Negotiating the Balancing Provision in a Completion Guaranty

A construction loan funds an asset that does not yet exist. The lender advances money against future improvements that will be worth more than the dirt the borrower owns today, but only if the improvements actually get built — on schedule, on budget, and to specifications. Every step of the way, the lender is exposed to the risk that the cost of completing the project will outrun the remaining unfunded loan balance plus the borrower’s available equity. When that happens, the loan is “out of balance.”

The balancing provision is the lender’s contractual response to that exposure. In a typical construction loan and the related completion guaranty, it is the lender’s right to refuse to advance further proceeds when the unfunded balance is no longer enough to fund the work that remains, and to demand that the borrower or the guarantor close the gap. It is also one of the most heavily negotiated provisions in a construction finance deal, and the one where careful drafting on the front end pays the highest dividends when the project actually encounters trouble.

This article uses the balancing-related provisions of a real-world completion guaranty — a tax-exempt bond financing of a roughly $60 million multi-family housing project in San Antonio, Texas — as the framework for discussing how to negotiate one. The party names and project details have been omitted; the drafting is what we’re after. Each section below reproduces an excerpt from that guaranty, walks through what the language is doing, identifies the lender-favorable and borrower-favorable features, and proposes a middle-of-the-road revision that gives the lender the protection it genuinely needs without leaving the guarantor exposed to demands that are not yet quantifiable or due.

A practical caveat before we begin: negotiating with a lender on behalf of a borrower does not always result in all of the requested changes. Many times, lenders will simply not agree to any changes and will demand a balancing provision that is subjectively in the determination of the lender. Even so, I hope this article will allow you to point out some things in this very important part of the construction loan documents.

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I. What a balancing provision is — and why both sides need one

The lender’s interest is straightforward. If the lender continues to advance against a budget that everyone knows is too small, the lender ends up financing its own loss. Worse, if the lender eventually has to stop funding because the loan is out of balance, mechanic’s liens cascade rapidly. The Seventh Circuit’s decision in BB Syndication Services, Inc. v. First American Title Insurance Co., 780 F.3d 825 (7th Cir. 2015), held that mechanic’s liens that arise after a lender stops funding because the loan is out of balance are “created” or “suffered” by the lender within the meaning of Exclusion 3(a) of the standard ALTA loan policy — meaning the lender’s title insurance does not cover them. The case is the structural reason lenders are aggressive about balancing language and stop-funding rights. A balancing provision lets the lender front-load the rebalancing decision, ideally long before the lender has to make the binary BB Syndication choice between funding into a deteriorating project and triggering uninsured liens.

The borrower’s interest is equally real. The balancing provision sits in a part of the deal where the lender holds enormous leverage. The trigger is almost always written in terms favorable to the lender. The consequences of an out-of-balance default are severe: default-rate interest typically runs three to five percentage points above the standard rate, and the lender can cease funding altogether. See David J. Murphy, Loan Balancing Provisions in Construction Lending, Murphy PC (Aug. 22, 2025). A balancing provision drafted without borrower input — or signed without close attention — can be invoked on the basis of projections rather than actual costs, can require funding before the project’s own contingency has been exhausted, and can give the lender remedies that the borrower has no contractual mechanism to contest.

A fair balancing provision is not borrower-friendly in any tendentious sense. Ideally, the balancing provision is an objective statement of the intent of both Borrower and Lender. The main difference being the Lender’s proposed language is almost always subjective and the comments from the Borrower should pull that language more to the objective. With that in mind, here is the guaranty.

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II. The guaranty of payment — the “when due” formulation

Here is an example of a Guaranty of Payment covenant from a $60MM multi-family transaction in San Antonio, Texas:

“Borrower will fully and punctually pay and discharge any and all costs, expenses, obligations, and liabilities for or in conjunction with the cost of completing the Guaranteed Work (including all permitting fees, licensing fees, amounts payable under construction contracts, subcontracts and supply contracts, and all amounts payable to architects, engineers and other design consultants), as the same become due and payable subject to Borrower’s right to contest and bond over, or obtain title insurance over, the same to the satisfaction of Bond Trustee and Bond Owner Representative or as otherwise set forth in the Loan Documents … .”

