Exposure And Remedies Under Completion Guaranties

Under a completion guaranty, sometimes referred to as a “cost overrun guaranty,” the guarantor typically guarantees any excess of the cost of completing construction over the portion of the construction loan allocated to funding construction costs.

The lender will usually have all or some of the following three remedies: (i) requiring the guarantor to complete construction, in which case the guarantor will be entitled to draw undisbursed amounts of the construction loan allocated to construction costs, as these costs are incurred; (ii) the lender itself completing the construction, with the guarantor being obligated to reimburse the lender for costs incurred to the extent they exceed the undisbursed loan amount allocated to construction; and (iii) most importantly, collecting from the guarantor a payment in an amount equal to the estimated cost of completion less any undisbursed loan proceeds allocated to construction, which is referred to as a “liquidated damages”