The "Bad Boy" Carve-Out: Understanding Recourse in Construction Loans

You've negotiated a "non-recourse" loan. Great. But then your lawyer hands you a stack of documents including a "Guaranty of Recourse Obligations." What gives? In commercial real estate, non-recourse is rarely absolute.

The Three Types of Guarantees

In a typical construction loan, you will encounter three distinct types of liability:

1. The Repayment Guaranty (Full Recourse)

This is the scary one. It means if the project fails and the property value doesn't cover the loan, the lender can come after your personal assets (house, bank accounts, other projects) to make up the difference. Most bank construction loans start with some level of recourse (e.g., 50% or 100%) that "burns off" as you achieve milestones like Certificate of Occupancy or Stabilization.

2. The Completion Guaranty

Even in a "non-recourse" loan, the lender almost always requires a Completion Guaranty. You are personally promising to complete the construction of the project according to the plans, on time, and on budget. If you run out of money, you must reach into your pocket to finish the building. This protects the lender from being left with a half-built steel skeleton.

3. The "Bad Boy" Carve-Outs

This is the standard "non-recourse" guaranty. It says the loan is non-recourse unless you do something "bad." If you trigger a carve-out, the loan becomes fully recourse.

Managing the Risk

As a developer, your goal is to limit these liabilities. Key negotiation points include:

• Burn-Off Provisions: Ensure the repayment guaranty burns off to 0% upon stabilization.
• Capped Completion Guaranty: Try to cap your liability at a certain percentage of the budget (hard to get, but possible).
• Carve-Out Specifics: Watch out for "springing recourse" clauses that are triggered by things out of your control (like a mechanic's lien you are actively disputing).