What Is a Recourse Loan in Commercial Real Estate?

A recourse loan gives the lender the right to pursue the borrower's personal assets if the property securing the loan does not fully cover the outstanding debt in a default. If the borrower stops paying and the lender forecloses, the lender can sell the property and then go after the borrower personally for any remaining shortfall. This is the standard structure for bank loans, credit union loans, SBA loans, and most hard money loans in commercial real estate.

How Recourse Works in Practice

Here is the typical sequence when a recourse loan goes into default:

1. The borrower defaults on the loan (missed payments, covenant violations, or maturity default).
2. The lender forecloses on the property and sells it, either through auction or REO disposition.
3. If the sale price is less than the outstanding loan balance (including accrued interest and fees), there is a deficiency.
4. The lender obtains a deficiency judgment against the borrower and any personal guarantors.
5. The lender can then pursue the guarantor's personal bank accounts, investment accounts, other real estate, and other non-exempt assets to satisfy the judgment.

The key difference from a non-recourse loan is step 4. In a non-recourse structure, the lender's recovery ends at step 2 (unless carve-out provisions are triggered). With recourse, the lender has a second path to recovery through the borrower's personal balance sheet.

Recourse vs. Non-Recourse: Key Differences

For a detailed breakdown of non-recourse structures and carve-out provisions, see the non-recourse loan glossary entry and the Broker's Guide to Non-Recourse Financing.

Which CRE Loan Types Require Recourse

The Personal Guarantee

The personal guarantee is the legal mechanism that makes a loan recourse. When a commercial property is owned by an LLC (which is standard practice), the LLC is the borrower on the loan. Without a personal guarantee, the lender could only pursue the LLC's assets, which are limited to the property itself. The personal guarantee pierces that corporate veil and makes individual principals personally liable.

Guarantee structures vary:

• Full personal guarantee. The guarantor is liable for the entire outstanding loan balance. This is standard on most bank and SBA loans.
• Limited or partial guarantee. The guarantor is liable for a percentage of the loan (for example, 50%) or a specific dollar amount. Some banks offer this for stronger borrowers or lower-risk properties.
• Burning guarantee. The guarantee reduces over time as the borrower pays down the loan or meets certain performance milestones. For example, the guarantee might drop from 50% to 25% after 3 years of on-time payments.
• Joint and several guarantee. When multiple partners guarantee a loan, each guarantor is individually responsible for the full amount, not just their ownership share. The lender can pursue any one guarantor for the entire deficiency.

Why Borrowers Accept Recourse

If non-recourse sounds better (and it generally is for the borrower), why do so many CRE loans carry full recourse? Several reasons:

The property does not qualify for non-recourse. CMBS and agency lenders have minimum loan sizes (typically $2 million to $5 million), property stabilization requirements, and property type restrictions. Smaller deals, transitional properties, and specialty property types often do not fit non-recourse programs.

The borrower needs higher leverage. Recourse lenders often offer higher loan-to-value (LTV) ratios because the personal guarantee reduces their risk. SBA 504 offers up to 90% LTV, but it requires full recourse. A non-recourse CMBS loan on the same property might cap at 70% LTV.

Speed and relationship. Bank loans often close faster than CMBS or agency, and borrowers with existing banking relationships get preferential terms. The convenience of a 30-day bank closing versus a 60 to 90-day CMBS closing is worth the recourse trade-off for some borrowers.

Construction and transitional deals. Non-recourse financing is generally not available for ground-up construction, major renovations, or lease-up situations. These higher-risk strategies require recourse, typically through both a payment guarantee and a completion guarantee.

Managing Recourse Exposure

For borrowers who must take on recourse, there are strategies to manage the exposure:

Negotiate a burning guarantee. Ask the bank if the personal guarantee can step down over time as the loan performs. For example, the guarantee drops from full recourse to 50% after 3 years of on-time payments and adequate DSCR.

Request a dollar cap. Instead of unlimited personal liability, negotiate a guarantee capped at a specific dollar amount, especially for larger loans where unlimited exposure creates disproportionate personal risk.

Plan the exit to non-recourse. Use recourse bank or bridge financing as a stepping stone. Stabilize the property, increase NOI, and then refinance into non-recourse permanent debt through CMBS, agency, or life company lenders. This is one of the most common capital strategies in CRE.

Isolate guarantor exposure. When structuring partnerships, consider which principals will sign the guarantee. Not every partner needs to guarantee the loan, especially passive investors. The guarantee obligation should align with the level of control over the asset.

Recourse and Loan Sizing

Recourse plays directly into how much a lender will lend. Because the personal guarantee gives the lender additional security beyond the property, recourse loans often offer more aggressive sizing:

The trade-off is clear: recourse loans may give you more proceeds, but they come with personal liability. Non-recourse loans protect the borrower personally but require the property to carry the deal on its own metrics.

State Laws and Deficiency Judgments

Not all states treat deficiency judgments the same way. Some states have anti-deficiency statutes that limit or prohibit lenders from pursuing deficiency judgments in certain circumstances, though these protections are generally stronger for residential loans than commercial loans. Borrowers should understand the laws in the state where the property is located and where the guarantor resides, as both may apply.

A few notable state-level considerations:

• California has anti-deficiency protections for purchase money loans, but these generally apply to owner-occupied residential properties, not commercial investment properties.
• Some states require the lender to pursue a fair market value credit rather than the foreclosure sale price when calculating the deficiency.
• The statute of limitations on deficiency judgments varies by state, typically between 2 and 10 years.

Legal counsel should review guarantee and recourse provisions for any significant commercial loan. The specifics matter.

Related Terms

• Non-recourse loan is the counterpart to recourse, where lender recovery is limited to the collateral property.
• Carve-outs (bad boy guarantees) are the exceptions in non-recourse loans that can trigger personal liability for specific borrower misconduct.
• Special purpose entity (SPE) is the LLC structure typically required by non-recourse lenders to isolate the property from the borrower's other assets and liabilities.
• Loan-to-value (LTV) and DSCR are the primary sizing metrics that determine loan proceeds under both recourse and non-recourse structures.

Frequently Asked Questions