When small-business owners lease commercial space in Seattle, they typically have to sign a personal guarantee that makes them personally responsible for paying the rent even if the business fails.
For some, like Charlie Anthe of Ballard’s Moshi Moshi Sushi & Izakaya, the personal guarantee can be a heavy burden. If the business closes, Anthe will personally have to pay the base rent, $8,000 a month, through the remainder of the lease or until a new tenant moves over. Commercial leases vary in length, but many run for years.
Seattle City Councilmember Andrew Lewis is sponsoring a bill to regulate that burden — and other lease issues. The proposal would cap personal guarantees to two years of rent plus tenant improvements.
The regulations would not apply to lease renewals, only new leases.
The bill might be the first of its kind in the country, according to city officials.
“Personal guarantees have a way of scaring people away from wanting to open a business,” said Anthe, who has co-owned Moshi Moshi since 2019. These guarantees, he said, can put everything small business owners have, including their homes, retirement savings and college funds, at risk.
Lewis said the bill would incentivize Seattleites to start a business, contributing to the economic recovery of the city post-COVID-19. Seattle’s annual average of new business applications has decreased 42% from 2019 to 2022, according to city data analyzed by Axios.
But even for some established businesses, the personal guarantee remains a drag. During an Aug. 16 City Council meeting, Portage Bay Cafe owner Amy Gunnar said that even though she has been a business owner for 25 years, she still has had to negotiate limits for personal guarantees with landlords.
“The backing of my company should have been sufficient,” Gunnar said. “And yet I had to fight, fight, fight, and I still ended up with personal guarantees of some level on all of my leases.”
If a long-term successful group of restaurants had to negotiate hard, Gunnar said, a new restaurant or business has little chance to avoid a personal guarantee that can last several years.
Portage Bay Cafe has five Seattle locations in West Seattle, Ballard, South Lake Union, Roosevelt and University District.
Landlords at loss
Councilmember Lewis, who is an incumbent in the upcoming City Council election, said he expects pushback from landlords. According to a report by city analyst Ann Gorman, lessors may want to minimize their losses with higher rents or increasing maintenance charges in new leases.
“Lessors include personal guarantee, security deposit and/or letter-of-credit requirements in commercial leases for a variety of reasons, including to protect their investments, to ensure that their operating costs are covered, and to earn a regular profit,” according to the report.
The bill is still in early stages, Lewis said, and he hopes to hear from landlords and trade groups before a vote.
Commercial property management companies CBRE and Colliers did not respond to Seattle Times inquiries.
Anthe’s landlord, John Teutsch, said in an interview that there has been no outreach to him or other landlords regarding the bill.
Personal guarantees have always existed in a commercial leasing contract, Teutsch said. Instead of collecting the guarantee if a business goes under, he added, his priority is replacing the tenant.
If the bill is approved, Teutsch said, his preference might shift to leasing to big national chains that have a lower risk of defaulting instead of small businesses
Teutsch said it is unclear to him what problem the bill is trying to solve. “When the business fails, both landlord and tenant suffer.”
Commercial leases include retail, industrial and office spaces. It is unclear if the bill would apply to industrial and office leases since they operate differently and have a larger square-footage than retail and restaurant spaces.
The length of a lease term varies between one and 15 years, though the most common terms are between five and 10, said Brian Hayden, a broker with corporate real estate firm Flinn Ferguson.
“The length of the term depends on how much money the tenant wants the landlord to contribute towards building space out,” Hayden said.
If a landlord contributes money to build out a retail space, for example, the personal guarantees are a way to securitize the landlord’s investment.
“Under this tent”
Lewis, who partnered with the Seattle Restaurant Alliance and Washington Hospitality Association, argues that the bill will help small businesses and the community. Small businesses add “cultural fabrics to our communities,” Lewis said.
According to the bill, the regulations would be enforced by city hearings and citations, including monetary penalties. Landlords would also have to provide notice of the new regulations to existing and prospective tenants.
The bill would provide commercial tenant protections that could benefit business owners who are not native English speakers and might not understand the full impact of the personal guarantee, said Councilmember Tammy Morales, also an incumbent.
“I have a feeling once we stick our nose under this tent we’re going to realize there are a lot of issues we need to be working on as a city to make sure our small-business community has greater protections,” Morales said during the City Council meeting last week.
Because of his existing lease, Anthe would not immediately be affected by the regulations if they become law. He and his partner have a five-year lease with an optional five-year extension. They assumed the original lease when they bought Moshi Moshi from the previous owner in 2019 as a condition of approving the business sale.
The bill would also limit the value of security deposits and letters of credit required for commercial leases. If the bill gets approved, security deposits and letters of credit “would be the sum of the first and the last month of rent payments as specified in the lease.”
According to Gorman’s report, the Public Assets and Homelessness Committee plans to continue the discussion of the bill and vote on any amendments Sept. 6. If committee members vote on the amended bill, it could be scheduled for City Council vote on Sept. 12.
