An exception to a non-recourse loan that makes the sponsor personally liable for losses caused by specified bad acts, and in some cases for the entire debt.
The longer version
Non-recourse means the lender looks to the property, not the sponsor, for repayment. The carve-outs restore personal liability where the loss was caused by conduct the sponsor controlled: misapplied funds, fraud, waste, unpermitted transfers, or failure to maintain required insurance. These are loss carve-outs, limited to the damage caused.
A smaller set of springing carve-outs makes the full debt recourse. Voluntary bankruptcy filings and violations of the single purpose entity covenants are the usual triggers. The negotiation at closing is almost always about which items sit in which category, because the difference is between a measurable loss and the whole loan.
Common questions
- What is the difference between a loss carve-out and a springing carve-out?
- A loss carve-out makes the guarantor liable only for the damage the act caused. A springing carve-out makes the entire loan recourse, and the common triggers are a voluntary bankruptcy filing or a breach of the single purpose entity provisions.
- Who signs the carve-out guaranty?
- A creditworthy principal or parent entity, not the borrowing entity, because the point is to reach someone outside the property-owning special purpose vehicle.
- Are carve-outs negotiable?
- The categories usually are. Most negotiation concerns whether transfer and insurance failures produce loss liability or full recourse, and whether carve-outs are limited to acts within the sponsor's control.