Nonrecourse Financing: A Broker’s Guide to Fit, Trade-Offs, and Misconceptions

Clients love the idea of nonrecourse debt. But as a broker, you know that just wanting it isn’t enough. It’s your job to help them understand what nonrecourse actually means, whether it fits their deal, and what they may be giving up to get it.

Use this guide as a framework — four critical questions to walk through with clients. It’ll help you identify when nonrecourse is the best fit, when it’s possible with some trade-offs, and when it’s just the wrong path.

1. Why Do They Want Nonrecourse in the First Place?

This question cuts straight to the motivation. Nonrecourse can be a must have in some situations. In others, it's just something a borrower heard was "better."

Ask:

• Is this required by the partnership or investors? If yes, you likely need to find a nonrecourse solution.
• Is it about personal asset protection? High-net-worth individuals often want to keep this deal separate.
• Do they think it’s just what "smart investors" do? This is where client education matters. Nonrecourse isn't always the better option.

2. Is the Asset Institutional-Grade?

Nonrecourse lenders underwrite the asset far more than the borrower. If the property doesn't stand on its own, you won't get there.

What to evaluate:

• Stabilization: Is the property already performing, or does it need work?
• Location: Strong market? Or tertiary?
• Tenant strength: Credit tenants, diverse rent roll, or just one mom-and-pop shop with a lease expiring in 18 months?
• Use: Nonrecourse debt tends to go to core and core-plus assets — multifamily, industrial, office, etc. Not self storage in a rural town.

3. Can They Handle the Trade-Offs?

Nonrecourse isn’t free. And it definitely isn’t flexible.

Common pain points:

• Prepayment penalties: Yield maintenance and defeasance can wreck a sale or refi plan.
• Lower leverage: Nonrecourse lenders are more conservative. Be ready to bring more equity to the table.
• Higher costs: Legal, third-party reports, and rate spreads can all be steeper than a bank loan.

Ask your client: Is their business plan compatible with these terms? A client planning to exit in three years probably shouldn’t be looking at a 10-year CMBS deal. It'll get expensive fast.

4. Do They Understand That "Nonrecourse" Doesn't Mean No Liability?

This is honestly the biggest misconception I can think of. Every nonrecourse loan comes with carve-outs — and if a borrower triggers them, the loan becomes fully recourse.

Examples:

• Committing fraud or misrepresenting information
• Voluntarily filing for bankruptcy
• Failing to pay property taxes or insurance
• Allowing physical waste to the property
• Transferring ownership without approval

You've got to explain this clearly. Most lenders call these "bad boy carve-outs," but don’t let the name fool your clients. The consequences are very real, even if you're not intentionally being a, uh, bad boy.

Putting It Together

Use this framework to qualify your client:

• Best fit: Institutional asset, long-term hold, and a client who understands the structure and stakes.
• Possible fit: A motivated borrower who values asset protection and can live with the trade offs.
• Wrong fit: Transitional asset, short-term exit plan, or a client chasing nonrecourse for the wrong reasons.

Your job as a broker is to spot the difference. When nonrecourse makes sense, it’s a powerful tool. When it doesn’t, steer your client toward something better suited to the deal.