What is the difference?

There is a vast difference between these two types of real estate loans.  A sophisticated real estate investor should understand what these terms mean.  A recourse loan means that the individual that is borrowing the money – even if the legal borrower is an LLC (which is typical for most real estate loans) – has personal liability to repay the loan even if the LLC can’t repay the loan. A non-recourse loan means that the individual owner(s) of the borrower (again, borrow is probably an LLC) has no personal liability to pay the loan.

In a typical commercial real estate loan, an investor creates a contract to purchase a property (let’s use as an example – a retail building with a single tenant – like a Safeway) for $1,000,000.  The investor obtains a bank loan for $750,000 and put down $250,000 in cash.  The Safeway tenant doesn’t renew their lease and the value of the property drops to $700,000 because it is now 100% vacant.  With no cash flow the borrower can’t make the loan payments and the bank lender places their loan into default.

Here is how a recourse vs non-recourse loan will play out.  If the bank made a non-recourse loan (banks normally will not do this but certain private lenders will consider non-recourse) then the borrower may want to walk away from the loan.  Because the loan went into default the interest rate can jump from the normal rate of (say) 5% up to a default rate of 24%.  24% default interest x $750,000 = $15,000 per month + whatever attorney fees and other costs the bank decides to charge. In six months, the borrower now owes over $850,000 (up from the $750,000 original balance) and the value of the collateral property may have fallen below this amount.  To collect their loan the bank can file a lawsuit against the borrower individually and get a judgement against him individually for the $850,000.  They can then proceed to seize his house, his car, his bank accounts, and the retail property that was their initial collateral. The borrower has few defenses against this type of aggressive collection efforts of a recourse loan.

With a non-recourse loan, the story has a very different ending.  The bank can initiate foreclosure and take title to the empty retail property, but it does not have the ability to file a lawsuit against the individual borrower (unless the borrower violated one of the standard carveout clauses typically built into non-recourse terms).  If the retail property sells for $600,000 the bank must write off a loss of a substantial amount of their principal plus all their other costs and delinquent interest.  It is clear that a savvy real estate investor would prefer a non-recourse loan.

For the reasons given above, few bank real estate lenders are willing to fund non-recourse loans. This isn’t necessarily true for very large real estate loans – like a $50,000,000 loan on a large office building (normally made by a life insurance company) – because once a loan gets to a certain size a recourse loan is not appropriate.

Unlike most banks, Montegra Capital is willing to consider non-recourse loans.  However, in structuring a non-recourse loan Montegra will fund it at a lower loan to value (LTV) than our recourse loans.   If we would fund an acquisition loan on a retail improved property at 65% of appraised value, we would consider the same loan in a non-recourse format – at a 50 to 55% LTV.  If you are applying for a hard money loan with Montegra, Bob or Kim are happy to discuss the various options with you.