This is the foundational payment covenant. The borrower must pay the project’s costs “as the same become due and payable.” That sounds anodyne, but the “due and payable” formulation is doing real work. It anchors every downstream payment and rebalancing obligation to costs that have actually accrued, not to projections of what costs might be. Borrower’s counsel should fight to keep this language exactly as it is, and should resist any lender effort to substitute “as the same become due and payable or as Lender reasonably anticipates the same to become due and payable.” The latter formulation turns every projection into a payment trigger.

The drafted language also wisely preserves the borrower’s right to contest and to bond over disputed amounts. That is a borrower-friendly feature worth holding onto. Lender’s counsel sometimes proposes to limit the contest right to amounts disputed in good faith and bonded over with security acceptable to lender; that is a reasonable middle ground.

Middle-of-the-road revision. I would keep the language as drafted but add a single clarifying sentence to remove any ambiguity about what “due” means:

“For the avoidance of doubt, a cost shall be considered ‘due and payable’ for purposes of this Section only upon (i) the issuance of an invoice from a contractor, subcontractor, vendor, design professional, or other party performing work or providing materials for the Guaranteed Work; (ii) the approval of a change order; or (iii) the inclusion of such cost in a draw request as an actually incurred cost. Projected, anticipated, or estimated future costs that have not yet been invoiced, change-ordered, or included in a draw request shall not be deemed ‘due and payable.’”

This sentence is short, neutral, and matches the way both lenders and borrowers actually think about cost accrual on construction loans. It removes the principal source of ambiguity from the most-litigated word in the provision.

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III. The cost-overrun guaranty and the Loan Rebalancing Payment mechanic

Here is an example of a cost-overrun guaranty and Loan Rebalancing Payment mechanic from that same $60MM multi-family transaction:

“[A]ll costs of the Guaranteed Work and construction of the Project, including, without limitation, the following costs, will be paid when due:

i. any and all cost overruns above the total of the Guaranteed Maximum Price as of the Closing Date of $[X], plus $[Y] [the hard-cost contingency]; and

[ii.] increased costs of the Guaranteed Work, including carrying costs, of constructing or completing the Project, resulting from any cause, including without limitation, the following (unless caused by the action or inaction of Bond Trustee and or Bond Owner Representative): differing or unforeseen site conditions, delays, defects in design, material or workmanship, pandemics (unless ordered by a governmental authority to stop work because of a pandemic), defective equipment or materials, disruption, hazardous environmental conditions at the site, including required remedial work, monitoring and inspections, ingress and egress issues with regard to the Project, cost of design or redesign activities, supply chain disruptions, Force Majeure (as such term is defined in the Development Agreement), warranty claims, change orders, insurance deductibles and/or amounts related to insurance losses that may not rise to the level of the deductible, and/or unreimbursed insurance claims.

In the event costs of the Guaranteed Work increase by more than $1,000,000 as a result of foregoing, Guarantor will make loan rebalancing payments in increments of $1,000,000 (each, a ‘Loan Rebalancing Payment’). By way of example, if costs of the Guaranteed Work increase by $1,200,000, Guarantor would be required to make a Loan Rebalancing Payment in the amount of $1,000,000, and a second Loan Rebalancing Payment would not be required until the costs of the Guaranteed Work increased by $2,200,000 in the aggregate, at which time Guarantor would be required to make an additional Loan Rebalancing Payment. In the event there is a remaining delta between the original approved costs of the Guaranteed Work and the adjusted costs of the Guaranteed Work which has not been previously funded by Guarantor, Guarantor shall make a final Loan Rebalancing Payment which may be less than $1,000,000.”

This is the heart of the balancing provision and, in many respects, a model of how this language should read. Three drafting choices in particular are worth borrowing.

First, the trigger is a hard number, not a lender determination. The obligation to make a Loan Rebalancing Payment accrues when “costs of the Guaranteed Work increase by more than $1,000,000.” There is no language giving the lender discretion to declare the loan out of balance based on its own forecast of future costs. The guarantor can perform the math at any time and know whether a payment is owed. Borrower’s counsel should ask for a fixed, dollar-denominated trigger in every balancing provision. A provision keyed to “Lender’s reasonable determination” is no protection at all.

