3 per cent concession. Against what a full guaranty actually recovers once the replacement rent is credited, $1,136,705, the concession is 82.5 per cent of the loss, and the good guy delivers something the full guaranty cannot: a vacant building months earlier.
The re-letting costs and the deposit sizing behind this case are in the free workbook for this book; for the deposit side of the same default, see how large a security deposit should be.
A limit on a personal or parent guarantee: the guarantor is released once the tenant gives the required notice, pays rent to the surrender date and hands back a vacant space. On a 6,000 square foot lease at $67.53 a foot, six months' notice limits the guarantor to $202,592, whatever the remaining term.
It depends on timing. A burn-down of 12 months falling by two a year is worth $309,000 at the start of year 2 against $185,400 for a six-month good guy, but by year 5 it has reached its four-month floor, $135,061, against $202,592. Early in the lease the burn-down protects more; later the good guy does.
On most clauses the protection depends on surrender, so the guarantor stays liable while the tenant occupies without paying. On the worked lease, a tenant evicted after 14 unpaid months leaves the guarantor owing $474,740, more than twice the six-month figure, which is why guarantors push a failing tenant to leave.
This article is one calculation from How to Read a Commercial Lease. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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