A recourse commercial loan lets the lender collect a shortfall from the borrowing entity and anyone who signed a guaranty, while a non-recourse loan limits the lender to the property and other pledged collateral unless a carve-out is triggered. That reach runs only as far as the guaranty's terms and state law allow. On otherwise similar loans, recourse has priced lower in Federal Reserve data, but quotes from different lenders don't follow that rule, so compare real quotes and take recourse only when the saving is worth a shortfall you could actually pay.
Key points
- Non-recourse limits what the lender can collect, but carve-outs can make a borrower or guarantor liable. The loan documents decide whether each trigger costs the lender's loss or the entire debt, and even a technical breach can trigger full recourse.
- A Federal Reserve study of the largest U.S. banks' loans on stabilized properties, using loan data between 2012 and 2020 and published in December 2021, estimated that recourse lowered spreads by 20 to 52 basis points and came with about 3 percentage points more loan-to-value than on otherwise similar loans. Those are historical estimates, not today's prices.
- Your personal exposure comes from the guaranty you sign, so its cap, carve-outs and release terms matter more than the label on the term sheet.
What is the difference between a recourse and a non-recourse commercial loan?
| Recourse | Non-recourse | |
|---|---|---|
| If a foreclosure sale leaves a shortfall | Lender can pursue the borrowing entity and any guarantor, up to the guaranty's terms and subject to state deficiency rules | The shortfall is the lender's loss unless a carve-out applies |
| Your personal assets | Exposed through the guaranty you sign, in full or up to a cap | Exposed only if a carve-out or indemnity you signed is triggered |
| Price (largest U.S. banks, stabilized properties, loan data between 2012 and 2020, adjusted estimates, study published December 2021) | Spreads 20 to 52 basis points lower than on otherwise similar loans | Higher |
| Leverage (same study, adjusted) | About 3 percentage points more loan-to-value | Lower |
| In a workout | Half as likely to get an accommodation during the COVID pandemic | More likely |
| Where it usually comes from | Banks: 78 percent of stabilized-property loans at the largest U.S. banks had recourse (same study) | CMBS loans, non-recourse outside "bad boy" carve-outs (same study) |
Recourse against the borrower is not the same as recourse against you. A single-purpose LLC borrower usually has no assets beyond those the loan already encumbers, so, as a real estate attorney, in a sponsored article on the Mortgage Bankers Association's NewsLink, puts it, most lenders look to the ultimate principals of the borrower. The guaranty you sign in your own name is what puts your other assets in play, either in full or, under a partial guaranty, up to the amount or share it states.
How much does recourse save on a commercial loan?
A Federal Reserve working paper, Recourse as Shadow Equity, measured the gap using loan-level stress-test data from the largest U.S. banks, focused on loans secured by stabilized properties, covering loans between 2012 and 2020 and published in December 2021. Against loans with similar observable traits, recourse loans carried spreads 20 basis points lower, likely a lower bound, the authors say. A second method, based on each bank's tendency to require recourse on similar loans, gave 52 basis points. Their main leverage estimate was 2.8 percentage points of loan-to-value.
These are spreads over the banks' own cost of funds between 2012 and 2020, so they size the trade rather than quote today's market, and they are adjusted figures. On raw averages, recourse loans in the sample had lower loan-to-value ratios, and the raw spread gap ran from 31 basis points on multifamily to within 7 basis points on retail, industrial and office loans. A small raw gap on those three doesn't prove recourse saves less there, but it is a good reason to get both structures priced. The study also labels any loan with partial or full recourse as recourse, so its range doesn't price a full-repayment guaranty on its own.
Hypothetical example: a $12,000,000 interest-only loan held five years, with two quotes identical except for recourse and rate, including the same fees and prepayment terms. The study's recourse loans averaged about one-fourth the size of its non-recourse loans, so its range may not transfer cleanly to a loan this size. The savings below are simple undiscounted totals, not present values.
- A rate gap of 0.20 percentage points saves $24,000 a year, or $120,000 over five years.
- A rate gap of 0.52 percentage points saves $62,400 a year, or $312,000 over five years.
What can recourse cost if the property comes up short?
Hypothetical example, continued: at maturity the property is worth $10,000,000, the balance is still $12,000,000, and the lender forecloses and recovers $10,000,000. That leaves a $2,000,000 shortfall before sale costs, interest and legal fees.
With a full-repayment guaranty, the lender can pursue the borrowing entity and you for that $2,000,000, though the Fed paper notes that legal differences across states can make a deficiency judgment more or less difficult to obtain. With non-recourse and no carve-out triggered, the $10,000,000 recovered from the collateral leaves $2,000,000 unrecovered, and the lender cannot collect that deficiency from the borrower or a guarantor. A separate indemnity you signed, such as an environmental indemnity, is its own obligation. What you could owe under it depends on the losses it covers, not on the size of the deficiency. Even the high-end saving of $312,000 covers about 16 percent of that shortfall. That says nothing about how likely the drop is, only what you are being paid to carry it.