Second, the increments are predictable. The example built into the provision (“if costs increase by $1,200,000, Guarantor pays $1,000,000; the next $1,000,000 obligation does not accrue until aggregate increases reach $2,200,000”) is unusual and useful. It eliminates the argument over whether the second tranche is due at $2,000,000 or $2,200,000 — a question that, without the example, would be genuinely ambiguous.

Third, the final true-up may be less than $1,000,000. The guarantor is not over-funded.

The drafting also includes two strong carve-outs that are easy to overlook: cost increases caused by the lender’s own action or inaction are excluded, and cost increases caused by government-ordered pandemic shutdowns are excluded. Both belong in every modern construction guaranty. The lender-caused-delay carve-out is fundamental fairness; the pandemic carve-out is a hard-won lesson from 2020 and 2021.

What is missing — and what borrower’s counsel should add — is an explicit order of resort against project contingency and other budgeted absorption mechanisms before a Loan Rebalancing Payment is owed. Most project budgets contain a hard-cost contingency, a soft-cost contingency, an interest reserve, and sometimes an unfunded developer fee. Those amounts exist precisely to absorb cost overruns. A balancing provision that does not require the lender to look to them first invites a demand for double-counted protection.

Middle-of-the-road revision. Keep the trigger structure and the example exactly as drafted. Add the following before the rebalancing-mechanic paragraph:

“Before any Loan Rebalancing Payment becomes due, the increase in the costs of the Guaranteed Work shall first be applied against, and reduced by, the unused balance (in the following order) of (i) the hard-cost contingency line item in the Project Budget, (ii) the soft-cost contingency line item in the Project Budget, (iii) the interest reserve in excess of remaining projected debt service through the Completion Date, and (iv) the unfunded portion of the Developer Fee. A Loan Rebalancing Payment shall be required only to the extent the increase in the costs of the Guaranteed Work, as so reduced, exceeds $1,000,000. Borrower shall be entitled to reallocate line items within the Project Budget without Lender’s consent so long as the aggregate reallocation in any draw period does not exceed seven percent (7%) of the affected line item.”

This addition does not impair the lender’s protection in any way — the lender’s collateral is exactly the same. It simply requires the lender to spend the dollars that already exist in the budget before it asks the guarantor to write a new check.

A second revision worth proposing: reorganize the parade-of-horribles list of triggering causes so the carve-outs read more clearly. As drafted, the carve-outs are buried inside a long sentence with no formatting. A cleaner version:

“Notwithstanding anything in this Section to the contrary, the following shall not be considered an increase in the costs of the Guaranteed Work for purposes of this Guaranty, and Guarantor shall have no obligation to make a Loan Rebalancing Payment with respect thereto:

(a) any cost increase caused, in whole or in material part, by the action or inaction of Lender, Bond Trustee, or Bond Owner Representative, including delayed approvals, delayed inspections, or delayed funding;

(b) any cost increase caused by a Force Majeure event (as defined in the Development Agreement);

(c) any cost increase caused by a pandemic, epidemic, or governmental order issued in response thereto;

(d) any cost increase caused by acts of war, terrorism, or civil unrest; and

(e) any cost increase to the extent covered by insurance proceeds actually received by Borrower or available under any Project insurance policy.”

The substance is essentially identical; the structure makes the carve-outs operative rather than ornamental.

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IV. The Right to Complete

Here is an example of a Right to Complete provision from that same transaction:

“(a) If Guarantor fails to perform the Guaranteed Work on or before the times such actions are to be performed by Borrower, Bond Trustee and Bond Owner Representative shall have the right, but not the obligation, to complete the Guaranteed Work (either before or after a Foreclosure Event), with such changes or modifications to the Plans that Bond Trustee and Bond Owner Representative deems necessary, and to expend such sums as Bond Trustee and Bond Owner Representative deem appropriate in order to so complete the Guaranteed Work. Bond Trustee and Bond Owner Representative may utilize such employees, agents, contractors, subcontractors or other Persons to perform the Guaranteed Work as Bond Trustee and Bond Owner Representative may elect.

(b) Guarantor hereby waives any right to contest any such changes or modifications to the Plans, or the amount of any such expenditures in furtherance of the completion of the Guaranteed Work. The amount of any and all expenditures made by Bond Trustee and Bond Owner Representative to perform the Guaranteed Work or otherwise discharge the Guaranteed Obligations shall be immediately due and payable by Guarantor to Bond Trustee and Bond Owner Representative, regardless of whether the Guaranteed Work is completed.”

