Understanding completion and carry guarantees

Completion and carry guarantees allocate different risks during development. A completion obligation addresses finishing the required project and paying the defined costs of doing so. A carry obligation addresses specified expenses while the property is being held or operated. A repayment guaranty can separately address debt repayment. The owner should identify the precise undertaking before measuring sponsor exposure.

The document's title is a starting point. Definitions, incorporated agreements, triggering events, funding credits and release conditions determine what the guarantor actually promises. A limited obligation in one document does not automatically limit a separate promise signed by the same sponsor.

Build an obligation map across the whole package

List the guarantor for each instrument and identify the covered payments or performance. Separate construction costs, interest, taxes, insurance, operating deficits, repayment and liability arising from specified acts. Then record triggers, caps, notice provisions, remedies and termination conditions.

Holland & Knight's Florida construction-loan discussion distinguishes carry and completion guaranties, while describing costs that can be included in each.^[1] Its descriptions explain negotiated structures; they do not replace the actual definition of obligations in a guaranty. Ask counsel to reconcile broad language with the loan and construction documents it incorporates.

OCC guidance similarly recognizes limited guarantees, including interest-only, completion-only and partial-principal obligations, as well as reductions or releases tied to conditions.^[2] These are bank-risk concepts, not a guarantee that a lender will accept a particular limitation. They support assessing each undertaking separately.

Identify whether liability requires a borrower default, a funding deficiency, failure to complete by a deadline or another event. Determine whether the lender may demand performance, payment of a completion estimate, reimbursement or another remedy. The difference affects when the guarantor needs cash and how much control it has over spending.

Read completion as a defined project outcome

Determine what completion means. The definition may involve approved plans, final inspections, lien resolution, permits, occupancy approvals or other deliverables. Physical completion and legal or financial completion can occur on different dates. The guarantor's exposure should be modeled through the applicable contractual finish line.

In Turnberry, a New York appellate court examined a completion guaranty in a Las Vegas resort financing and distinguished the defined project-cost undertaking from a payment guaranty.^[3] Its analysis depended on the documents, including a definition excluding debt service from the relevant project costs. The decision does not mean every completion guaranty excludes interest or every construction sponsor avoids repayment exposure.

The useful lesson is to connect each asserted limitation to language. If the guaranty refers to all project costs, identify the defined term and every included or excluded category. If it incorporates other agreements, read those provisions too. A short guaranty can contain a broad promise through cross-references.

Measure incremental funding without counting costs twice

Consider a hypothetical $100 million construction loan with $18 million of eligible undrawn funding. An updated completion estimate shows $22 million of remaining covered construction and closeout costs. Assume the completion guaranty credits the full eligible undrawn funding and contains no other amounts for this simplified illustration.

The estimated completion funding gap is $4 million: $22 million less $18 million. That is different from assuming the guarantor must immediately contribute all $22 million. The funding credit depends on the actual document and availability of those loan funds; it is not an automatic legal offset.

Separately, assume a carry undertaking covers $550,000 per month for six months, comprising interest, taxes, insurance and specified operating expenses. Assume $1.5 million of available carry reserves can be used for the same covered payments and that the carry obligation gives credit for those payments. Gross covered carry is $3.3 million; the remaining cash need is $1.8 million.

Under those assumptions, total incremental sponsor funding is $5.8 million, combining the $4 million completion gap and $1.8 million carry gap. The construction estimate expressly excludes every carry item, so the two amounts do not overlap. If the completion definition included part of the same interest or taxes, reconcile that overlap rather than adding identical costs twice.

Now assume $2 million of the apparent undrawn construction funding is unavailable for the covered scope because it is allocated to another restricted use. The eligible credit falls to $16 million, and the completion gap rises to $6 million. Total incremental funding becomes $7.8 million if the carry assumptions stay unchanged. A headline commitment can therefore overstate the resources available against a particular guarantee.

Determine what control accompanies the obligation

If the guarantor must complete the project, determine whether it may access the site, use plans, retain or replace contractors and apply available project funds. Ask how those rights coordinate with the borrower, lender, construction contracts and any other capital provider. An obligation without workable implementation rights can be difficult to perform even for a liquid sponsor.

Holland & Knight describes construction-party consents, collateral assignments and negotiation of lender or guarantor takeover arrangements.^[1] Those documents can address continuity, but their existence alone does not prove that every contract or permit is freely transferable. Obtain the actual consents and identify conditions for their use.

Turnberry also addressed the effect of project transfer and the continuing scope of the particular completion promise.^[3] Do not assume a foreclosure, collateral sale or borrower bankruptcy automatically ends every guarantee. Counsel should evaluate survival, enforcement and credit provisions under the governing law and actual transaction documents.

Test sponsor resources across projects

A sponsor's net worth is not the same as cash available to meet a demand. Identify liquid assets, existing pledges, current funding commitments and contingent obligations on other developments. Show which resources can be accessed by the guarantor entity itself and which require distributions or transfers from another entity.

The 2023 interagency workout statement calls for assessment of guarantor liquidity, global financial condition, contingent liabilities and the total guarantees extended.^[4] This is supervisory guidance. Its practical implication is to test simultaneous demands rather than evaluate each project as though it were the sponsor's only obligation.

OCC guidance also instructs banks to assess willingness and ability and verify liquidity, noting that unpledged guarantor assets are not a substitute for project equity.^[2] A proposed source should therefore have a realistic conversion-to-cash timetable. A property sale still subject to financing or approvals may be a backup plan rather than immediate funding.

Document release conditions and track them

Identify the evidence required to terminate or reduce each obligation and the approving party. A project may satisfy completion requirements while still incurring carry expenses during lease-up. Do not use one milestone to end both obligations unless the agreements do so.

The interagency statement distinguishes legally obligated guarantors from sponsors who may provide support without a contractual duty.^[4] Keep voluntary support separate from enforceable exposure in the owner's risk schedule. An expected contribution should not silently become an assumed release of a signed obligation.

Maintain a guarantee register with current estimated exposure, available credits, liquidity and remaining conditions. Update it when budgets, timelines or financing change. The register should tell the sponsor what performance it owes, what cash it may need and what verified event ends each promise.