There is a vast difference between these recourse and non-recourse real estate loans. A sophisticated real estate investor should understand what these terms mean and what the difference is between these types of loans.

What Is A Recourse Loan?

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.

With a recourse loan, the borrower takes on more personal financial risk. However, this higher risk often comes with the benefit of more favorable loan terms, such as lower interest rates or higher loan-to-value ratios. In most non-recourse loans, recourse provisions may only apply under specific conditions outlined in the loan agreement, such as fraud, misrepresentation, the borrowing entity filing for bankruptcy, or other types of borrower default.

What Is A Non-Recourse Loan?

A non-recourse loan means that the individual owner(s) of the borrower (again, the borrower is probably an LLC) has no personal liability to pay the loan.

Non-recourse financing options are often appealing to borrowers because they protect personal assets beyond the property itself. However, they are typically harder to qualify for, come with more conservative underwriting standards, and may include carve-outs—known as “bad boy” provisions—that convert the loan to full recourse under certain conditions like fraud or gross negligence.

Commercial Real Estate Recourse vs Non-Recourse Loan Example

In a typical commercial real estate loan, an investor creates a contract to purchase a commercial 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 puts down $250,000 in cash. The Safeway tenant doesn’t renew their lease, and the value of the property drops to $700,000 because the property 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.

Let’s look at how a bank handles the default with a recourse loan vs a non-recourse loan.

Recourse Loan Result

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 loan amount), 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 judgment against him individually for the $850,000. They can then proceed to seize the borrower’s other assets, such as his house, his car, his bank accounts, and the retail property that was the initial loan collateral.

In the event of a default, the borrower has few defenses against this type of aggressive collection efforts of a recourse loan.

Non-Recourse Loan Result

With a non-recourse loan, the story has a very different ending. If the bank made a non-recourse loan, then the borrower may want to walk away from the loan.

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 and go after the borrower’s personal assets, unless the borrower violated one of the standard carve-out clauses typically built into non-recourse terms.

If the retail property sells for $600,000, the bank must write off the remaining balance, which is a loss of a substantial amount of their principal, plus all their other costs and delinquent interest.

When Real Estate Investors Should Consider Recourse Loans vs Non-Recourse Loans

For real estate investors, choosing between recourse and non-recourse debt often depends on risk tolerance, the specifics of the investment, the borrower’s financial situation, and the terms being offered.

Recourse loans are often a better fit for investors who are comfortable with personal liability and are seeking more favorable loan terms. These loans can offer higher leverage and lower interest rates, which may be beneficial for value-add projects or short-term holds where maximizing return is the priority. Borrowers with a strong financial profile may also find it easier to negotiate better terms with a recourse structure.

Non-recourse loans, on the other hand, may be the preferred option for investors who are focused on asset protection and long-term risk mitigation. These loans make the most sense when an investor is not willing to put additional assets on the line beyond the collateral. Non-recourse financing is commonly used in larger commercial real estate deals, including stabilized assets and institutional-grade properties, where the property’s cash flow and value are strong enough to support the loan on their own.

Ultimately, the decision should align with the investor’s overall strategy, financial goals, and tolerance for risk exposure.

Colorado Non-Recourse Loans

Few traditional 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, private lenders like Montegra Capital are willing to consider non-recourse loans. However, in structuring a non-recourse loan, Montegra will typically fund it at a lower loan-to-value (LTV) than our recourse loans. If we were to 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 bridge loan with Montegra, Bob or Kim would be happy to discuss the various options with you. Please contact us today.