Non-recourse carve-out guaranty in commercial real estate

A non-recourse carve-out guaranty, often called a bad boy guaranty, is a separate promise by the borrower's principal to be personally liable if the borrower commits one of an enumerated list of acts. The loan stays non-recourse otherwise. The acts come in two tiers: some make the guarantor cover the lender's actual loss, and others convert the whole loan balance to recourse.

What does the guaranty actually cover?

The two tiers are the structure worth learning first. ArentFox Schiff describes the carve-outs as producing "(i) an indemnity for losses or damages suffered by the lender as a result of a breach of the applicable covenant; and (ii) full liability for the amount of the loan." Practitioners call the first tier above the line and the second below the line.

The acts themselves are more mundane than the "bad boy" name suggests. The Adventures in CRE glossary lists six typical ones: "committing fraud or misrepresentation during the loan application process," "misappropriating property income," "filing for voluntary bankruptcy protection," "failing to maintain required insurance on the property," "neglecting to pay property taxes, resulting in liens against the property," and "refusing to permit property inspections as required by the loan agreement." ArentFox Schiff adds waste to the collateral and "obtaining financing that is not permitted by the loan documents."

Why has the list kept growing?

Because lenders keep adding to it. Dean Mead notes plainly that "over the years, these bad boy carve-outs have expanded," and gives a recent example: interference with the exercise of the lender's remedies now shows up as an additional bad act. Barley Snyder makes the same observation from the guarantor's side, that "with the advent of new non-recourse financing structures the list of 'triggers' for recourse and/or guarantor liability has grown."

The modern list therefore mixes deliberate acts with ordinary operational drift: a missed inspection or a lapsed policy can sit on the same list as fraud.

Which tier is a given act in?

That is negotiated, not standard. Dean Mead describes the split: for some bad acts, "some expose the guarantor to full recourse," while "others limit the exposure of the guarantor to the actual damages incurred by the lender arising out of the particular act." Two loans can carry nearly the same clause list and place the same act on opposite sides of the line, so one deal's guaranty tells you little about the next. Barley Snyder adds that the guaranty is "usually by an individual, not an entity," so the tier question is rarely abstract for whoever signed.

What a borrower can actually track

TractTerm, part of Composed Studio, is a record system, not counsel. It keeps a guarantor register and a non-recourse carve-out trigger register tied to each guaranty, holds the signed guaranty in the document repository, and records an immutable audit trail of every change to those terms. That answers "who guaranteed what, and which acts are listed" without reopening a closing binder.

The operational half sits next to it. Insurance and tax obligations that appear on a carve-out list are usually also reporting deliverables on a calendar, and financial thresholds are usually also loan covenants with test dates and headroom. Where a minimum DSCR appears in both places it is one computed number serving two documents, though the consequences of a covenant breach run on their own track.

TractTerm gives no legal advice, and it does not decide whether a carve-out has been triggered or released. That rests with the lender under the loan documents, and how a clause reads on a particular deal is a question for the borrower's own counsel.