Recourse and Guaranty Burndown: Tracking Guarantor Exposure Across a CRE Portfolio

Recourse on a commercial real estate loan is the guarantor’s personal or entity-level liability for the debt beyond the collateral: full recourse for the whole loan, partial recourse for a percentage or fixed amount, or non-recourse with carve-outs for specified bad acts. Burndown is the reduction of that liability on milestones the documents define, such as completion, a DSCR threshold, a leasing percentage or the passage of time. Every guaranty is a contingent liability that appears on the guarantor’s SREO and in every lender’s net worth test. The burndown is the guarantor’s right to reduce it, and it is almost never automatic: the borrower must prove the milestone and request the reduction. Guarantor exposure is tracked per loan and read across the portfolio.

The types of recourse

Full recourse. The guarantor is liable for the entire debt. Common on construction loans and smaller bank loans.

Partial recourse. Liability for a percentage of the loan (25% and 50% are common) or a fixed amount, often reducing on milestones.

Completion guaranty. On construction loans, liability to complete the project, released at completion.

Carry guaranty. Liability for interest, taxes and operating shortfalls until stabilization.

Non-recourse carve-out guaranty. The standard on agency, CMBS and LifeCo loans: no liability for the debt except for losses caused by specified acts (fraud, misapplication of funds, waste, environmental) and, for a shorter list of acts (voluntary bankruptcy, unauthorized transfer), full liability. Often called the “bad boy” guaranty. The carve-outs are the liability; tracking them means knowing which acts trigger which consequence.

Guarantor financial covenants. Minimum net worth and liquidity, tested annually, on all types. See balance sheet and bank loans.

Burndown provisions

Typical triggers: certificate of occupancy; a DSCR at or above a threshold for a stated number of consecutive quarters, on the lender’s definitions; leasing at or above a percentage; a loan-to-value at or below a threshold on a new appraisal; a principal paydown; or a date. Each trigger reduces recourse by a stated amount or to a stated level. Most documents require the borrower to deliver evidence and request the reduction in writing; some require lender confirmation.

The common failure: the milestone is achieved, nobody requests the burndown, and the guarantor carries a larger contingent liability for years, which shows up in every net worth test at every other lender.

What to track, per loan

• Recourse type, amount or percentage, and the guarantors.
• Carve-out list with the consequence of each.
• Burndown triggers with the definition of each test, the evidence required, and the current status.
• Guarantor covenants: thresholds, test dates, reporting deadlines.
• Current exposure: the recourse amount after burndowns achieved and requested.

A worked example: one guarantor, nine loans

A principal guarantees nine loans at five lenders. Before anyone adds it up:

Contingent liability on every net worth test the principal signs: $41 million plus the carry guaranty. After the three burndown requests that were available months ago: $5.5 million on A, $4.5 million on B, D released. Total: about $20 million.

The principal’s liquidity covenant at lender H is tested against net worth that includes contingent liabilities. The principal has been reporting $41 million when $20 million was available. Three letters, with evidence the platform already had, cut the exposure in half.

Common mistakes with guaranties

• Assuming burndown is automatic. Almost always a request with evidence.
• Not knowing the aggregate. Each loan’s guaranty is tracked by the loan’s analyst; nobody owns the guarantor.
• Reporting stale contingent liabilities. Every lender’s net worth test inherits the error.
• Missing the test definition. Burndown DSCR uses the lender’s adjustments, like every other test.
• Forgetting release on sale or refinancing. The old guaranty should be released in writing when the loan is repaid.

Across a portfolio

A guarantor behind twelve loans at six lenders has twelve guaranties, several with burndown available, and six net worth tests with different definitions. The portfolio questions: total contingent liability by guarantor, which burndowns are achievable now, which tests are approaching, and what the exposure looks like on the SREO each lender receives. See automating the SREO and debt summary.

The burndown tests are DSCR, LTV and leasing tests on the lender’s definitions, which means they are the same calculations as covenant tests and should run continuously. See DSCR and debt yield tests.

How this looks in LoanBoss

Recourse is tracked per loan and per guaranty, with burndown triggers abstracted and tested against integrated financials so an achievable burndown is visible before the request is made. Guarantor covenants are tracked across loans with the most restrictive requirement identified. Contingent liability by guarantor rolls up to the portfolio and into guarantor-level SREOs. Burndown milestone dates and test dates are critical dates with alerts. LoanBoss tracks recourse and burndown on balance sheet, bridge and construction loans in the same view as the rest of the portfolio.

Frequently Asked Questions

Key takeaways

• Recourse comes in full, partial, completion, carry and carve-out forms; each is a contingent liability that appears on the guarantor’s SREO and in every lender’s net worth test.
• Burndown reduces the liability on milestones such as completion, a DSCR threshold for consecutive quarters, leasing or LTV, on the lender’s definitions, and is almost always a written request with evidence rather than an automatic reduction.
• The common failure is a milestone achieved and never requested, leaving an oversized contingent liability on every other lender’s test for years.
• Guarantor covenants are portfolio obligations; the most restrictive lender sets the operating floor.
• Burndown tests are the same calculations as covenant tests and should run continuously.
• Track type, amount, carve-outs, triggers, evidence required, status and aggregate exposure by guarantor.

Related reading

• Construction loan draw tracking
• Bridge and debt fund loans
• Family office CRE debt management
• Loan critical date tracking
• Loan-to-value in the glossary
• Recourse and non-recourse loans in the glossary
• Guaranty in the glossary

A guaranty you could have reduced two years ago is still full-size on every net worth test today. LoanBoss tracks burndown so the request goes out the quarter the milestone is met.