What is a bad boy carve-out guarantee?

Why do non-recourse lenders require a carve-out guarantee?

A non-recourse loan leaves the lender relying on the property. That only works if the sponsor cannot strip value from it or block the lender's remedies without consequence. The carve-out guarantee covers those behaviors. A sponsor who operates the property honestly and lets the lender enforce its remedies in a downturn generally never triggers it.

What are common loss carve-outs?

Loss carve-outs make the guarantor liable for the lender's actual loss caused by the act, and not the whole loan. Typical examples include:

• Fraud or intentional misrepresentation in connection with the loan
• Misapplication of rents, security deposits, insurance proceeds, or condemnation awards
• Physical waste of the property
• Failure to pay taxes or insurance when property cash flow was available
• Removal of personal property or fixtures without consent
• Breach of environmental covenants, when not handled by a separate indemnity

What are springing full recourse triggers?

Full recourse carve-outs convert the entire loan into a recourse obligation of the guarantor. They target acts that most damage the lender's position. Typical triggers include:

• A voluntary bankruptcy filing by the borrower
• A collusive involuntary bankruptcy filed with the borrower's help
• A transfer of the property or a change of control without lender consent
• Unpermitted additional debt or liens on the property
• Material breach of single-purpose entity covenants that leads to substantive consolidation

What can sponsors negotiate in a carve-out guarantee?

The list is standard in outline and negotiable in detail. Sponsors commonly seek to limit liability to losses where possible, require that failures to pay taxes or insurance apply only when property cash flow was available, add cure periods for inadvertent entity covenant breaches, carve out transfers already permitted in the loan agreement, and cap the guarantor's net worth and liquidity covenants at levels that fit the balance sheet.

Small drafting choices, such as whether a trigger requires intent or whether a breach must cause a loss, change what the guarantor actually risks. Lender forms differ, so each guarantor should have independent counsel review the guarantee and the loan agreement definitions it relies on. The personal guarantee page compares carve-out guarantees with payment guarantees.

How carve-outs affect lender selection

Carve-out terms differ meaningfully between lender types, and a slightly higher rate with a narrower guarantee can be the better loan for a sponsor with a large balance sheet. Moderate leverage also widens the pool of non-recourse lenders, and the DSCR calculator shows how much debt a property carries at a given coverage. Capital Partners compares guarantee terms alongside proceeds, pricing, and prepayment when placing permanent loans and bridge loans. To review terms on a specific property, submit a deal.

Common questions