Construction Loan Guarantees

This article will discuss several different types of guarantees that may be required by lenders in  order to minimize payment and performance risks associated with construction loans.

Commercial mortgage loans secured by existing income producing properties are often made on a  non-recourse basis to the borrower (and its principals), other than with respect to customary  limited recourse carve-outs. These permanent or mini-permanent loans generally have the benefit of  real property collateral producing sufficient cash flow to service the lender's debt and cover  operating expenses for the property. Construction loans, however, present a different risk profile  for the mortgage lender due to, among other things, no cash flow being generated from the property  during the course of construction, the possibility of the project not being completed within budget  (or at all) and the increased risk of liens for labor and materials being filed against the  property. In