| Detail | Explanation |
|---|---|
| Lender's recovery | The collateral property, rents, and reserves |
| Usual exceptions | Fraud, misapplied funds, unpermitted transfers, voluntary bankruptcy, environmental |
| Common with | Life companies, CMBS, Fannie Mae and Freddie Mac multifamily, many debt funds |
| Less common with | Community banks, construction loans, small and transitional loans |
How does a non-recourse loan work?
The borrower is a single-purpose entity that owns the property. If the loan defaults, the lender forecloses or takes a deed in lieu and keeps what the property is worth. If that is less than the debt, the lender absorbs the loss and cannot pursue the sponsor for the difference, as long as no carve-out has been triggered.
Because the lender relies entirely on the asset, it underwrites the property harder. Non-recourse loans generally require stabilized cash flow, moderate leverage, and the single-purpose entity covenants that keep the borrower separate from the sponsor's other businesses.
Worked example: recourse versus non-recourse after a default
In this hypothetical example, a loan with a $15,000,000 balance defaults and the property sells at foreclosure for $12,500,000 and leaves a $2,500,000 deficiency before costs.
| Loan structure | Who bears the deficiency |
|---|---|
| Full recourse | Guarantor may be pursued for the deficiency, subject to state law |
| Non-recourse, no carve-out triggered | Lender absorbs the deficiency |
| Non-recourse, loss carve-out triggered | Guarantor liable for losses tied to the triggering act |
| Non-recourse, springing full recourse triggered | Guarantor may be liable for the full debt |
What are non-recourse carve-outs?
Carve-outs, also called bad boy provisions, are the exceptions that restore personal liability. Most documents sort them into 2 groups. Loss carve-outs make the guarantor liable for the lender's actual losses from acts such as misapplying rents, failing to pay taxes from available cash, or waste. Full recourse carve-outs make the whole debt recourse after events such as a voluntary bankruptcy filing or an unpermitted transfer. The bad boy carve-out guarantee page covers the typical list.
The exact triggers vary by lender and loan, and they are negotiated in the documents. Sponsors should have counsel read the carve-out list and definitions before closing.
When does non-recourse make sense?
A sponsor with a stabilized property and a long hold often gets non-recourse terms at moderate leverage. The tradeoff can be lower proceeds, tighter prepayment terms such as yield maintenance, and less flexibility on transfers. A transitional deal that needs more proceeds may get better economics with a partial personal guarantee. Capital Partners places both recourse and non-recourse permanent loans, and the right one depends on the hold period, leverage, and the sponsor's balance sheet. The DSCR calculator helps test whether a property's cash flow supports non-recourse leverage, and you can submit a deal to see which lenders fit.
Common questions
Are commercial real estate loans usually non-recourse?
It depends on the lender and deal. Stabilized loans from life companies, CMBS lenders, and agency multifamily programs are commonly non-recourse. Bank loans and construction loans more often carry recourse.
Is non-recourse really no liability?
No. Carve-outs can make the guarantor liable for losses or for the entire loan if specified acts or events occur, so the liability depends on how the documents define those triggers.
Do non-recourse loans have higher rates?
Pricing depends on the full risk profile. Non-recourse lenders often offset the lack of a guarantee with lower leverage, stronger property requirements, and stricter prepayment terms instead of a higher rate alone.
Can a construction loan be non-recourse?
It is uncommon. Construction lenders typically require a completion guarantee and often a payment or carry guarantee until the project stabilizes.
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