What is a Carveout in Real Estate?

What is a Carveout?

In real estate, a carveout is a provision in a loan agreement that creates an exception to the non-recourse nature of the loan, making the borrower personally liable for specific actions or failures. Typically, non-recourse loans limit the lender's ability to seek repayment solely to the property serving as collateral and the income it generates. However, with carveouts, the borrower could be held personally liable if certain "bad boy" actions occur, such as fraud, misrepresentation, or environmental damage. Essentially, carveouts are designed to protect lenders by ensuring that borrowers have a personal stake in adhering to certain important terms of the agreement.