In one sentence
A guaranty covering a property's operating shortfalls, debt service, and carrying costs during construction or lease-up, rather than the loan principal.
The longer version
On a construction or transitional deal the property does not cover its own costs for a period. The carry guaranty puts that gap on the sponsor: interest, taxes, insurance, and operating expenses not met by property income, usually until a stated debt service coverage or occupancy test is satisfied.
It is separate from a completion guaranty, which covers finishing the building, and from a payment guaranty, which covers the debt. A closing checklist that lists one guaranty line item rather than three is a checklist that will produce a question later.
Common questions
- How is a carry guaranty different from a completion guaranty?
- A completion guaranty obligates the sponsor to finish construction lien free. A carry guaranty covers the cost of holding the asset, including interest and operating shortfalls, until it performs.
- When does a carry guaranty burn off?
- At a stated test, commonly a debt service coverage ratio held for a defined number of consecutive months, or a physical and economic occupancy threshold.
- Does it cover debt service after a default?
- That depends on drafting. Many carry guaranties are capped or terminate on acceleration, which is a point worth confirming rather than assuming at closing.
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