In one sentence
The guaranty behind a non-recourse loan that springs personal liability for specified bad acts like fraud, waste, misapplication of funds, or unauthorized transfers.
The longer version
Often called bad-boy guaranties, carve-outs split into loss items, where the guarantor covers the lender's actual loss from the act, and full-recourse triggers, where the whole loan becomes personally guaranteed, classically bankruptcy filings and prohibited transfers.
Carve-out language is heavily negotiated because case law has enforced springing recourse literally. Sponsors read these clauses the way lenders read financial covenants.
Common questions
- What is a carve-out guaranty?
- The guaranty behind a non-recourse loan that makes the sponsor personally liable if specified acts occur, such as fraud, misapplication of funds, waste, an unpermitted transfer or a voluntary bankruptcy.
- What is the difference between a loss carve-out and a full recourse carve-out?
- A loss carve-out makes the guarantor liable only for the lender's actual loss from the act. A full recourse carve-out springs the entire loan to recourse, and typically applies to the most serious acts such as a bankruptcy filing.
- What do sponsors negotiate in a carve-out guaranty?
- Narrower triggers limited to acts they control, knowledge and materiality qualifiers, caps on loss carve-outs, and exclusions for acts by third parties such as property managers.
Keep reading
- The commercial loan closing checklistWhat goes on the list and who owns each line.
- The CRE due diligence checklistEvery phase of diligence, organized the way deals close.
- What lenders check in a closing binderFour reviewers, four different reads.
- Loan closing softwareWhere this item is cleared before funding.