Definition
A carve out in real estate refers to a provision within an agreement that removes a portion of the property or obligations from the larger scope of the agreement. This means that the specified part is either subject to a new provision or free from a certain provision originally included in the agreement. Carve-outs can be applied to sales contracts, mortgages, leases, or other real estate-related documents, providing flexibility and tailor-made solutions in various transactions.
Examples
Nonrecourse Loan Carve Outs
In a typical nonrecourse loan, the borrower is not personally liable for the debt if they default. However, a carve-out might specify situations where this liability protection does not apply (often called “bad boy carve outs”). For instance, if the borrower commits fraud or misrepresentation, they could be held personally liable despite the nonrecourse nature of the loan.
Sale Agreement Carve Outs
Consider a sale agreement where certain assets of a company are being sold. A carve-out could exclude intellectual property like patents from the agreement, stipulating that the buyer does not acquire them and keeping them with the seller.
Lease Agreement Carve Outs
A multi-unit apartment lease might have a carve-out provision that excludes parking spaces from the lease terms. This allows the landlord to rent the parking spaces separately from the apartment units.
Frequently Asked Questions
What are bad boy carve outs?
Bad boy carve outs are provisions in nonrecourse loans that make the borrower personally liable for certain “bad acts” like fraud or voluntary bankruptcy.
Can carve outs be negotiated during an agreement?
Yes, carve outs are often subject to negotiation and can be tailored to address specific needs and concerns of both parties.
Why are carve outs used in real estate?
Carve outs provide flexibility in real estate transactions, allowing specific terms to apply to certain aspects of the agreement without affecting the entire contract.
Are carve outs common in all types of real estate transactions?
Carve outs are more common in complex transactions involving mortgages, high-value assets, or specific contractual obligations.
Can carve outs affect the overall value of a property?
Yes, specific carve outs can influence the property valuation as they might change the rights and obligations associated with the property.
Nonrecourse Loan
A loan where the borrower is not personally liable to repay the loan. In the event of a default, the lender can only seize specified collateral.
Bad Boy Carve Outs
Specific actions or situations in a nonrecourse loan agreement that will trigger personal liability for the borrower.
Lease Agreement
A contractual arrangement where one party (lessor) agrees to rent property to another party (lessee) for a specified period in exchange for payment.
Mortgage
A legal agreement where a bank or creditor lends money at interest in exchange for taking the title of the borrower’s property.
Online Resources
References
- Schwartz, RoSp, Robert K. “Commercial Real Estate Loan Mediation Standards for Nonrecourse Carve-Out Guarantee Cases.” Real Estate Review 2020.
- Gelt, Donald N. “Principles of Real Estate Law.” Real Estate Law Journal 2019.
Suggested Books for Further Studies
- “Real Estate Finance and Investments” by William B. Brueggeman and Jeffrey D. Fisher
- “Commercial Real Estate: Analysis & Investments” by David Geltner, Norman G. Miller, Jim Clayton, & Piet Eichholtz
- “The Due Diligence Handbook For Commercial Real Estate: A Proven System To Save Time, Money, Headaches When Buying Real Estate” by Brian Hennessey
Real Estate Basics: Carve Out Fundamentals Quiz
### What is a carve out in real estate agreements?
- [x] A provision that removes or excludes a specific portion of the property or obligations.
- [ ] A clause that mandates changes to the entire agreement.
- [ ] An automatic nullification of the agreement.
- [ ] A type of penalty for breach of contract.
> **Explanation:** A carve out is a provision within an agreement that removes a portion of the property or obligations from the larger scope of the agreement, often exempting it from certain terms.
### In what type of loan are bad boy carve outs commonly found?
- [ ] Adjustable-rate mortgage
- [ ] Fixed-rate mortgage
- [x] Nonrecourse loan
- [ ] Personal loan
> **Explanation:** Bad boy carve outs are typically found in nonrecourse loans, outlining scenarios where the borrower would still be held personally liable.
### What might a carve out provision in a sale agreement exclude?
- [x] Intellectual property like patents
- [ ] Down payment requirements
- [ ] Obligation to pay taxes
- [ ] Mortgage interest rates
> **Explanation:** A carve out in a sale agreement can exclude specific assets, such as intellectual property, from the sale.
### Why are carve outs beneficial in lease agreements?
- [ ] They lower the rent automatically.
- [x] They allow for exclusion or separate treatment of certain assets like parking spaces.
- [ ] They enforce higher compliance standards.
- [ ] They eliminate the need for legal review.
> **Explanation:** Carve outs in lease agreements can exclude specific parts of the lease, such as parking spaces, allowing the landlord to treat them separately.
### Can carve outs impact the overall value of the property?
- [x] Yes, they can change the rights and obligations which can affect the valuation.
- [ ] No, they don't have any effect on valuation.
- [ ] Only governmental rules impact property value.
- [ ] They only add personal obligations without altering value.
> **Explanation:** Carve outs can change the terms related to specific property rights or obligations, potentially impacting the property’s value.
### What type of real estate transaction might heavily utilize carve outs?
- [x] Complex transactions involving mortgages, high-value assets, or specific obligations.
- [ ] Simple rental agreements.
- [ ] Purchasing common household items.
- [ ] Real estate agent commission agreements.
> **Explanation:** Carve outs are common in complex transactions where specific parts of the agreement need to be treated differently.
### Who can negotiate carve outs in an agreement?
- [ ] Only the banks
- [x] Both the buyer and the seller or involved parties
- [ ] Government agencies
- [ ] Local authorities
> **Explanation:** Carve outs can be negotiated by both the buyer and seller to reflect their specific needs and concerns.
### What is the purpose of a carve out in a mortgage agreement?
- [ ] Reduces the interest rates.
- [x] Excludes certain properties or obligations from the larger agreement.
- [ ] Automatically extends the loan term.
- [ ] Ensures the mortgage is interest-free.
> **Explanation:** The purpose of a carve out in a mortgage agreement is to exclude specific properties or obligations, potentially subjecting them to new terms.
### What do carve outs offer in terms of agreement flexibility?
- [ ] They limit changes and adjustments.
- [x] Provide tailored solutions for specific needs.
- [ ] Enforce stricter adherence to general terms.
- [ ] Standardize all property within the agreement.
> **Explanation:** Carve outs offer flexibility and the ability to tailor agreements to address specific needs and concerns, differentiating certain terms or portions.
### In a nonrecourse loan, what conditions might carve outs specify to hold the borrower personally liable?
- [x] Fraud or misrepresentation
- [ ] Timely payments
- [ ] Payment of higher taxes
- [ ] Minor document errors
> **Explanation:** Carve outs may specify conditions such as fraud or misrepresentation that will hold the borrower personally liable despite the nonrecourse nature of the loan.
