Whether a loan is recourse or non-recourse decides what happens to you personally if the property cannot repay it. It is one of the most important, and most misunderstood, terms in commercial real estate financing.
Recourse loans
With a full-recourse loan, the borrower and the guarantors are personally liable. If a foreclosure does not cover the balance, the lender can pursue the guarantors' other assets. Bank loans and SBA loans are typically full recourse; SBA loans require unconditional guarantees from owners of 20% or more.
Non-recourse loans
A non-recourse loan limits the lender to the property and its income. Life insurance companies, agency lenders and CMBS lenders commonly offer non-recourse loans on stabilized properties, usually at lower leverage.
Carve-outs: non-recourse is never absolute
Non-recourse loans include "carve-outs," often called bad-boy provisions, that create personal liability for specific acts, such as fraud or misrepresentation, misapplication of rents or insurance proceeds, unpermitted transfers or additional debt, environmental liabilities and voluntary bankruptcy. Some carve-outs make the guarantor liable for the lender's losses; others "spring" full recourse for the whole loan. The exact language matters.
Partial and burn-off structures
Between the two extremes are partial guarantees (for example, of a percentage of the loan) and burn-off guarantees that fall away when the property reaches stabilization or a coverage target. These are common on construction and bridge loans.
Weighing the trade-offs
- Cost and leverage: recourse bank and SBA loans may offer higher leverage or more flexible prepayment; non-recourse loans may carry stricter cash-management and prepayment terms.
- Your balance sheet: guarantees can affect your ability to borrow on other deals.
- The asset: non-recourse lenders focus on stabilized, institutional-quality properties.
General information, not legal advice. Guarantee and carve-out language should be reviewed by your attorney.