
Recourse debt and nonrecourse debt are two types of debt that have distinct characteristics and implications for borrowers.
Recourse debt, also known as recourse financing, requires the borrower to personally guarantee the loan, meaning they are liable for the debt even if the property is sold for less than the loan amount.
In contrast, nonrecourse debt does not require a personal guarantee and is typically used for commercial or investment properties.
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What Is Recourse Debt?
Recourse debt is a type of loan where the borrower is personally liable for the debt, meaning the lender can pursue their personal assets if the collateral is insufficient to cover the loan.
This type of loan is riskier for borrowers, as lenders may go after their personal assets, including wages, in the event of default.
Borrowers should be aware that certain activities, such as fraud or misrepresentation of financial strength, can trigger a bad boy carve-out, allowing the lender to pursue recourse options.
If the collateral is insufficient to cover the loan, a lender could attempt to recover losses by going after a borrower's personal assets.
Understanding the potential liabilities associated with recourse debt is critical for any borrower exploring their commercial real estate finance options.
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Impact on Investors

As an investor, it's essential to understand the impact of recourse and non-recourse loans on your financial situation.
Recourse loans expose personal assets to potential seizure in case of default, which can be a significant risk for investors looking to minimize personal liability.
Non-recourse loans, on the other hand, limit liability to the collateral, providing a level of protection for personal assets.
Investors with substantial personal assets may opt for non-recourse loans to protect those assets from potential loss in the event of default.
Lenders may impose stricter requirements and higher interest rates for recourse loans due to the increased risk they bear.
Non-recourse loans may come with lower interest rates and more favorable terms, as the lender relies solely on the value of the collateral for repayment.
Lenders assess the risk associated with a loan based on various factors, including the borrower's creditworthiness, the property's value, and the projected cash flow.
In favorable market conditions, non-recourse loans may be more readily available as lenders seek to attract borrowers with competitive terms.
During economic downturns or periods of financial instability, lenders may become more conservative and prefer offering recourse loans to mitigate risk.
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Key Takeaways
Non-recourse debt is a type of loan that is secured by collateral, commonly property. This means that if the borrower defaults on the loan, the lender can only seize the collateral, not the borrower's personal assets.
Lenders charge higher interest rates on non-recourse debt. This is likely due to the increased risk of default, as the lender has limited recourse to recover their losses.
Non-recourse debt is characterized by high capital expenditures, long loan periods, and uncertain revenue streams. This can make it challenging for borrowers to repay the loan, increasing the risk of default.
A non-recourse debt does not hold the borrower personally liable for the loan. This means that the borrower's personal assets are protected in the event of default, but the lender may still have limited recourse to recover their losses.
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Non-Recourse Debt
Non-recourse debt is a type of loan where the lender can only collect the value of the collateral, not the full amount borrowed. This means if you default on the loan, the lender can't come after your other assets.

In a non-recourse debt, the lender's only recourse is to sell the collateral and use the proceeds to pay off the loan. For example, if you take out a mortgage on a house and default, the lender can only sell the house to pay off the mortgage, not your other assets.
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Loan Process
The loan process for recourse debt involves a personal guarantee, which means the borrower is responsible for repaying the loan even if the business can't. This can put the borrower's personal assets at risk.
In contrast, nonrecourse debt only holds the business assets responsible for repayment, not the borrower's personal assets. This type of loan is often used for real estate investments.
To secure a loan, lenders typically require collateral, which can include business assets, property, or other valuables. The borrower must also meet the lender's creditworthiness standards, which may include a good credit score and a stable income.
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When a Loan is Issued

