Non-Recourse Commercial Loans: Carve-Outs and Bad-Boy Guarantees Explained
Non-recourse means the lender's remedy is the property, until a carve-out is triggered. Every non-recourse loan comes with a guarantor and a list of exceptions, and the details are in the loan documents, not the term sheet.
Two Levels of Carve-Outs
- Loss carve-outs: you're liable for the lender's actual loss from things like fraud or misrepresentation, misapplied rents or security deposits, insurance or condemnation proceeds not applied correctly, waste, and unpaid taxes when the property had cash flow.
- Springing full recourse: the entire loan becomes personally guaranteed for events such as a voluntary bankruptcy filing, an unpermitted transfer or additional financing, or violating single-purpose entity rules.
Other Personal Obligations
- Environmental indemnity: usually signed separately, and it can survive repayment or foreclosure.
- Completion guarantee on construction and heavy value-add loans.
- Net worth and liquidity covenants on the guarantor through the life of the loan.
What Sponsors Negotiate
- Limiting cash-flow carve-outs to available property cash flow
- Tightening "waste" and "insolvency" language so normal operating losses don't trigger recourse
- Transfer provisions that permit estate planning and partner changes
- Guarantor covenant levels and testing frequency
- Release of the environmental indemnity after a clean report at payoff
Room to negotiate varies: agency and CMBS documents are largely standardized, while banks, debt funds and bridge lenders have more flexibility. Have real estate counsel review the guaranty and loan agreement. This article is general information, not legal advice.
Related: Bridge and Agency Loans · Sponsor Liquidity Requirements
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