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This instrument may cover payments to the lender of all regular interest, default interest and late charges accruing on the loan, periodic principal payments (but excluding the balloon payment at maturity) and costs and expenses incurred in the course of maintenance and operation of the property.
This guarantee may have some redundancy (for at least the period of time prior to completion or later termination event under the completion guarantee) with certain carry costs aspects of the completion guarantee.
"Completion" under the guarantee is usually broadly defined to include punch list items.
To the extent a portion of the loan is budgeted for tenant improvement work for space leases, then the costs for such tenant improvements will likely be covered by the completion guarantee.
In those transactions where there is an early release mechanism for the carry guarantee based upon the property achieving stabilization, the guarantor would no longer bear the risk of the property falling on difficult times after stabilization (whether due to macro-economic conditions or otherwise) prior to the loan being repaid in full (such as during any loan extension periods).
In other circumstances, a full payment guarantee may be required at the closing of the loan but the guarantee may have certain "burn off " provisions which would provide for a reduction (or elimination) of the guaranteed amount upon the project being completed, the property achieving certain financial thresholds, such as achieving an agreed upon DSCR for a prescribed period of time, and there then being no existing event of default.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.The guarantor will be responsible for lien-free completion and all cost overruns and for all other costs that do not fall into the category of construction related expenses, such as interest charges under the loan, insurance premiums and real estate taxes.
In certain instances, the portion of the completion guarantee that covers soft costs such as interest charges, insurance premiums and real estate taxes may only be in place until completion of the project or stabilization of the completed project.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.