If you are planning an investment in today’s commercial real estate market by borrowing funds, then you have two options to choose from – “recourse and non-recourse real estate loans.” Let’s delve deeper into the differences between these two types of loans in this article.
What are recourse and non-recourse loans?
Recourse loans are loans where the lender can collect the difference amount between the property’s sale price and the value remaining on the loan if the property is sold for a value that’s less than the remaining loan amount due. These loans provide a secondary loan repayment source if the property value is insufficient to pay off the loan.
On the other hand, non-recourse loans are loans where the lender is restricted from collecting the shortage in the difference between the sale price of the property and the amount of loan. In these types of loans, the lender can recover the loan only through the commercial property that’s given as collateral. If the property is sold at a price that’s less than the loan amount, then the personal assets and liabilities of the borrower stay protected.
What are the pros and cons of recourse and non-recourse loans?
Pros of recourse loans
- Flexibility: Recourse real estate loans provide more flexibility in loan structure and pricing. Since these loans are funded by commercial banks, the direct relationship between the borrower and the lender allows banks to know the financial status and the borrowing requirements of the borrower.
- Level of disclosure: Recourse real estate loans generally demand underwriting and full disclosure for each borrower. This allows the lender to customize the loan to help the borrower meet particular borrowing needs. Also, these loans allow lenders to work directly with the borrower throughout the loan term and address capital improvements, property maintenance, and restructuring requirements.
Cons of recourse loans
One disadvantage of recourse real estate loans is that the borrower will be personally liable in case he or she fails to repay the loan. The lender can recover the loan amount by drawing into the borrower’s personal assets and liabilities.
Pros of non-recourse loans
One of the biggest advantages of recourse loans is that the borrower is not held personally liable in case there’s a default.
Cons of non-recourse loans
Non-recourse loans are less flexible in terms of loan structuring. Also, these loans come with “bad boy” curve-out provisions, which allows the lender to convert a non-recourse loan into a recourse loan if the borrower declares bankruptcy or engaged in illegal activities.
The decision to choose between recourse and non-recourse loans will depend on individual borrowing needs and property situation. It’s recommended that you consult a financial professional to know which one suits your commercial real estate investment the best.
Hi, my name is Michael Avent. I founded The Multifamily Review in 2020. I’m a Commercial Agent at Northcap Multifamily located in Las Vegas, Nevada. My vision for The Multifamily Review is to be the most trusted resource for all Multifamily Investors and Industry Professionals. We strive to offer the best and most up to date content to our readers and are always open for suggestions. Make sure you sign up to join our newsletter to stay up to date on our latest blog, ebook, and more exclusive content that’s coming your way! The Multifamily Review team and I look forward to building a deeper relationship with you!
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