Is It Me? When CRE Loans Get Personal

Savvy commercial real estate (CRE) borrowers and lenders seeking to minimize downside exposure pay close attention to the triggers for nonrecourse carveout (NRC) guaranty liability. Many CRE loans are structured as "nonrecourse," meaning that after a default, the lender may only look to the collateral property itself for repayment of the loan, with no personal liability of the borrower entity and no credit support or payment guaranties from a borrower's owners. This lack of personal liability raises moral hazard issues, with little downside to a distressed CRE borrower filing for bankruptcy to prevent a foreclosure or otherwise hinder its lender's exercise of remedies. To limit these types of risks—and incentivize borrower parties to cooperate with their lender's exercise of remedies after a default—CRE lenders often look to NRC guaranties, under which a credit-worthy principal or parent entity may become partially or fully liable for a borrower's obligations upon the