The Hotel Carter near Times Square, twice named America’s dirtiest hotel, has seen its share of horrors. The seedy hotel’s history includes insect infestations, crack cocaine dealers and even a corpse in a plastic bag.
Now you can add to that list the thing that makes every real estate investor’s skin crawl most: the personal guarantee.
Developers Joseph and Meyer Chetrit are staring at an $84 million bill that their lender, Richard Mack, wants them to reach into their own pockets to pay. Mack sued the brothers in January, claiming they’ve racked up tens of millions of dollars in interest expenses and unpaid taxes after defaulting on roughly $194 million in loans more than two years ago.
Personal guarantees like the Chetrits’ are the sacred vows that hold together commercial real estate’s most dubious marriages. And as more of these mortgages head for divorce, those pledges are coming into play.
“As the cycle progresses, you’re starting to see lenders enforce personal guarantees,” said Zev Gewurz, co-chair of the real estate group at the law firm Goulston & Storrs.
In recent months, a number of big-time investors have been hit with guarantees.
Billionaire Charles Cohen owes $187 million on a personal pledge he signed to finance a portfolio of struggling movie theaters, a Manhattan office tower and a design center outside Fort Lauderdale, a New York judge ruled in October.
RFR’s Aby Rosen and Michael Fuchs have been sued on at least five different properties with various guarantees.
And multifamily syndicators Sean Kia and Ryan Andrade of Tides Equities are being pursued by Barry Sternlicht’s Starwood Capital and Acres Capital for guarantees they signed on several busted deals.
These are just a few examples of the countless mortgages that were made in sunnier times with the promise that — if things got really bad — there’d be personal assets on the table to backstop any losses. Now, many are looking at properties where the only thing of value left worth fighting over may be the PG.
“I think lenders and borrowers have come to realize the value may not lie in the property because the property values have gone down significantly or been reset,” said Leo Jacobs, an attorney working with borrowers on personal guarantees.
Broke billionaires
Real estate investors like to think of each property in isolation — separate from the sprawling portfolios they list on their websites.
Their lenders, however, take a broader view of the world. They know the principals behind the LLCs own other investments and often have vast personal wealth.
In many cases, the lenders aren’t as interested in taking someone’s home or private jet as they are using the personal guarantee as leverage to resolve a lengthy foreclosure process.
“It becomes a critical kind of bargaining chip,” Chris Gorman, an attorney at Rosenberg & Estis, said. “The principals of borrower entities are more inclined to quickly find ways to involve things.”
Going to court to enforce a personal guarantee can often be a kind of hard-line negotiating tactic meant to get a borrower’s attention.
It’s just infuriating where these guys will claim poverty either from the deck of their yacht or from their private plane. It’s hard to be sympathetic for a lot of these guys.”
Gorman said that he sees lots of cases where lenders file a claim but then don’t follow up with the lengthy (and expensive) discovery process necessary to prove their case — a sure sign, he said, that their end game is a settlement.
“I’m seeing a lot of claims against guarantors getting pled, and I’m not seeing the corresponding legal work needed to go into proving those claims,” he explained. “It seems lenders are more interested in getting to the end of the line in a foreclosure case.”
A drawn-out battle over a guarantee can become costly. Take the carry guarantee, where a borrower is on the hook for interest payments and property taxes. When a borrower falls behind, the high-cost default rate kicks in and the bill starts to quickly add up.
“That’s a moving number, because every day that goes by, that number increases if they’re not paying,” Christine Kearney O’Connell, an attorney at King & Spalding, said.
Collecting on a guarantee is a whole other matter, one that can sometimes seem like an international thriller flick.
In the case of uber-wealthy guarantors, lenders may be dealing with French authorities to confiscate chateaus or working to hunt down yachts registered in Panama or the Cayman Islands.
Some guarantors will try to hide assets: a case of billionaires claiming they’re broke.
“You’ll be amazed at how some of these guys will be completely illiquid but won’t sell their yacht, won’t sell their plane, won’t sell their beach property or one of their Manhattan townhouses,” one lender with extensive experience structuring and enforcing personal guarantees said. “It’s just infuriating where these guys will claim poverty either from the deck of their yacht or from their private plane. It’s hard to be sympathetic for a lot of these guys.”
Anything for a loan modification
Guarantees are increasingly becoming part of the equation for borrowers who want loan modifications.
Attorneys who work on these kinds of deals said they’re frequently seeing lenders require borrowers to guarantee portions of their loans in order to extend the term.
“The guarantee is an opportunity to kick the can down the road,” Gewurz said.
That’s what happened with Rosen and Fuchs at their Upper East Side retail condo at 188 East 78th Street.
They took out a $45 million loan on the property with Signature Bank in 2014. When they went to modify it five years later, they agreed to guarantee $15 million of the debt, according to a lawsuit filed in December by Rialto, which took over as servicer after the FDIC sold Signature’s loans.
Rialto claims RFR defaulted on the mortgage when it stopped making payments in April 2023 and it’s suing to get Rosen and Fuchs to cough up the $15 million guarantee.
The two also faced another lawsuit with Rialto in the Financial District, which was discontinued about a month after it was filed but revealed crucial details about the developers’ guarantee.
Rialto filed the complaint in December, claiming RFR failed to deposit rents in a cash management account for the tower at 17 State Street and then stonewalled efforts to conduct an audit.
“The guarantors are personally liable for the full amount of any rents and revenues that have been misappropriated,” the lawsuit read.
In the Cohen case, the developer is appealing the judge’s ruling on his $187 million guarantee. In the meantime, his lender, Fortress Investment Group, has accused him of trying to hide assets. Cohen allegedly transferred ownership of his Greenwich, Connecticut, home (where he stores his Lamborghini, Rolls Royce and Ferrari) to his wife in May 2024, Fortress claims.
The lender also accused Cohen of transferring four boats, including a yacht the developer had valued at $49 million, to new owners.
“These steps appear calculated to hinder Fortress’ ability to enforce the anticipated judgment against Cohen’s assets and raise concerns that Cohen may have taken or may be taking additional steps to frustrate Fortress’s ability to collect on the forthcoming judgment,” Fortress’ lawyers wrote in their court papers.
Steven Cherniak, Cohen’s chief operating officer, said any claim that Cohen tried to hide assets is “baseless, a mischaracterization of his actions and should be summarily rejected.”
Losing everything?
The most notorious guarantee in recent memory was the $1 billion guarantee that Harry Macklowe took out to get a hard-money bridge loan from Fortress in 2008, but there has yet to be a bellwether case like that one in this cycle of distress.
When Macklowe defaulted on his debt, he was forced to sell properties, including his prized GM Building, to cover the guarantee. It marked a low point for the developer, and his guarantees were a source of acrimony with his now-ex-wife, Linda, and his son, Billy, who stopped working with his father afterward.
So far, this time around, personal guarantees are just a spotlight on the list of high-flying developers who now have bills coming due, and it’s unclear if anyone will lose his shirt, plane or townhouse.
Harold Bordwin, co-president of Keen-Summit Capital Partners, said that many borrowers either didn’t pay close enough attention to the details of the guarantees they signed, or they never thought things would get to the point where they’d actually be enforced. It can be a real eye-opener, even for seasoned investors.
“It’s kind of a come-to-Jesus moment,” Bordwin said.