Risk Factors of being a KP (Key Principal)?

Question

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

Brian Burke · Answer

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.

Greg Dickerson · Answer

KPs can be hit with civil and legal liability in the event of lawsuits filed by LPs, other members of GP etc. As the KP you are part of the GP and are on the hook personally without the protection of an LLC so you can open yourself up to liability in a number of ways not just loan carve outs.

John Blanton · Answer

Appreciate the insight @Greg Dickerson!!

John Blanton · Answer

Thanks @Brian Burke as always for the detailed and informative response!!