March 29, 2014
What is non-recourse financing? It's a type of financing sometimes available for commercial real estate loans. "Recourse" simply means that the lender is requiring a personal guarantee from the borrowers or key principals on the loan. "Non-recourse" means that no personal guarantee is required. On a recourse loan, should you not be able to make your payments, and if a judicial foreclosure takes place, the lender can go after you personally for the deficiency. Yes, they can obtain a court judgment against you and go after everything you own – your bank and stock accounts (except retirement accounts), your home, autos, boats, RVs, even your children’s educational savings accounts.
A non-recourse loan is not made to you personally. It is made to a single-asset ownership entity like a Limited Liability Company (LLC), or Limited Partnership (LP). If there is a default on the loan and it is not cured in time, the lender simply takes the property back. He cannot go after you personally for the deficiency if he is not able to sell the property for what is still owed on your loan plus legal and administrative costs. Therefore, your personal assets are protected. This gives the investor the freedom to take risks investing in commercial real estate without risking his/her personal assets. Non-recourse loans also give the borrowers the option of selling their share of a commercial property without continuing to be liable for the loan. If you have personally guaranteed a loan and sell your share, you are still liable for a default on the loan during the term of the loan, even though you might no longer own a share of the property. There are also great benefits of having a non-recourse loan for estate planning. Keep in mind that many commercial banks today go after a 100% guarantee from each of the partners on a commercial loan.
Most non-recourse loans require the key principals to sign what is called the standard carve-outs. These are really caveats attached to the closing documents that state that if the borrowers have committed fraud in the loan submission process or the future required submission of personal or property financial documents, the loan converts to full recourse to the borrowers. Also if the borrower files bankruptcy on behalf of the ownership entity that owns the property, the loan converts to a recourse loan.
By Terry Painter, President