Risk Factors of being a KP (Key Principal)?

[John Blanton]

Outside of the carve outs in loans (fraud, etc), for non-recourse debt what other risk factors are there for a KP?

[Brian Burke]

If a sponsor files bankruptcy, many if not most non-recourse loans turn full recourse.  So by no fault of your own, you could find yourself fully on the hook for the entire loan with full recourse.  That happened to someone I know and he was on the hook for something like $800 million and had to file personal bankruptcy himself.  That's probably the biggest risk.

Another carve-out is if the property taxes aren't paid, carve-out guarantors can be personally liable for the amount of the property taxes.  Maybe even insurance.

If you are also a deal sponsor, there is significant reputational risk.  This comes from two directions--first is from passive investors who looked to you to shore up the deal if the sponsor screwed up.  Second is from lenders who might be hesitant to make you a loan on your own deal in the future.  You'll notice that their questionnaires always ask you if you've ever had a foreclosure, receivership, etc--which would include loans where you were only a carve-out guarantor.