Although each property has its own financing structure, hotel financings are generally nonrecourse, which means lenders can only look to their collateral, namely the real property itself, for satisfaction of their claims. If a loan is fully nonrecourse, the property owner has no personal obligation to repay the hotel’s loans. Often, however, the lender will require the owner to provide a guaranty that is triggered upon the occurrence of certain specified events, such as (a) the borrower entity’s failure to maintain single-purpose entity status, (b) entering into new financings or junior loans, or (c) its filing for bankruptcy.(1) Thus, despite the fact that the underlying loan is nonrecourse, the owner may face substantial personal liability if any carve-out defaults are tripped.
Hotel Bankruptcy: Owner Liability Under Nonrecourse Carve-Out or “Bad Boy” Guaranties
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