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Guaranties in Commercial Real Estate Loans Toolkit
Practical Law Toolkit w-020-8006 (Approx. 17 pages)
Guaranties in Commercial Real Estate Loans Toolkit
by Practical Law Real Estate
| Maintained • ExpandCalifornia, Florida, Georgia...Illinois, Massachusetts, New Jersey, New York, Pennsylvania, Texas, USA (National/Federal) |
A collection of resources to assist borrowers, lenders, and guarantors in understanding and effectively drafting and negotiating loan guaranties in commercial real estate loan transactions.
A loan guaranty is an agreement in which one or more parties assumes responsibility for:
- Payment of all a portion of the loan debt.
- Performance of all or a specific set of the loan obligations.
- Reimbursement or indemnity against lender's losses for all or a specific set of liabilities.
- Some combination of the above.
Guaranties as Credit Enhancement
Guaranties and indemnities provide loans credit enhancement by allowing the lender to seek recourse for loan repayment against more than just the real property collateral and the borrower. Although not the primary obligor under a loan, a loan guarantor is typically a principal owner or parent company of the borrower or some other person or entity that derives a direct or indirect benefit by the making of the loan. In addition to providing an alternate source of repayment for the borrower's loan obligations, a loan guaranty ensures that a creditworthy third party with expertise in real property management has the financial incentive to avoid liability under the loan's guaranties and indemnities and incentivize the borrower to perform its obligations under the loan documents.
Drafting Considerations
To understand and successfully draft and negotiate loan guaranties in a commercial real estate loan transaction, loan counsel must consider:
- The scope of liability and the events that trigger liability under guaranties and indemnities. Common types of guaranties and indemnities, include:
- full recourse guaranties which impose the potential for full liability for a breach of the payment and performance obligations of the borrower;
- nonrecourse carveout guaranties which limit liability (and the scope of the liability) depending on the nature of the default;
- payment guaranties which limit liability to the loan's debt obligations. The scope of these guaranties can be further limited to principal, interest, or both and are sometimes capped at a specific dollar amount or percentage of the original principal loan amount;
- completion guaranties used in construction loans to ensure work is performed (see Practice Note, Construction Financing: Overview); and
- environmental indemnities which protect the lender against risks associated with potential environmental contamination of the collateral (see Practice Note, Commercial Real Estate Loans: Lender's Environmental Liability).
- State and local law requirements (see State-Specific Resources).
This Toolkit contains continuously maintained Practice Notes, Standard Documents, Standard Clauses, and other resources offering drafting and negotiating for counsel working on guaranties and indemnities in commercial real estate loan transactions.
State-Specific Resources
State Q&A Tools
For state-specific guidance and information about guaranties and indemnities in other jurisdictions, or to compare the laws of surety and lending generally across multiple jurisdictions, see Real Estate Finance: State Q&A Tool.