What are bad boy carve-outs in real estate?

What does the term "Bad Boy Carve-outs" Mean in Real Estate?

"Bad boy carve-outs" in real estate are clauses found in loan agreements that create personal liability for borrowers, typically limited liability companies (LLCs) or corporations, if they commit certain "bad acts." Originally, these carve-outs were meant to apply to fraudulent or criminal actions, such as embezzlement or misappropriation of funds. However, the scope of these clauses has expanded over time to include a range of actions, such as failing to maintain property insurance, allowing senior liens to be placed on the property, or declaring voluntary bankruptcy.

While the loan is non-recourse under normal circumstances (meaning the lender can only claim the collateral, the property, in case of default), the bad boy carve-outs create exceptions where the lender can pursue the borrower's other assets or the personal assets of the guarantors if these specific wrongful acts are committed.

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