Recourse also weakens your hand in a workout. In the Fed data, recourse loans were half as likely to receive an accommodation during the COVID pandemic, which the authors read as extra bargaining power for the lender. If a maturity is already close, see what happens when a commercial loan matures and you can't refinance.
The tax treatment also differs, mostly in the type of income. If a lender takes the property to satisfy the debt, the IRS treats it as a sale to the lender. For recourse debt, the amount realized is the property's fair market value, the difference between that value and your adjusted basis is a gain or loss, and debt forgiven above it is ordinary income unless an exception or exclusion applies. For non-recourse debt, the amount realized is the entire debt, with no ordinary income from debt cancellation. That debt minus your adjusted basis is your gain, so a non-recourse foreclosure can leave a taxable gain even if you receive no cash. Before any exclusion, the taxable total can come out similar either way; recourse splits it between gain and cancellation-of-debt income, while non-recourse makes it all gain. The IRS guidance is written for individuals, so have your CPA run both cases, starting from your adjusted basis, for your ownership entity before you sign.
What are carve-outs in a non-recourse commercial loan?
Carve-outs are listed events that turn personal liability back on, and they come in two weights. Per the MBA NewsLink article, "above the line" carve-outs make the guarantor liable for the losses, as the loan documents define them, that arise from the specified event, while "below the line" carve-outs trigger full recourse for the entire debt.
The article lists the original triggers as bankruptcy, fraud, waste and misapplication of funds such as rents or casualty proceeds. Newer documents add unpaid taxes or insurance premiums, mechanics liens and failure to maintain single-purpose entity status. A law firm's guide to negotiating carve-out guaranties argues that full recourse "should be reserved for truly material risks," with non-material transfers and entity covenant breaches kept above the line.
Watch for solvency covenants. Michigan's Nonrecourse Mortgage Loan Act bars post-closing solvency covenants as carve-outs on commercial loans secured by Michigan real estate. Elsewhere, ask to strike any promise to stay solvent or keep adequate capital as a recourse trigger.
How do you choose a recourse vs non-recourse commercial loan?
Take recourse only when two tests both pass. First, the saving on otherwise identical terms is enough that you would accept it as pay for carrying the exposure. Second, you could still pay a stressed shortfall like the $2,000,000 above plus enforcement costs from the cash and liquid assets you would have left in that same downturn, after reserves, debts and any calls on guaranties you have already signed. Passing the second test alone is no reason to sign. If either test fails, negotiate a capped guaranty or take non-recourse. Non-recourse also fits when one property's trouble must not reach your other holdings, as long as this loan isn't cross-collateralized with them.
Before you sign either one:
- Get both structures quoted on the same amount, term, amortization, fees and prepayment terms. If the non-recourse quote comes from a different lender type, its prepayment terms may differ too, so compare total cost, including prepayment, rather than the rate alone.
- Ask to cap the guaranty, and have counsel confirm whether interest, enforcement costs and carve-out liability sit inside the cap.
- Ask whether the guaranty steps down or ends once the property meets stated occupancy or debt service tests.
- Have counsel mark every carve-out as loss-only or full recourse, push the minor ones above the line, and check each one's causation language, covered expenses, overlap with other indemnities and cure rights. Ask to limit loss-only liability to the lender's actual, documented losses.
- Read the environmental indemnity too, since a guarantor can owe the lender under it separately.
Northern Ridge Capital is a broker for commercial real estate loans of $5 million to $30 million. If this decision is part of refinancing a commercial property, that page covers the rest of the package.
FAQ
Are bank commercial real estate loans usually recourse?
In the Fed study of the largest U.S. banks' loans (data between 2012 and 2020), 78 percent of loans secured by stabilized properties had recourse. By dollar value the share was 45 percent, because recourse loans were much smaller on average. Smaller banks were not in the sample, so these shares don't describe every bank.
Is a CMBS loan recourse?
Generally not. The Fed paper describes CMBS loans as non-recourse outside "bad boy" clauses, which trigger recourse after a particular bad act, such as fraud.
Can a non-recourse loan become full recourse?
Yes. A "below the line" carve-out, once triggered, makes the borrower and the guarantor liable for the entire debt. A guaranty that switches on this way is often called a springing guaranty.
Does a personal guaranty affect your next commercial loan?
It can. Federal financial regulators' 2023 policy statement on commercial real estate workouts says an effective assessment of a guarantor considers whether they have the financial ability to "fulfill the total number and amount of guarantees currently extended by the guarantor." That guidance covers loans in workouts, but it suggests how a lender may weigh guaranties already on your personal financial statement. See what it takes to get a commercial property loan approved for the rest.