Completion guaranty : burns off at substantial completion, typically defined as certificate of occupancy issued, lien-free completion certificate delivered by the architect, and the GC's final waivers received. Carry guaranty : burns off at stabilized DSCR (commonly 1.20x to 1.25x) maintained for three to six consecutive months, sometimes with a debt-yield backstop test.
Two distinct guaranties with different burn triggers
Almost every institutional construction loan requires two non-recourse-exception guaranties beyond the standard bad-boy carve-outs: a completion guaranty (the guarantor agrees to fund cost overruns to deliver the project per plans) and a carry guaranty (the guarantor agrees to fund debt service shortfalls during construction and lease-up).
Completion guaranty burn-off is event-driven: the guaranty terminates when substantial completion is achieved per the loan-document definition. The mechanical triggers are CO from the local jurisdiction, AIA G704 (certificate of substantial completion) from the architect, and the lien-free completion certificate plus final lien waivers. Some lender drafts add the lender inspector's sign-off as a fourth condition.
Carry guaranty burn-off is performance-driven: the guaranty terminates when the property hits a stabilized cash-flow test for a defined number of consecutive months. Standard test: DSCR at 1.20x to 1.25x for three to six consecutive months, with the debt-service calculation based on either the construction-loan rate or the projected take-out perm rate (the latter is more sponsor-friendly).
Negotiating the burn-off mechanics at the term-sheet stage matters more than negotiating the existence of the guaranties, the existence is non-negotiable on most institutional construction debt, but the burn-off terms control how long the recourse exposure lasts. Loosening the burn-off test shortens recourse. Debt yield in place of DSCR is the tighter test and lengthens exposure. Three months instead of six, and a perm-rate calculation, shorten exposure.
Sources
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1
- Financial Stability Report · Board of Governors of the Federal Reserve System · 2025-11
- Semiannual Risk Perspective · Office of the Comptroller of the Currency · 2025-12