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A non-recourse loan limits the lender's recovery to the collateral property in the event of default. If the borrower stops making payments and the lender forecloses, the lender can sell the property to recover what it is owed, but it cannot go after the borrower's personal assets, other real estate, or bank accounts for any remaining shortfall. Most CMBS, Fannie Mae, Freddie Mac, and HUD multifamily loans are non-recourse. This is one of the primary reasons sophisticated borrowers and sponsors seek these loan products over conventional bank financing.
Non-Recourse vs. Recourse: The Core Difference
The distinction comes down to what happens when things go wrong. With a recourse loan, the lender can pursue the borrower personally for the deficiency, meaning the gap between what the property sells for at foreclosure and what is still owed on the loan. With a non-recourse loan, the lender absorbs that loss.
| Feature | Recourse Loan | Non-Recourse Loan |
|---|---|---|
| Lender recovery in default | Property + borrower's personal assets | Property only (with carve-out exceptions) |
| Personal guarantee | Full personal guarantee required | Limited to carve-out guarantor obligations |
| Common loan types | Bank loans, credit union loans, bridge loans | CMBS, agency (Fannie/Freddie), HUD, life company |
| Borrower risk exposure | Unlimited personal liability | Limited to invested equity (unless carve-outs trigger) |
| Typical borrower | Smaller deals, relationship banking | Institutional sponsors, larger stabilized assets |
For a comprehensive look at structuring non-recourse deals, see the Broker's Guide to Non-Recourse Financing.
The Carve-Out Reality
"Non-recourse" does not mean "zero personal liability." Every non-recourse commercial loan includes carve-out provisions, sometimes called "bad boy" guarantees, that allow the lender to pierce the non-recourse protection and pursue the borrower or guarantor personally. These carve-outs exist to prevent borrower misconduct, not to catch borrowers who simply experience a market downturn.
Common carve-outs that trigger personal liability include:
- Fraud or intentional misrepresentation in the loan application or ongoing reporting
- Misappropriation of rents, insurance proceeds, or condemnation awards
- Voluntary bankruptcy filing by the borrower entity
- Failure to maintain required property insurance
- Environmental contamination caused by the borrower
- Unapproved transfers of the property or ownership interests
- Failure to maintain the property as a going concern
The carve-out guarantor is typically the sponsor or principal behind the borrowing entity. Even though the loan is non-recourse to the entity, the guarantor personally stands behind these specific obligations. Negotiating the scope and language of carve-outs is one of the most important parts of the loan documentation process.
Which Loan Types Offer Non-Recourse
| Loan Type | Recourse Structure | Notes |
|---|---|---|
| CMBS | Non-recourse | Standard for all CMBS; carve-outs negotiable at origination |
| Fannie Mae | Non-recourse | Standard for DUS and Small Balance programs |
| Freddie Mac | Non-recourse | Standard for Optigo conventional programs |
| HUD/FHA | Non-recourse | 223(f) and 221(d)(4) programs are non-recourse |
| Life Company | Non-recourse (usually) | Most life companies offer non-recourse for stabilized assets |
| Bank / Credit Union | Recourse (typically) | Some banks offer non-recourse for larger loans on strong assets, often with rate premium |
| Bridge / Debt Fund | Varies | Many bridge lenders are non-recourse; some require recourse or partial recourse |
| Hard Money | Recourse (typically) | Most hard money lenders require personal guarantees |
| SBA 504 / 7(a) | Recourse | SBA loans require personal guarantees from all 20%+ owners |
Why Non-Recourse Matters for Deal Structuring
Non-recourse financing changes how borrowers and sponsors think about risk. When personal assets are off the table, the downside is limited to the equity invested in the deal. This makes non-recourse loans particularly attractive for larger transactions where the potential personal exposure under a recourse loan would be unacceptable.
For sponsors raising capital from investors, non-recourse is often a requirement. Limited partners and passive investors generally will not invest in a deal where the sponsor's personal financial issues could create complications for the partnership. Non-recourse structures cleanly separate the property-level risk from the sponsor's personal balance sheet.
