Recourse debt, also referred to as a recourse loan, refers to a debt where the lender can claim the borrower’s assets if he or she fails to pay back the debt in full. There are two types of recourse debt. Full recourse debt allows the lender to take whichever assets the lender claims, as long as it falls within the range of the debt. In contrast, in the case of limited recourse debt, only specific assets can be claimed.

Unlike recourse debt, with non-recourse loans the lender is only allowed to collect the collateral but has no right to go after the borrower’s other personal assets. Although a recourse debt is more beneficial than a non-recourse debt for a lender, only those individuals and businesses with a good standing credit history can take advantage of this type of loan.

While recourse loans are widely used for most asset classes, nonrecourse lenders are typically far more selective, generally opting to finance stronger, lower-risk properties with one eye fixed on a market’s overall strengths and outlook.

For example, the owner of 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.

The main advantage of recourse debt in commercial real estate is that it allows the lender to take whichever assets the lender claims, as long as it falls within the range of the debt. This is beneficial for the lender, as it provides more security in the event of a loan default. However, only those individuals and businesses with a good standing credit history can take advantage of this type of loan.

The main disadvantage of recourse debt is that it can limit the amount of debt a borrower can take on, relative to their personal income. This can be a problem for investors who are looking to borrow more money than their personal income would allow. Additionally, if the loan defaults, the lender can go after the borrower’s other personal assets, which can be a major risk for the borrower.

The main advantage of a non-recourse loan for borrowers is the lack of any personal liability. If a loan defaults, the borrower can effectively walk away, after all. Another advantage of a non-recourse loan is that it can enable an investor to borrow more, as the debt isn’t tied to the borrower’s income or total assets.

The main disadvantages of a non-recourse loan 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 disadvantage is tied to exceptions to the non-recourse clause in the loan. 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, the borrower is no longer protected by the non-recourse clause and is fully responsible for the loan.

In order to obtain recourse debt in commercial real estate, you must have a good standing credit history. This type of loan is more beneficial for the lender, as they can claim the borrower's assets if they fail to pay back the debt in full. Full recourse debt allows the lender to take whichever assets the lender claims, as long as it falls within the range of the debt. In contrast, in the case of limited recourse debt, only specific assets can be claimed.

Sources:

• Recourse Debt Versus Non-Recourse Debt in Commercial Real Estate
• Recourse Debt
• What is a Recourse Loan?
• Non-Recourse Commercial Loans

In order to qualify for non-recourse financing, commercial lenders often have strict eligibility requirements. These requirements can include the type and class of the property, the income that the property produces, and the amount of leverage requested. Generally, non-recourse financing is only available to borrowers with a very strong financial profile, ample "skin in the game", and experience in commercial real estate investing. Additionally, lenders tend to analyze the requested amount of leverage and set more stringent debt service coverage ratio requirements. Non-recourse commercial mortgage loans tend to have higher interest rates than their recourse counterparts.

When taking out a recourse loan, it is important to understand the potential liabilities that could arise. Recourse loans are typically more risky for borrowers, as lenders may pursue a borrower’s personal assets in the event of default. This means that if the collateral is insufficient to cover the outstanding loan amount, a lender could attempt to recover losses by going after a borrower’s personal assets, including wages. It is therefore essential that borrowers understand their personal liability and exposure when taking out a recourse loan. Additionally, borrowers should be aware that certain activities, such as fraud or misrepresentation of financial strength, could trigger a bad boy carve-out, which would allow the lender to pursue recourse options. Knowing the potential liabilities associated with a recourse loan is critical for any borrower looking to explore their commercial real estate finance options.