A great deal of the impetus behind the growth and
development of commercial real estate from 1995 through 2007 came as a result
of our industry’s access to “Wall Street” money through Commercial
Mortgage Backed Securities (“CMBS”). CMBS promised 10 year fixed rates and greatly
expanded the concept of “non-recourse” lending (i.e. no personal liability), to
owners and investors. The CMBS lending market exploded during this period of
time.
As originally written (but now rewritten under the so-called
CMBS 2.0 rules of 2012 and forward), CMBS loan documents provided a
“non-recourse carveout guaranty” where a key principal of the borrower LLC
becomes personally liable for all or a portion of a non-recourse loan upon the
occurrence of certain rather serious “recourse events” or “bad acts” such as
fraud or misrepresentation. This type of guaranty has been in the
limelight recently by virtue of two Michigan Court decisions that expanded the
liability of a guarantor beyond bad boy acts.
The Michigan Courts essentially ruled that a decline in the
value of available project cash flow resulting from general economic
conditions—WITHOUT ANY OTHER BAD BOY ACT BY BORROWER—WOULD QUALIFY AS A
RECOURSE EVENT resulting in some or all of the individual owners becoming
personally responsible for loan deficiencies.
If you have clients that are considering using CMBS 2.0, you
should caution them that the rules have changed and that the loan they are
expecting to be non-recourse, now has many ways in which that loan could be
their personal liability. It is strongly suggested that your clients have
qualified commercial real estate counsel represent their interests before
entering into a “non-recourse” loan.