Recourse obligations and personal guarantees are essential aspects of commercial real estate financing. In tough times recourse liabilities can severely impact the financial well-being of the guarantor, so borrowers and guarantors understand their potential obligations thoroughly before signing a guaranty or indemnity.
Generally speaking, loans come with three different levels of recourse – full, limited, and non-recourse. The level of recourse available for a property depends on a variety of factors including; loan to value, loan size, lender type, occupancy, property type, location, tenant credit, lease term, etc. Below is a simple description of each level of recourse and how it could potentially impact the guarantor.
With a full recourse loan, the guarantor is held responsible for repaying the outstanding balance of the loan as well as any losses and fees incurred by the lender. Typically, the guarantor is an individual who controls the borrowing entity. The lender will look to this individual to recover any losses they incur that cannot be repaid by the borrower.
Limited recourse loans are similar to full recourse loans but limit the amount the lender can recover from the guarantor to a specific dollar amount or percentage of the loan amount.
Under non-recourse loans, the guarantor is not generally responsible for losses the lender incurs, unless they commit certain bad acts; such as fraud, waste, damage or destruction, misapplication, misrepresentation, bankruptcy, or environmental contamination. These bad acts are generally known as non-recourse carveouts. If a borrower under a non-recourse loan is unable to make its monthly payments or pay off the loan at maturity, they can give the property back to the lender without the guarantor having to repay the loan and the lender’s losses so long as they have not violated one of the non-recourse carveouts.
If you’d like to learn more or are interested in securing a loan for your next commercial real estate venture, reach out to Friedman Finance to help you determine which loan is right for your needs.
Director of Friedman Finance