This is the most lender-friendly provision in the document and the one that warrants the most borrower pushback. It contains three features that, taken together, give the lender essentially unconstrained spending authority at the guarantor’s expense.

First, there is no notice or cure period before the lender can exercise the step-in right. Subsection (a) is triggered the moment the guarantor “fails to perform” — there is no requirement that the lender notify the guarantor or give the guarantor a window to cure.

Second, the lender can make any changes to the plans it deems “necessary” and spend any amounts it deems “appropriate.” There is no objective standard, no commercial-reasonableness limitation, and no requirement that the changes be related to completing the original scope.

Third — and this is the provision most worth fighting over — the guarantor waives any right to contest the changes or the expenditures. The lender has unilateral authority to gold-plate the project, and the guarantor pays.

The real-world risk is not that the lender acts in bad faith; in my experience, lenders that take over construction projects act in good faith. The real-world risk is that a lender with no equity in the project tends to make conservative, expensive choices: substituting more durable (and more expensive) materials, hiring more inspections than the original plan contemplated, retaining its own consultants to second-guess the design team. None of those choices are bad ones; they are just expensive ones, and the guarantor is paying for all of them with no contractual mechanism to object.

Middle-of-the-road revision.

“(a) If Guarantor fails to perform the Guaranteed Work after written notice from Lender and a reasonable opportunity to cure (which shall not be less than thirty (30) days from the date such notice is received), Lender shall have the right, but not the obligation, to complete the Guaranteed Work, with such changes or modifications to the Plans as are commercially reasonable and necessary to complete the Project substantially in accordance with the original Plans, and to expend such sums as are commercially reasonable to do so. Lender shall use commercially reasonable efforts to minimize costs and shall not be entitled to upgrade the specifications of the Project from those reflected in the original Plans except to the extent required by applicable law or by a Governmental Authority.

(b) The amount of any expenditures made by Lender in completing the Guaranteed Work shall be reimbursable by Guarantor only to the extent commercially reasonable and incurred in accordance with subsection (a). Lender shall provide Guarantor with reasonable documentation of all such expenditures, including copies of invoices, change orders, and contracts, on a monthly basis. Guarantor shall have the right to dispute the commercial reasonableness of any such expenditure in accordance with [the dispute-resolution provisions of this Guaranty / the dispute-resolution provisions of the Loan Documents], provided that such dispute shall not relieve Guarantor of the obligation to pay any undisputed portion of the expenditure when due.”

The revision keeps the lender’s step-in right and the guarantor’s obligation to reimburse. It adds (i) notice and a thirty-day cure window, (ii) a commercial-reasonableness standard, (iii) a no-gold-plating rule, (iv) reasonable documentation, and (v) a contest right tied to commercial reasonableness. None of those features eliminates the lender’s protection; all of them make the provision livable for the guarantor.

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V. Termination of the guaranty

Here is an example of a termination provision from that same transaction:

“This Guaranty shall terminate and be of no further force and effect, without further act by Bond Trustee and Bond Owner Representative, upon the earlier to occur of (1) payment in full of the Indebtedness, or (2) completion of the Guaranteed Work and full satisfaction of the Guaranteed Obligations. Any termination of the liability of Guarantor under this Guaranty shall not affect the liability (if any) of Guarantor under any other Loan Document … .”

Two termination triggers and an “earlier to occur” formulation are reasonable. The drafting is borrower-friendly to the extent that completion of the work alone terminates the guaranty — the guarantor is not required to wait for the loan to be paid off. Many completion guaranties are drafted so that the guarantor remains exposed until repayment, which is a much harsher result. If you encounter such a draft, the model formulation in this excerpt is a good starting point for revision.

What is missing is a termination trigger on an involuntary divestiture. If the lender forecloses, takes a deed in lieu, or otherwise becomes the owner of the project, the guarantor should not still be on the hook for completing the project. The lender, having taken the asset, has assumed the completion decision. Asking the guarantor to fund whatever budget the new owner approves is not what the guarantor signed up for.

