10A — January 30 - February 12, 2015 — Economic Development — M id A tlantic

Real Estate Journal


E conomic D evelopment By Scott C. Butler, Esquire, Kaplin Stewart Beware of personal liability in your non-recourse loan


cable costs. Also, with regard to the potential environmen- tal liability, it is important to have a full environmental investigation of the property performed and to include en- vironmental protections in all of the leases at the property. The second carve-outs are those that result in the guar- antor being fully liable for the entire loan amount and losing all of the non-recourse protec- tions. Originally, these carve- outs were limited to voluntary bankruptcy and transferring the property; however, lenders have been expanding on these carve-outs. In negotiating these guarantees, a guaran- tor should be careful that the involuntary bankruptcy of the borrower is not included as a carve-out. Also, a guarantor should be careful that the carve-out for the transfer of the property does not include transfers of non-controlling partnership interests, leases of space at the property and granting easements benefit- ting the property. Although a lender might desire consent rights over these transfers, such transfers should not cause the loan to become fully recourse. In expanding the bankruptcy protections, lenders sometimes include provisions regarding the op- eration of the borrower entity to maintain its “single purpose entity” status and, therefore, a guarantor must be careful so that using the wrong station- ary or bank account does not trigger the loan to become a full recourse loan. Since the security for a non- recourse loan is intended to be limited to the foreclosure of the real estate, borrowers and guarantors should negotiate the carve-out guaranty with an argument that the guar- anty be limited to liability for intentionally preventing the lender to regain control of the collateral. Without carefully reviewing and negotiating the non-recourse carve-out guar- anty, a real estate owner may be under the false impression that they have no personal liability under a defaulting loan. Scott C. Butler, Esquire is a principal of the Kaplin Stewart firmand amember of the Real Estate Transac- tions and Corporate Law& Business Planning Depart- ments. n

recent financial crisis, many lenders have expanded the personal liability under these guarantees and, if the guaran- tor is not careful, these loans can easily become full person- ally guaranteed loans. There are normally two types of carve-outs covered by these carve-out guarantees. The first carve-outs are those that result in the guarantor being liable only for the loss sustained by the lender. These carve-outs normally include: (i) certain wrongful acts, such as fraud, willful misconduct andmisappropriation of funds;

(ii) certain protections for the priority of the lender’s lien on the real estate and the physi- cal condition of the property, such as paying real estate taxes, maintaining insurance and preventing mechanic’s liens; and (iii) indemnifica- tion for the environmental condition of the property. With regard to the foregoing items related to the lender’s lien and the physical condition of the property, it is important for the guarantor to limit the liability to the extent there is sufficient cash-flow from the property to pay for the appli-

ost owners of real es- tate look forward to the day when they are

liable. If the borrower defaults under such a loan, the lender's recovery is limited to fore- closing on the real estate. In most of these non-recourse loans, however, the controlling owner is obligated to person- ally enter into a carve-out guaranty, under which the owner guarantees certain acts or omissions related to the loan. These guarantees were originally known as “bad boy guarantees” since the actions that triggered recourse liabil- ity were limited to the wrong- ful acts of the borrower. Over time, and especially since the

able to refi- nance their pe r s ona l l y guaranteed c o n s t r u c - t i o n a n d acquisition loan with a non-recourse loan. A non-

Scott Butler

recourse loan is a loan that is secured by a pledge of collat- eral (in this case, real estate), but for which the owner is theoretically not personally

Firmly Rooted in the Law and in the Community We are well grounded in every facet of real estate law, from acquisition to construction. We are committed to serving the needs of our clients and our communities.

Kaplin Stewart At torneys at Law

Contact: Scott Butler • sbutler@kaplaw.com 910 Harvest Drive, Blue Bell, PA 19422-0765 • 610-941-2560 • www.kaplaw.com

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