Wednesday, September 2, 2009

Ripples from Broken RE Bubble Hobble Foreign Investors

The Wall Street Journal reported today that Mexico's prominent Cababie family, owners of the respected Grupo Gicsa development
company, is "potentially on the hook for hundreds of millions of dollars
as a result of personal guarantees they made on loans used to finance
two major U.S. real-estate investments".

Those of us who advise wealthy foreign clients have been cautiously monitoring the Miami's real estate market, looking for legitimate opportunities while remaining wary of what is still a very turbulent local RE economy.  Miami RE watchers all saw the news about last month's Chapter 11 filing by downtown's "Everglades on the Bay".  What many did NOT know is that most projects like Everglades, even those financed at the height of the boom, did require personal guarantees by principals...principals whose personal fortunes are now threatened by the bursting of the bubble.

The myth that well-heeled corporations were able to circumvent the dreaded personal guarantee has slowly been shattered over the past year as more and more personal bankruptcies shadowed corporate filings, but the Cababie's misfortune brings the extent of the problem to light.  When folks like the Cababie's are asked for personal guarantees, you can bet the rest of us will be asked as well.

There is a fine line between greed/recklessness and legitimate entrepreneurship, and it would be difficult for anyone to know the Cababie's legacy to characterize the family as anything but legitimate, proven investors.  Still, the need to secure guarantees for high risk ventures is obvious, and by the time Everglades on the Bay was a reality, the writing was certainly on the walls.  Given the fact that too many legitimate entrepreneurs lack the assets to guarantee innovative and job-creating projects, the chilling effect on local economies of this latest news is easy to foresee.

This development will likely serve to increase demands for personal guarantees, even from borrowers who have historically enjoyed corporate corporate credit without them.  Banks who have offered unsecured lines of credits to a corporate clients for years will begin asking for personal guarantees. Sadly, it will only make the credit markets that much more difficult to access for small enterprise, and barring alternative guarantee structures, means even tougher times ahead for small businesses in America.



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