A recourse loan is a commercial real estate loan that lets the lender pursue the borrower and any guarantor for the amount by which the loan balance exceeds the proceeds of the collateral. A non-recourse loan limits the lender to the property, except for losses caused by specified bad acts, which a carve-out guaranty makes the guarantor’s personal liability.
What is the difference between full recourse and non-recourse?
Under full recourse, the guarantor is liable for the entire debt. If the lender forecloses and the sale proceeds fall short of the balance, it obtains a deficiency judgment and collects from the guarantor’s other assets. The guaranty carries net worth and liquidity covenants to keep the guarantor’s balance sheet intact.
Under non-recourse, the lender agrees at origination that the property is its only source of repayment. The borrower is a single-purpose entity that owns nothing else, and the lender’s underwriting rests on the property’s income and value. Every non-recourse loan is documented with a carve-out guaranty, and the carve-outs are where the guarantor’s exposure lives.
What is a carve-out (bad-boy) guaranty?
A carve-out guaranty is the guarantor’s personal liability for a list of acts the lender will not absorb. It has two tiers. The first tier is loss carve-outs: fraud, misapplication of rents, insurance proceeds or security deposits, waste, environmental damage and failure to pay taxes. For these, the guarantor owes the lender’s actual loss from the act, not the whole loan.
The second tier is full recourse triggers: a voluntary bankruptcy filing, an unauthorized transfer of the property or of interests in the borrower, unpermitted subordinate financing, and a breach of the single-purpose entity covenants. Any one of these converts the entire loan to full recourse against the guarantor.
The carve-out list is negotiated at origination and lasts for the life of the loan.
What is partial recourse, and how does burndown work?
Partial recourse sets the guarantor’s liability at a percentage of the loan or a fixed amount, with the carve-outs sitting underneath it. Burndown is the reduction of that liability on milestones the loan documents define: a certificate of occupancy, a DSCR at or above a threshold for a stated number of consecutive quarters on the lender’s definitions, leasing at or above a percentage, a loan-to-value at or below a threshold on a new appraisal, a principal paydown, or a date.
Illustrative example:
| Stage | Milestone in the guaranty | Recourse after the milestone |
|---|---|---|
| Closing | None | Full recourse on a $20,000,000 construction loan |
| Certificate of occupancy | Completion evidenced and reduction requested | $5,000,000, or 25% of the loan |
| Stabilization | DSCR at or above the stated threshold for the stated consecutive quarters, on the lender’s definitions | Carve-out guaranty only |
The reduction takes effect when the borrower delivers the evidence and requests it in writing; some documents also require the lender’s written confirmation. A milestone that is met and never requested leaves the guarantor at the prior level.
Which lenders require recourse?
Agency, CMBS and life company loans are non-recourse with carve-outs as a matter of course. Banks commonly require full or partial recourse, and construction loans commonly carry both a completion guaranty and a repayment guaranty that burns down as the project stabilizes. Debt fund and bridge lenders vary; many lend non-recourse with carve-outs and add a carry guaranty for interest and shortfalls until stabilization.
Why does recourse matter at default and at sale?
At default, recourse decides what the lender can reach. On a non-recourse loan, the lender forecloses and the guarantor walks away unless a carve-out has been triggered, which is why a borrower that considers filing bankruptcy to stall a foreclosure must first read the guaranty: the filing itself is a full recourse trigger. On a recourse loan, the deficiency follows the guarantor.
At sale, an assumption keeps the loan in place with the buyer’s principal as the new guarantor, which requires the lender’s consent and a written release of the seller’s guarantor. Without the release, the seller remains liable on a loan it no longer controls. A guaranty is a contingent liability on the guarantor’s schedule of real estate owned until it is released in writing.
How recourse shows up in LoanBoss
Recourse is among the critical loan provisions the LoanBoss team abstracts from each loan, and LoanBoss tracks recourse and burndown on balance sheet and construction loans alongside the rest of the portfolio.
Frequently Asked Questions
Is a non-recourse loan truly non-recourse?
No. Every non-recourse loan carries a carve-out guaranty. The guarantor owes the lender’s loss from specified bad acts and owes the whole loan if a full recourse trigger, such as a voluntary bankruptcy or an unauthorized transfer, occurs.
What triggers full recourse on a non-recourse loan?
Commonly a voluntary bankruptcy filing, an unauthorized transfer of the property or of ownership interests, unpermitted subordinate debt and a breach of the single-purpose entity covenants.
Does recourse reduce automatically when a burndown milestone is met?
Rarely. Most guaranties require the borrower to deliver evidence of the milestone and request the reduction in writing, and some require the lender’s confirmation before the reduction takes effect.
Can a guarantor be released when the property is sold?
Yes, on an assumption the lender approves with a substitute guarantor, or on repayment of the loan. The release must be in writing; until then the guaranty remains a contingent liability of the seller’s guarantor.
How is recourse shown on a personal financial statement?
As a contingent liability at the current recourse amount after burndowns achieved and requested, listed by loan with the guaranty type.
Related Terms
- Guaranty
- Covenant
- Construction Loan
- CMBS
- Loan-to-Value
- Recourse and Guaranty Burndown: Tracking Guarantor Exposure Across a CRE Portfolio
- Lender Consent Requirements: Leases, Transfers and Management Changes Your Loan Documents Control
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.
Sources
- LoanBoss CRE Debt Glossary