A non-recourse loan is a type of loan where the borrower is not personally liable if they default on their loan. Instead, the lender may only repossess and sell the property in order to recoup their losses. Non-recourse loans are the opposite of recourse loans, which allow a lender to seize and sell a borrower’s personal property. Most bank loans, mini-perm loans, and commercial construction loans are typically recourse loans, while CMBS financing, Fannie Mae® and Freddie Mac® multifamily loans, mezzanine loans, life company loans, and HUD multifamily loans are generally non-recourse financial instruments.

The primary benefit of non-recourse loans is that they provide a greater degree of protection for the borrower. Without a personal guarantee, the lender cannot seize the borrower's personal assets if they default on the loan. This can be especially beneficial for developers who are just starting out and don't have a lot of assets to protect.

Advantages of Non-Recourse Loans for Borrowers include the lack of any personal liability, the ability to borrow more, and the potential for less complicated syndication or partnership.

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Non-recourse loans can be used to finance a variety of commercial real estate, including multifamily, office, retail, industrial, and hospitality properties. However, lenders typically set more stringent debt service coverage ratio requirements and may cap leverage at a certain amount, as well. Additionally, borrowers must meet certain conditions, such as higher credit scores and more experience in commercial real estate investing.

The main risks associated with non-recourse loans are tied to the loan terms a borrower can receive. Because the risks to a lender are higher than with recourse debt, a lender will typically pass this on in the form of higher interest rates, or lower loan amounts relative to the property value to offset the risk. This typically makes non-recourse financing more expensive.

Another potential risk is tied to exceptions to the non-recourse clause in the loan. While it’s true that a lender generally cannot pursue a borrower’s personal assets or income outside of the property itself, most non-recourse loans include language for what are known as bad boy carve-outs. These provisions essentially state that, should the borrower misrepresent a property or themselves, or file fraudulent financial documents — like tax returns or financial statements — the borrower is no longer protected by the non-recourse clause and is fully responsible for the loan. They may also cover other acts, such as raising subordinate financing when it’s not allowed, or even paying real estate taxes late.

In order to qualify for a non-recourse loan, commercial lenders often have strict eligibility requirements. Most non-recourse programs can only be utilized for the financing of certain property types and classes, such as a class A office or multifamily property in a major MSA (i.e. New York or Los Angeles). The income that a commercial property produces (both past and present) is also a determining factor. Additionally, lenders tend to analyze the requested amount of leverage. Non-recourse commercial mortgage loans tend to have higher interest rates than their recourse counterparts, and are also generally only available to borrowers that have a very strong financial profile. Lenders can be pretty strict about this, the thought process being that a default is significantly less likely in this scenario because the borrower has the financial means to make sure that the property’s income is reinvested into the property. Aside from strong finances, commercial mortgage lenders also require a very experienced borrower with ample "skin in the game" for non-recourse financing.

Sources:

• Apartment.loans: What are Non Recourse Loans?
• Multifamily.loans: Non-Recourse Loans

Non-recourse loans are a type of commercial real estate financing that is typically used for lower-risk properties. These loans are generally more selective and are often used for stronger assets. For example, a stabilized Class A multifamily property in Manhattan may have little trouble landing a nonrecourse loan, but a first-time investor seeking a hotel refinance in suburban Boise, Idaho, would likely have little choice but to look to recourse financing.

It is important to note that every situation and borrower is different, and what works for you in one investment may not work for you in another. If you would like to learn more about your unique situation and strategy, please contact our team.