From a portfolio perspective, non-recourse loans allow borrowers to take on more deals without compounding personal guarantee exposure. A borrower with five recourse loans is personally liable for all five. A borrower with five non-recourse loans has risk limited to the equity in each individual property.
How Lenders Underwrite Non-Recourse Loans
Because the lender cannot pursue the borrower personally, non-recourse loans place more emphasis on the property's ability to generate income and hold value. The key underwriting metrics shift accordingly:
DSCR becomes the primary constraint. The property's net operating income must comfortably cover debt service with a margin of safety, typically 1.25x or higher for CMBS and agency loans. Use the DSCR calculator to check where your deal stands.
Cap rate and property value determine the LTV ratio, which is the other major constraint. Non-recourse lenders are generally more conservative on LTV than recourse lenders, because they have less recourse (pun intended) if values decline.
Debt yield serves as a backstop metric, especially for CMBS lenders. A minimum debt yield of 8% to 10% ensures the property generates sufficient income relative to the loan amount regardless of prevailing cap rates.
Sponsor experience and net worth still matter. Even on non-recourse loans, lenders evaluate the sponsor's track record, liquidity, and net worth. They want confidence the borrower will manage the property competently and has the resources to handle unexpected expenses without walking away.
Negotiating Carve-Out Guarantees
Carve-out language is where the real negotiation happens on non-recourse loans. A few areas where experienced brokers push back:
Springing recourse triggers. Some loan documents include provisions where the entire loan becomes full recourse if certain events occur (voluntary bankruptcy is the most common). Sponsors should understand exactly which events trigger full recourse versus limited liability for a specific loss amount.
Scope of the guarantor's obligation. Is the carve-out guarantor liable for the full loan balance or only for actual losses the lender suffers? "Full recourse" carve-outs versus "loss" carve-outs make a significant difference in the guarantor's exposure.
Transfer provisions. Unapproved transfers of ownership interests can trigger carve-outs. Negotiate clear boundaries for what transfers are permitted (estate planning, internal restructuring) without triggering a default.
Environmental liability scope. Environmental carve-outs can be broad. Try to limit them to contamination caused by the borrower during the loan term, not pre-existing conditions discovered after closing.
The time to negotiate carve-outs is at the term sheet stage, before the borrower is committed to the lender. Once loan documents are drafted and the closing date is near, leverage to negotiate narrows significantly. Brokers should flag carve-out concerns in the initial term sheet review.
Non-Recourse and Loan Sizing
Non-recourse lenders compensate for the lack of personal recourse by being more conservative on loan sizing. This shows up in lower maximum LTV ratios compared to recourse bank loans:
| Loan Type | Typical Max LTV | Recourse |
|---|---|---|
| CMBS | 65% to 75% | Non-recourse |
| Fannie Mae / Freddie Mac | 75% to 80% | Non-recourse |
| HUD/FHA | Up to 85% | Non-recourse |
| Life Company | 55% to 65% | Non-recourse |
| Bank (recourse) | 65% to 80% | Recourse |
| SBA 504 | Up to 90% | Recourse |
HUD and SBA programs are notable exceptions to the pattern. HUD offers both high LTV and non-recourse. SBA offers high LTV but requires personal recourse. Each program's risk profile is structured differently, which is why understanding the full loan landscape matters when advising clients.
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Try Janover Pro →Disclaimer: This glossary entry is for educational purposes only and does not constitute financial, legal, or investment advice. Loan structures, recourse requirements, and carve-out provisions vary by lender and loan program. Consult qualified legal and financial professionals before making financing decisions.
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Try Janover Pro →This content is for informational and educational purposes only and does not constitute financial, legal, tax, or investment advice. Janover Pro is a technology platform that connects commercial mortgage brokers with lenders. Janover Pro is not a lender and does not make lending decisions. Loan terms, rates, eligibility, and availability are determined by individual lenders and are subject to change without notice. Consult qualified financial and legal professionals before making financing decisions.
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