Guaranty Insurance in Real Estate Finance Transactions

Policy Requirements, Provisions and Exclusions; Loan Document Provisions; Determining Need for Backup Guaranty

Recording of a 90-minute premium CLE webinar with Q&A


Conducted on Wednesday, August 7, 2019

Recorded event now available

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Program Materials

This CLE webinar will provide counsel with an understanding of loan guaranty insurance and how it can be used instead of, or supplement, a personal guaranty in a commercial mortgage transaction. The panel will discuss the mechanics of placing and making claims under guaranty insurance, backstop guaranties and other documentation in conjunction with the policy, and critical deal points when negotiating coverage and exclusions.

Description

Because it imposes personal liability, a guaranty is of particular importance to the guarantor and is often the most heavily negotiated document in a lending transaction. Terms may vary depending on the size and scope of the deal, the credit record and financial statement of the sponsor, and whether the loan is a construction or permanent loan. The inability of a sponsor to provide a guaranty, or a lender's determination that the sponsor's guaranty offers inadequate protection may derail the transaction.

Guaranty insurance can be used by the parties to transfer/mitigate against the risk of loan default without the need for a personal guaranty. If the borrower defaults, the lender acquires title through foreclosure, and if the proceeds from the sale are less than the outstanding loan balance, the lender can file a claim under the policy (up to the policy limit) instead of pursuing the borrower in court for the deficiency.

There are deal points to address in the related transaction. What if the claim is denied or the insurance company loses its investment grade rating (required by most banks) during the term of the loan? How is the policy read together with nonrecourse carveouts relating to bad acts of the borrower? What if the borrower causes a delay in the foreclosure? There will still be events for which the lender might require personal recourse to the borrower or guarantor.

The insurance company will want to underwrite the feasibility of the project and experience of the sponsor/borrower (similarly to the lender, but lenders focus is more on borrower) before agreeing to place insurance and the resulting policy limit may not cover all of the loss. Counsel must have a thorough understanding of the policy terms and limits to craft the loan documents accordingly.

Listen as our authoritative panel discusses this new guaranty insurance option and the issues which borrowers and lenders will encounter in incorporating it into a commercial real estate financing.

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Outline

  1. Problems presented by traditional guaranties: heavily negotiated, borrower credit history, enforcement
  2. Guaranty insurance as an alternative to a guaranty
  3. Requirements and characteristics of guaranty insurance
    1. Property underwriting
    2. Type of transaction: construction vs. permanent
    3. Loan term
    4. Coverage and exclusions
  4. Making claims under a guaranty policy--foreclosure requirement
  5. Adjustments to loan documents to reflect insurance: Need for backup guaranty?

Benefits

The panel will review these and other key issues:

  • What are some advantages of guaranty insurance over a traditional personal guaranty in a real estate finance transaction?
  • What kinds of properties and loans are best suited for guaranty insurance?
  • Why is the insurance company rating important and how should loan documents address a downgrade in the insurance company?
  • In what circumstances might a lender still require recourse to the borrower and guarantor?

Faculty

Eichenblatt, David
David L. Eichenblatt, CCIM
President and Founder
LGIS Group

Mr. Eichenblatt has over 30 years in commercial real estate investment, development and management in all property type...  |  Read More

Hayhurst, Ren
Ren R. Hayhurst

Founder
Ren RH Legal Consultants

Mr. Hayhurst’s professional life has focused for over 30 years on all aspects of lender and borrower...  |  Read More

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