| Detail | Explanation |
|---|---|
| Recourse means | Guarantors owe any deficiency after foreclosure |
| Non-recourse means | Lender looks to the property, subject to carve-outs |
| Carve-out triggers | Fraud, misapplied funds, unapproved transfers, bankruptcy filings |
| Middle ground | Partial recourse caps and guarantees that burn off |
| Always read | The guaranty and environmental indemnity, with counsel |
How do recourse and non-recourse loans compare?
The label describes what happens after a foreclosure leaves the lender short. Everything else in the loan, from the entity structure to the covenants on the guarantor's balance sheet, follows from that answer.
| Feature | Recourse loan | Non-recourse loan |
|---|---|---|
| Shortfall after foreclosure | Borrower and guarantors owe it | Lender absorbs it unless a carve-out applies |
| Guarantees signed | Payment guaranty, full or capped | Carve-out guaranty and environmental indemnity |
| Where it is common | Banks, credit unions, construction lenders, many private lenders | Agency, CMBS, life companies, many debt funds on stabilized assets |
| Typical property profile | Transitional, construction, owner-user, smaller loans | Stabilized income property |
| Borrower entity | Can be an operating or holding company | Usually a single-purpose entity with separateness covenants |
| Guarantor tests | Net worth, liquidity, and often global cash flow | Net worth and liquidity for the carve-out guarantor |
| Full recourse can spring | Already full recourse | Yes, on listed acts such as a voluntary bankruptcy |
| What gets negotiated | Cap size and burn-off tests | The carve-out list and what triggers full recourse |
What does recourse mean on a commercial loan?
On a recourse loan, a personal guarantee makes the guarantor responsible for repayment if the property does not cover the debt. The lender can foreclose, apply the proceeds, and then pursue the guarantor for the remaining balance, interest, and enforcement costs, subject to state law.
Lenders require recourse when the property alone does not carry enough certainty. Construction projects, lease-up, heavy renovation, special-purpose buildings, and smaller loans all tend to land here. Banks also use guarantees to anchor the relationship and to satisfy their own credit policy. The guarantor's personal financial statement becomes part of the underwriting, and the contingent liability shows up when that guarantor borrows again.
What does non-recourse actually protect?
A non-recourse loan protects the sponsor from market risk. If rents fall or values drop and the lender forecloses, the loss stays with the lender. It does not protect the sponsor from its own conduct. Every non-recourse loan carries a bad boy carve-out guarantee that makes the guarantor liable for losses caused by listed acts, and for the full loan balance after the most serious ones.
- Loss carve-outs: fraud or misrepresentation, misapplied rents or insurance proceeds, waste, unpaid taxes when cash was available, and environmental liabilities
- Full recourse triggers: a voluntary bankruptcy filing, collusion in an involuntary filing, an unapproved transfer of the property or control, and new debt the loan prohibits
- Separateness breaches: some documents tie full recourse to violations of single-purpose entity covenants, which is worth negotiating hard
What sits between full recourse and non-recourse?
Many loans land in the middle. A partial guaranty caps the guarantor's exposure at a percentage or dollar amount of the loan. A burn-off reduces or removes the guaranty once the property hits a coverage, occupancy, or debt yield test. A completion guarantee makes the guarantor finish construction regardless of cost, and a carry guarantee covers interest, taxes, and insurance until the property stabilizes. A non-recourse construction loan can still leave a sponsor with meaningful exposure through those 2 guarantees.
Worked example: the same default under 3 structures
In this hypothetical example, a lender forecloses on a $12,000,000 loan and nets $9,000,000 from the sale after costs, leaving a $3,000,000 shortfall. Under full recourse the guarantor owes the full $3,000,000. Under a hypothetical partial guaranty capped at 20% of the loan, the guarantor owes up to $2,400,000 and the lender absorbs $600,000. Under non-recourse the lender absorbs the $3,000,000 unless the default involved a carve-out.
State law can change the result. Some states limit deficiency judgments after certain foreclosure methods, and guaranties are drafted with those rules in mind. Have counsel in the property's state review the guaranty before signing.
| Hypothetical outcome | Full recourse | Partial recourse | Non-recourse |
|---|---|---|---|
| Loan balance | $12,000,000 | $12,000,000 | $12,000,000 |
| Net foreclosure proceeds | $9,000,000 | $9,000,000 | $9,000,000 |
| Shortfall | $3,000,000 | $3,000,000 | $3,000,000 |
| Guaranty cap | None | 20% of loan | Carve-outs only |
| Guarantor pays | $3,000,000 | $2,400,000 | Nothing unless a carve-out applies |
| Lender absorbs | Nothing | $600,000 | $3,000,000 |
Which one fits your deal
These hypothetical situations show where each structure usually lands.
- A stabilized multifamily or industrial property with long operating history and a sponsor who wants to limit personal exposure: non-recourse permanent debt, accepting single-purpose entity rules and prepayment terms.
- A ground-up project: expect a completion guarantee and carry guarantee even when the lender calls the loan non-recourse.
- An owner-user building financed with the operating company's bank: recourse is standard, and the negotiation is usually over the cap and the guarantors.
- A value-add acquisition with partial occupancy: a partial guaranty that burns off at a stated coverage or occupancy level.
- A sponsor with several properties who needs to keep contingent liabilities off future loan applications: non-recourse wherever the asset supports it, even at lower proceeds.
What to negotiate in the guaranty
The sizing on a non-recourse loan is usually tighter, so check the loan sizing calculator against each structure. Capital Partners arranges recourse and non-recourse financing from $1M to $100M, including permanent loans on stabilized property. Submit the deal and note the recourse you can accept, and a principal will review which lenders fit.
- Narrow full recourse triggers to intentional acts
- Limit loss carve-outs to actual losses caused by the act
- Tie waste and unpaid tax carve-outs to available property cash flow
- Set objective burn-off tests on partial guaranties
- Match net worth and liquidity covenants to the guarantor's real balance sheet
- Release the guarantor for acts after a lender-approved transfer
Common questions
Are non-recourse commercial loans really non-recourse?
For market losses, generally yes. Every non-recourse loan still carries carve-outs that make the guarantor liable for losses from acts such as fraud or misapplied rents, and for the full balance after acts such as a voluntary bankruptcy filing or an unapproved transfer.
Do I need a personal guarantee for a commercial loan?
Most bank, construction, and SBA loans require one. Stabilized properties financed through agency, CMBS, or life company lenders are usually non-recourse, though a sponsor still signs a carve-out guaranty and environmental indemnity.
What triggers full recourse on a non-recourse loan?
The usual triggers are a voluntary bankruptcy filing, colluding in an involuntary bankruptcy, transferring the property or control without consent, and placing prohibited debt on the property. The exact list is negotiated in the loan documents.
Can a recourse guarantee burn off?
Yes, if the loan documents say so. Burn-offs typically reduce or release a guaranty once the property meets a stated coverage, occupancy, or debt yield test for a set period.
Does non-recourse debt cost more?
It often comes with lower proceeds, stricter entity requirements, reserves, and prepayment terms instead of a higher rate alone. The trade-off depends on the lender and asset, so compare full term sheets.
Send this deal to a principal
Share the basics now. A principal responds within 1 business day, and you can send the full package after the first conversation.