Lease-up guarantees from a GC: what they actually cover and what they don't

A deal worth studying: a 48 unit project in a mid-size secondary market, construction complete, CO issued, and the GC had signed a lease-up guarantee promising 93 percent occupancy within 90 days of certificate of occupancy or he would cover the debt service gap. Month four, physical occupancy hit 91 percent but economic occupancy was sitting at 84 percent because three tenants were in default and two units had concessions burning off. The GC's counsel argued the guarantee language said "occupancy," the lender read it as economic, and the sponsor was caught in the middle funding carry out of pocket while the dispute ran. The guarantee was real, the coverage was not. Before you accept that clause, ask whether the definition of occupancy in the guarantee matches the definition in your loan agreement, because if those two documents use the word differently, the gap between them is yours.