A completion guarantee, a carry obligation and a tenant lease support different risks and should not be treated as interchangeable.
An industrial development can be physically complete and still lack enough paying occupancy to service its loan. Preleasing helps describe demand, but the investor must examine the tenant’s remaining conditions, delivery obligations and rent commencement. Sponsor support can bridge some gaps, yet its scope and funding capacity depend on the actual documents and resources.
OCC’s construction-underwriting guidance distinguishes bona fide preleasing commitments from projections and calls for assessing their substance. That is a reason to inspect the actual lease and conditions, not a universal minimum preleasing percentage. OCC, Commercial Real Estate Lending, Preleasing discussion
Separate five types of evidence
A prospect list identifies interest. A letter of intent records proposed terms. An executed lease creates obligations subject to its actual provisions. Delivered and accepted space may satisfy some conditions. Paying occupancy demonstrates a further stage of performance. Keep each status in its own column and date the supporting evidence.
The same discipline applies to guarantees. A completion obligation may concern delivering the project and paying specified costs. A carry obligation may address interest or operating deficits. A repayment guarantee may cover principal under defined circumstances. These labels are not legal conclusions; counsel must interpret scope, limits, triggers, defenses and release conditions.
| Exposure | Evidence to examine | Cash question |
|---|---|---|
| Construction completion | Contract, budget and completion support | Who funds an overrun or incomplete work? |
| Tenant delivery | Executed lease and work letter | What must be delivered before acceptance or rent? |
| Lease-up period | Leasing schedule and carry arrangements | Who pays costs while space is vacant? |
| Loan maturity | Note, extension and repayment provisions | How is principal repaid if stabilization is late? |
| Sponsor support | Executed obligations and financial information | Is cash legally and practically available when needed? |
A high net-worth statement does not by itself establish liquid funding. Identify encumbrances, competing obligations and the timing of any asset liquidation or capital call.
Hypothetical 100,000-square-foot project
Assume 60,000 square feet is covered by an executed lease expected to commence at completion. Its annual net contribution before shared fixed property costs is $10 per square foot, or $600,000. Shared fixed costs are $100,000 annually. The remaining 40,000 square feet is unleased and contributes no income in the base commencement case.
Annual property cash before debt is therefore $500,000. Annual debt service is an entered $400,000, giving 1.25× coverage once the first tenant is paying. The 60% preleased area should not be described as 60% current cash occupancy before commencement.
Suppose delivery and rent commencement are delayed four months. During those months the project receives no tenant contribution but still pays one-third of annual shared costs, or approximately $33,333, and one-third of annual debt service, or approximately $133,333. The four-month cash requirement is approximately $166,667, before additional construction or tenant remedies.
Now assume a separate $250,000 construction overrun. Combined incremental funding need is approximately $416,667. If the sponsor’s completion support covers the overrun but not the carry deficit under the actual agreement, the two obligations need different funding treatment. Do not assume the label “guaranteed loan” answers the question.
Test support capacity across the sponsor’s projects
Assume the sponsor has $700,000 of liquid assets, of which $200,000 is pledged or otherwise unavailable and $180,000 is committed to another project. Available cash for this scenario is $320,000 before personal reserves or additional contingencies. That is approximately $96,667 short of the combined overrun and delay case.
| Support measure | Amount |
|---|---|
| Reported liquid assets | $700,000 |
| Unavailable or pledged cash | −$200,000 |
| Other committed project funding | −$180,000 |
| Remaining modeled liquidity | $320,000 |
| Overrun plus four-month carry | $416,667 |
| Unfunded amount | $96,667 |
The guarantee may create an enforceable obligation even when cash is insufficient. That does not make the shortfall disappear. Document the additional source, its conditions and whether it can arrive before invoices or debt payments are due.
Model the unleased portion without borrowing its future rent
If the remaining 40,000 square feet eventually contributes the same $10 per square foot, annual cash flow would rise by $400,000 before any incremental costs not already included. But reaching that result may require tenant improvements, commissions, free rent and additional downtime. Include them in a separate dated scenario, with no assumed contribution before the relevant commencement.
A takeout lender may require evidence different from the construction lender’s preleasing condition. Keep the maturity and extension calendar aligned with the date when paying occupancy and operating results are expected to support refinance. A completed building and an executed lease can still leave a timing gap.
The financing decision should state what the project can pay today, what depends on tenant performance, and what the sponsor has actually committed and can fund. This allows the investor to compare structures on their real repayment path rather than treating preleasing percentages or guarantee labels as substitutes for cash.
Sources and evidence
- OCC Commercial Real Estate LendingDetermining Project Feasibility, Preleasing, printed page 34 · Checked 2026-10-21 · No minimum preleasing ratio or legal guarantee interpretation is asserted.
Source dates and applicability matter. Report an error or a changed source.