Liquidating loans definition audio
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.
Construction lenders will typically require a creditworthy party to deliver a completion guarantee.
The completion guarantee will provide, in pertinent part, that the guarantor will guarantee the prompt and complete performance by the borrower of all of the terms of the loan agreement with respect to the design, construction and completion of the improvements that are the subject of the loan.
The construction lender may pursue its rights and remedies under the completion guarantee upon the occurrence of various events, including, among others, (i) the borrower's failure to commence or complete construction within the time periods set forth in the loan agreement, (ii) construction ceasing for an extended period of time resulting in a default under the loan agreement or (iii) the occurrence of any other event of default under the loan agreement.In as much as the guarantor will likely be an affiliate of the borrower, if the borrower fails to timely complete the project, the guarantor may be unable or unwilling to step up and perform under the completion guarantee (in addition to the lender's likely having lost faith in the ability of the borrower-related parties to complete the project).Furthermore, even if the lender desired the guarantor to complete the project under the terms of the guaranty, the lender may have difficulty obtaining specific performance as a result of the lender having the ability to instead sue for damages under the completion guarantee.In addition, even after construction is completed there is often a period of time prior to stabilization when there is insufficient cash flow to pay debt service on the loan and operating expenses for the property.Construction lenders require various mitigants to these and other construction related risks, such as requiring guaranteed maximum price contracts, payment and performance bonds and guarantees from creditworthy parties.