A loan is issued based on various factors, including state law. Some states require all mortgages to be nonrecourse debt.
Whether a loan is recourse or nonrecourse often depends on state law. This can impact the lender's ability to pursue a deficiency judgment after collateral has been seized.
In some states, all mortgages are considered nonrecourse debt. This means lenders cannot pursue a deficiency judgment after collateral has been seized.
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Loan Requirements
To qualify for a non-recourse loan, a borrower typically needs high credit scores and a low loan-to-value ratio.
Lenders require borrowers to have a strong financial profile and ample "skin in the game" to qualify for a recourse or non-recourse commercial loan. This means having a solid credit history and a significant amount of equity in the property.
Non-recourse commercial mortgage loans have higher interest rates than their recourse counterparts, with an average of 52 basis points higher, according to a Federal Reserve study from December 2021. This is because lenders take on more risk with non-recourse loans.
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LTV ratios tend to be 2.8% higher in recourse loans, enabling borrowers to increase leverage. This means that borrowers who opt for recourse loans can borrow more money relative to the value of the property.
Secured debt, such as auto loans and credit cards, is an example of recourse debt, where lenders can recover the balance with collateral if the borrower defaults. This type of debt is preferred by lenders because it presents a lower level of risk.
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Loan Collateral
Secured debt, like auto loans and credit cards, is an example of recourse debt, which means lenders can recover the balance with collateral if a borrower defaults.
Lenders can seize borrower assets if the collateral isn't sufficient to cover the full outstanding loan balance.
Some states treat home mortgages as non-recourse debt, while others will classify it as recourse debt.
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What Is Loan Collateral?
Loan collateral is a type of security that lenders use to protect their investment in a loan. It can be a car, a house, or other valuable assets that the borrower owns.

Secured debt, like auto loans and credit cards, is typically secured with loan collateral. This means that if the borrower defaults, the lender can recover the balance with the collateral.
Lenders prefer recourse debt, which is secured with loan collateral, because it presents a lower level of risk. In return, they can offer lower interest rates and wider availability for this type of loan.
If the collateral isn't sufficient to cover the full outstanding loan balance, lenders can seize the borrower's assets to recover the debt. Some states treat home mortgages as non-recourse debt, while others classify it as recourse debt.
Non-recourse debt is secured with loan collateral, but the lender is limited to the collateral itself to recoup losses if the borrower defaults.
Eligible Property Types
Recourse loans are widely used for most asset classes, including office, multifamily, retail, and industrial properties.
A Class B retail property in a tertiary market may have to pay a higher interest rate than a Class A office or multifamily property in a major MSA.
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Any property type can qualify for a recourse loan, but the lender may require a higher interest rate and more stringent qualifications.
Non-recourse 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.
A borrower might find it much easier to secure non-recourse financing for a class A office or multifamily property in a major MSA, while a class B retail property in a small market is likely to not qualify for non-recourse lending.
A stabilized Class A multifamily property in Manhattan may have little trouble landing a non-recourse 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.
Frequently Asked Questions
What qualifies as qualified nonrecourse debt?
Qualified nonrecourse debt refers to financing borrowed by a taxpayer for holding real property from a qualified person or lender. This type of debt is typically secured by the property itself, meaning the lender can only seize the property if the loan is not repaid.
Are home loans recourse or nonrecourse?
Home loans can be either recourse or nonrecourse, depending on the state you live in, with 12 states having nonrecourse laws. If you live in a nonrecourse state, you may have more protection in case of loan default.
Is a mortgage a recourse liability?
Most mortgages are recourse loans, but 12 states allow non-recourse mortgages, limiting the lender's ability to seize assets beyond the home. This means borrowers in those states have some protection against excessive debt collection.
What are the disadvantages of a non-recourse loan?
Non-recourse loans are harder to get and come with higher interest rates due to the increased risk for lenders. They are a riskier investment for lenders, making them less accessible and more expensive.
Sources
- https://terrydalecapital.com/learn/recourse-vs-non-recourse
- https://www.investopedia.com/terms/n/nonrecoursedebt.asp
- https://gocardless.com/en-us/guides/posts/recourse-loan-vs-non-recourse-loan/
- https://www.multifamily.loans/apartment-finance-blog/recourse-vs-nonrecourse-loans/
- https://fitsmallbusiness.com/recourse-vs-nonrecourse-debt/
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