Many multifamily real estate loans are nonrecourse when it comes to the borrower and its principals, with the principals signing what’s known as a “carve-out” guaranty. The carve-out guaranty was originally introduced into the market by lenders in order to protect the lender when the borrower and its principals committed certain enumerated bad acts.
However, over time and through the recession of the past few years, the list of bad acts in the carve-out guaranties has grown to a point where many of the carve-out guaranties that are signed today could be viewed as full guaranties of the underlying loan. In fact, that is just what the United States District Court in Michigan recently decided in 51382 Gratiot Ave. Holdings v. Chesterfield Development Co., Case No. 2:11-cv-12047 U.S. Dist. (D. Mich. Dec. 12, 2011). This decision challenges expectations in the real estate industry as to the extent to which guarantors may be liable under carve-out guaranties.
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