By: Scott Lynn

Metropolitan Capital Advisors has brokered billions of non-recourse commercial real estate loans over the years that have been placed with banks, conduits, life insurance companies, pension funds, etc. But does a non-recourse loan mean the Borrower and/or the principals of the Borrower are entering into a risk-less transaction whereby the Lender’s only recourse if things go bad is to take the property?

Answer: usually not. Most so-called non-recourse loans are subject to what is widely referred to by capital markets industry participants as the “Standard Non-Recourse Carve Out Guarantees” that include:

1) Promises not to commit fraud, misrepresentation or misappropriation

2) Promises to keep the property well maintained and in good condition

3) Promises to be responsible for any environmental issue that might arise

4) Promises not to put the property in bankruptcy as an attempt to avoid foreclosure.

pumpkin patchAnd it is not just the property or the Borrower that is required to make these promises, but rather the Carve Out “Guarantor,” which in most cases these days is a “warm body”… a real live person standing behind the promises not to do the above and if you do, you become personally liable for the loan. If drafted properly, most good people have no problem making promises not to intentionally do what is promised and as a result, trillions of dollars of non-recourse deals get done on this premise.

Sometimes circumstances exist where Borrowers and its principals have to provide additional carve-out guarantees to cover risk that is inherent to a specific property and those issues are usually disclosed and negotiated as part of the agreement before any loan documents are drafted. However, our firm has seen a recent trend by some Lenders (more so their attorneys) to expand standard carve-out provisions by adding other events, reasons or definitions the loan can suddenly become recourse/full liability.

As they say, “the devil is in the details,” which may very well be in a big fat stack of ghostly loan documents that don’t get properly read, reviewed or explained. For example, we recently worked on a deal where two carve guarantors became personally and individually liable for the full loan if either one of them died during the 10-year loan term. This included the dead guy’s estate … that’s just plain SPOOKY. Another example is property condition. If you’re not careful, the loan might become full liability if someone slips and falls or you sell a piece of obsolete maintenance equipment without asking for Lender consent. BOO, gotcha!!!!!

Don’t get too scared in the Pumpkin Patch. You can always pick where to go Trick or Treating as there are plenty of lenders doing deals the right way and only asking for promises that are reasonable and in line with what is viewed as a “standard carve out”. The best way to protect yourself from wasting time, money and effort is to request the Lenders carve out language up front as part of the Term Sheet, Loan Application or Loan Commitment. That way you can see any unusual requirements for yourself with no surprises later on down the road.

MCA has extensive expertise in arranging true, industry-standard, non-recourse financing in all shapes, sizes and property types. For further information, contact one of our Senior Directors in our Dallas or Denver offices or visit our web site at www.metcapital.com.

The Author, Scott Lynn, is the founding principal of MCA. Email Scott at slynn@metcapital.com