Non-Recourse Loans

A non-recourse commercial loan is the opposite of a recourse loan on commercial property. Recourse loans require the personal guarantee of the borrower(s) so that in the event of loan default, whatever money the bank doesn't recoup from the property, the borrower and their personal assets are on the line for the balance of the funds to make the bank whole. CMBS loans, for example, are generally non-recourse financial instruments.

In the case of non-recourse commercial loans, the bank’s only way to recoup lost investment and yield in the event of a default is through the property itself and the income the property generates. This is obviously an advantage for borrowers, because who wouldn’t want less risk and exposure? Conversely, non-recourse loans carry higher risks for lenders and investors. Because of this, the commercial lender often requires certain property types, and classes, in primary markets. Property income (both past and present) are also determining factors, as well as lower leverage.

Non-recourse commercial mortgage loans are also generally only available to borrowers that are very strong financially, because in those cases, a default is of course less likely because the borrower has the financial means to make sure that the property’s income is used for the property. Commercial mortgage lenders will also require a very experienced borrower for making a non-recourse loan.

To sum things up, non-recourse loans are harder to get, but are very much the norm in the market of commercial loans over $5–$10 million. There is one caveat: most non-recourse loans come with bad boy carve-outs, which give the lender full recourse if a borrower is negligent or does anything fraudulent. These carve-outs can quickly convert a non-recourse mortgage loan into a full-recourse loan.