Commercial Real Estate Finance: A quick primer for businesses on Commercial Loan Guaranties

This article, written by attorney Eric Kilchenstein, was originally published by and can be found here.

When it is my turn to take the pen with this column, I try to provide a commercial real estate law topic that I think is sometimes overlooked by closely held businesses and condense the topic, within the short word limit, into some broader considerations while hopefully not putting the readership to sleep.  Commercial real estate loan guaranties (have I lost you yet?) are a requirement of institutional and private equity lenders for virtually all closely held businesses that are borrowers under commercial real estate loans yet they are sometimes glossed over unless the business has savvy in-house expertise or experienced counsel.

While lenders may not have the discretion to negotiate the terms of a guaranty, a greater awareness of some general distinctions benefits discerning businesses, if not by ability to negotiate then at least by a better understanding.  In trying to fit the word limit of this column, I go through the very basics of each below, but note that it is in not uncommon for concepts of each to overlap or be meshed in a lender produced guaranty.  To that end, the most common types of guaranties required with commercial real estate loans are outlined in brief, below.

  1. The Non-Recourse Carveout Guaranty (“Bad-Boy” Guaranty). These make the guarantor liable

for specific acts or omissions of the borrower that put the collateral of the loan at risk. Typically, these distinguish such acts or omissions into those that i) trigger full recourse for the entire outstanding amount of the loan or ii) limited recourse for less egregious acts or omissions.

  • The Repayment Guaranty. Particularly common for construction loans or other loans on collateral

that is not stabilized, the repayment guaranty is typically crafted to protect the lender against loss after other remedies under the other loan documents have not been exercised (including foreclosure). That said, if there are several guarantors, lenders are often amenable to negotiating to several liability per each guarantor to reduce possible liability of each.

  • The Environmental Indemnity Guaranty. As it sounds, these protect the lender from liabilities and

actual losses arising from environmental conditions at the collateral property.  Though these often extend beyond the borrower’s repayment of the underlying debt or a foreclosure, lenders will sometimes agree to sunset provisions which release the guarantor after a certain amount of time.

  • The Carry Guaranty.  A carry guaranty is sometimes required in construction loans or if the

collateral property is not generating cash flow to pay operating expenses at the time of the issuance of the loan. Typically, carry guaranties release the guarantor after the borrower’s repayment in full or upon the collateral property reaching a benchmark of financial performance (such as a debt service coverage ratio).

  • The Completion Guaranty.  Also common with collateral property that is undergoing

construction, or other substantial improvements, a completion guaranty, puts the guarantor on the hook for completion of the construction or property improvements as a result of the borrower’s failure to complete.

As mentioned above, the basics of the various types of guaranties are sometimes meshed and while the word limits of this column do not allow for elaboration to adequately describe the enormity of the amount of distinction and possible variation, is important that businesses understand that the guaranties in front of them as part of any commercial real estate loan require full attention and consultation with their attorneys and advisors before signing and, if applicable, further negotiation.