A second feature worth adding, where the lender will accept it, is termination on stabilization. The guaranty’s purpose is to make sure the project gets built and reaches a functional operating state. Once the project is stabilized — typically measured by a debt-service coverage ratio held for two consecutive quarters — the guarantor has done what it agreed to do.

Middle-of-the-road revision.

“This Guaranty shall terminate and be of no further force and effect, without further act by Lender, upon the earliest to occur of:

(1) payment in full of the Indebtedness;

(2) completion of the Guaranteed Work and full satisfaction of the Guaranteed Obligations;

(3) any foreclosure sale, deed-in-lieu of foreclosure, sale under a power of sale, bankruptcy sale, receivership sale, or any other involuntary sale that divests Borrower (and its affiliates) of ownership of the Project; or

(4) the Project achieving a debt-service coverage ratio of [1.20:1.00] for two consecutive calendar quarters, as evidenced by financial statements certified by Borrower’s independent accountants.”

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VI. Ten practitioner observations

Reading the foregoing excerpts together, a practitioner working on either side of a balancing provision can extract a fairly compact checklist.

One. Define the rebalancing trigger formulaically — a hard dollar number, not a lender determination. A trigger keyed to the lender’s reasonable discretion is, in practice, no trigger at all.

Two. Anchor the payment obligation to costs that are “due” — invoiced, change-ordered, or included in a draw request. Resist any effort to replace “due” with “projected,” “anticipated,” or “estimated.”

Three. Sequence project contingency, soft-cost contingency, interest reserve, and unfunded developer fee in front of any rebalancing payment. Those amounts exist to absorb cost overruns. A rebalancing demand that ignores them is a demand for double-counted protection.

Four. Carve out lender-caused delay. Cost increases caused by the lender’s own action or inaction — delayed approvals, delayed inspections, slow draws — should never trigger a rebalancing obligation.

Five. Carve out genuine force majeure, pandemic, and governmental shutdowns. The 2020-2021 experience taught everyone that boilerplate force majeure language is interpreted narrowly. Spell it out.

Six. Negotiate the equity-funding sequence. Sophisticated developers ask for pro-rata equity and debt advances, or for milestone-based equity contributions, rather than the traditional equity-first structure. Even when the lender insists on equity-first, the valuation of contributed equity — land at full appraised value, documented soft costs dollar-for-dollar, pre-leased space credited at a reasonable discount — is negotiable. See Murphy, supra.

Seven. Build in a cure window. A balancing provision that lets the lender stop funding without first giving the borrower or guarantor a meaningful window (typically thirty days) to fund the gap is one that pushes both sides toward the BB Syndication problem. A real cure window benefits everyone.

Eight. Burn off the guaranty at substantial completion — and where possible at stabilization. The guaranty’s purpose is to make sure the project gets built. Once it is built, the guarantor has done its job.

Nine. Terminate the guaranty on involuntary divestiture. If the lender takes the project back, the lender owns the completion decision. The guarantor should not still be on the hook for budget the new owner approves.

Ten. Bound the guarantor’s exposure to step-in completion. Notice, cure, a commercial-reasonableness standard, no gold-plating, reasonable documentation, and a contest right tied to commercial reasonableness. The step-in right is the lender’s; the spending authority should not be unilateral.

None of these positions is hostile to the lender. They are the positions that allow the document to function fairly when the project encounters trouble — which is the only time anyone reads a balancing provision in the first place.

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VII. Cases and secondary sources

The case law on balancing provisions is thinner than one might expect, in part because most disputes resolve before they generate published opinions. The single most important decision in the area is BB Syndication Services, Inc. v. First American Title Insurance Co., 780 F.3d 825 (7th Cir. 2015), which holds that mechanic’s liens arising after a construction lender stops funding for out-of-balance reasons are excluded from the standard ALTA loan policy under Exclusion 3(a). The Eighth and Tenth Circuits have reached the same conclusion on similar facts. See, e.g., Reinhart Boerner Van Deuren, Construction Loans and Title Policies in the Seventh Circuit (collecting cases and describing the lender’s “Hobson’s choice”). For lenders, the practical response to BB Syndication has been to seek a special title-insurance endorsement (sometimes called the “Seattle endorsement”) covering mechanic’s liens that arise from stop-funding decisions; whether the endorsement is available, and at what premium, varies by deal. See King & Spalding, Seventh Circuit Court of Appeals: No Coverage under Title Insurance for Mechanics’ Liens Arising after Construction Lender Stops Funding. Borrower’s counsel should still negotiate cure mechanics on the assumption that the lender’s title insurance will not cover stop-funding liens.

