| Detail | Explanation |
|---|---|
| Used on | Ground-up construction, heavy renovation, and some build-to-suit loans |
| Covers | Finishing the work, overruns, and lien-free delivery |
| Ends at | Completion as defined in the loan, often certificate of occupancy plus lien releases |
| Often paired with | Carry guarantee and repayment guarantee |
What does a completion guarantee require?
The guarantor typically promises that construction will be substantially completed by a set date, in line with the approved plans, free of mechanics' liens, and with all costs paid. If loan proceeds and the required equity are not enough, the guarantor funds the difference. If the borrower stops work, the lender can require the guarantor to finish or to pay the lender's cost of finishing.
Worked example: funding a cost overrun
In this hypothetical example, a project has a $24,000,000 approved budget funded by the loan and sponsor equity. Midway through construction, higher trade costs create a $1,800,000 overrun, about 7.5% of the budget, after the hard cost contingency is exhausted. The lender will not advance beyond its commitment, so the loan documents require the borrower to deposit the $1,800,000 before the next draw. If the borrower cannot, the lender can call on the completion guarantor to fund it.
| Item | Amount |
|---|---|
| Approved budget | $24,000,000 |
| Overrun after contingency | $1,800,000 |
| Overrun as share of budget | 7.5% |
| Who funds it | Borrower, then completion guarantor |
How is it different from a repayment or carry guarantee?
A completion guarantee is about finishing the building. A carry guarantee covers interest, taxes, insurance, and operating shortfalls until the property stabilizes. A repayment guarantee covers some or all of the loan balance. Construction lenders often ask for all 3, sometimes with the repayment piece limited or burning off at stabilization. The personal guarantee page covers the broader range of guarantee types.
How do lenders evaluate a completion guarantor?
Lenders look for liquidity and net worth that are large relative to the budget, and for real construction experience. They also weigh contingent liabilities from other projects the guarantor supports. The general contractor contract, the contingency, and the interest reserve all reduce the chance the guarantee is ever called, which is why lenders review them closely. The loan sizing calculator shows how cost and value limits set construction proceeds. The construction underwriting guide covers that review in more detail.
Points sponsors commonly negotiate
Sponsors often ask to define completion clearly so the guarantee ends on a specific event, to exclude delays caused by force majeure or the lender, to cap liability for costs outside the sponsor's control, and to align guarantor financial covenants with their balance sheet. Guarantee forms vary by lender, and counsel should review the definitions before closing. Capital Partners arranges construction loans and compares guarantee packages across lenders. Submit a deal to review options for a project.
Common questions
Do all construction loans require a completion guarantee?
Almost all do. Even lenders that make non-recourse permanent loans usually require completion support during construction because the unfinished building is poor collateral.
When does a completion guarantee end?
It ends when completion occurs as defined in the loan documents. That definition often includes a certificate of occupancy, final lien waivers, and an architect's or inspector's confirmation.
Can a GMP contract replace a completion guarantee?
A guaranteed maximum price contract lowers overrun risk, but lenders generally still require a completion guarantee because contractors can default and change orders can raise costs.
Can an LLC be the completion guarantor?
A parent entity can serve as guarantor if it has enough liquidity and net worth. Lenders often want an individual principal as well when the entity's balance sheet is thin.
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