What is a carve out clause in a Non-Recourse loan?
In the commercial lending world, the mortgage loans are either a recourse loan or a non-recourse loan. The professionals at CRE-Finance LLC want to explain what a non-recourse loan is.
A non-recourse loan is one where the lender cannot come back after you personally for a deficiency judgment if they foreclose and take a loss.
Okay, but then a question came up. What about a carve-out clause? "A carve-out clause is a provision in a non-recourse loan that says if a borrower commits certain Bad Boy Acts that the commercial loan suddenly becomes a full-recourse loan" explains Todd Tretsky of CRE-Finance LLC.
So what is a Bad Boy Act?
Bad Boy Acts include the following "bad-boy" behaviors:
(i) fraud or intentional misrepresentation by the borrower (you lie to the lender to get the loan in the first place); (ii) waste occurring to or on the mortgaged property (you take a sledgehammer to the property right before you lose it in foreclosure); (iii) gross negligence or criminal acts of the borrower that result in the forfeiture, seizure or loss of any portion of the mortgaged property (you set up a meth lab in the property and the government seizes the property); (iv) misapplication or misappropriation of rents, insurance proceeds or condemnation awards received by the borrower after the occurrence and during the continuance of an event of default (you steal the insurance proceeds check); and (v) any sale, conveyance, mortgage, grant, bargain, encumbrance, pledge, assignment or transfer of the mortgaged property, or any part thereof, without the prior written consent of the lender (you put a second mortgage on the property even though the loan documents specifically forbid it).
Many people give miss information that there are no personal checks when applying for a commercial loan. Even though the loan is a non-recourse loan, all lenders will still run due diligence on the individuals that own 10% or more of the corporation. Once the individuals pass the due diligence checks then your loan passes the mustard for the next stage. You must work with someone that is experienced in Non-Recourse loans, as when used correctly, it's a great commercial loan. CRE-Finance has that experience. Please call Todd Tretsky at 212-851-6926 or Richard Tretsky at 212-257-7307 or visit us www.cre-finance.com