On the negotiation side, the single best borrower-oriented analysis on the open web is David J. Murphy, Loan Balancing Provisions in Construction Lending, Murphy PC (Aug. 22, 2025), which walks through pro-rata versus equity-first contributions, land-contribution valuation, line-item reallocation rights, and contingency triggers. For completion-guaranty negotiation specifically, Chad Richman, Construction Completion Guaranty: Worthwhile for a Guarantor to Negotiate, Lexology (May 8, 2017), is the most useful checklist on burn-off and termination triggers. Strafford and Barbri both publish recurring CLEs on the topic, which are useful for the lender-side perspective on what is and is not negotiable. For the construction-document side — making sure the AIA A201 and the loan documents do not contradict each other on change-order authority and completion deadlines — see Nelson Mullins, Avoiding Contract Conflicts: 5 Key AIA Provisions to Align with Loan Documents (Mar. 6, 2025). The CCIM Institute’s Seeking Balance (Mar. 2015) remains a useful introduction for clients who are encountering this language for the first time.

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A closing thought

A balancing provision and the completion guaranty in which it sits are, at their best, instruments for allocating the cost of project failure to the party best positioned to manage it. The lender absorbs the macro risk that the construction industry as a whole is more expensive than anyone projected at closing. The borrower and guarantor absorb the micro risk that the project specifically encounters difficulty. Drafting that respects that allocation produces a document worth signing on both sides of the table. Drafting that blurs it produces the kind of correspondence no practitioner enjoys writing.

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Citations

1. BB Syndication Services, Inc. v. First American Title Insurance Co., 780 F.3d 825 (7th Cir. 2015).
2. David J. Murphy, Loan Balancing Provisions in Construction Lending, Murphy PC (Aug. 22, 2025), https://murphypc.com/news/loan-balancing-provisions-in-construction-lending/.
3. Chad Richman, Construction Completion Guaranty: Worthwhile for a Guarantor to Negotiate, Lexology (May 8, 2017), https://www.lexology.com/library/detail.aspx?g=97704fda-f3a5-4367-9a8d-94a2f60ba1d7.
4. Essential Guide to Repayment and Completion Guaranty Agreements in Commercial Finance, RealDealDocs (Sept. 29, 2025), https://realdealdocs.com/essential-guide-to-repayment-and-completion-guaranty-agreements-in-commercial-finance/.
5. Construction Lending 101, Scotsman Guide (Feb. 8, 2023), https://www.scotsmanguide.com/commercial/construction-lending-101/.
6. Seeking Balance, CCIM Institute (Mar. 2015), https://www.ccim.com/cire-magazine/articles/323781/2015/03/seeking-balance/.
7. Nelson Mullins, Avoiding Contract Conflicts: 5 Key AIA Provisions to Align with Loan Documents (Mar. 6, 2025), https://www.nelsonmullins.com/insights/insights/avoiding-contract-conflicts-5-key-aia-provisions-to-align-with-loan-documents.
8. Arent Fox Schiff, Real Estate Lender’s Exercise of “Loan Balancing” Rights May be Deemed to Have Created Mechanics’ Liens, https://www.afslaw.com/sites/default/files/2023-02/Real-Estate-Lenders-Exercise-of-Loan-Balancing-Rights-May-be-Deemed-to-Have-Created-Mechanics-Liens.pdf.
9. King & Spalding, Seventh Circuit Court of Appeals: No Coverage under Title Insurance for Mechanics’ Liens Arising after Construction Lender Stops Funding, https://www.kslaw.com/blog-posts/seventh-circuit-court-of-appeals-no-coverage-under-title-insurance-for-mechanics-liens-arising-after-construction-lender-stops-funding-2.
10. Reinhart Boerner Van Deuren, Construction Loans and Title Policies in the Seventh Circuit, https://www.reinhartlaw.com/news-insights/construction-loans-and-title-policies-in-the-seventh-circuit.