What it is
Recourse decides what a lender can go after if a loan goes bad. On a non-recourse loan, the lender's main remedy is the property itself. On a recourse loan, if selling the property doesn't cover what's owed, the lender can pursue the guarantor personally for the shortfall.
The borrower on most commercial loans is a single-purpose entity, so in practice recourse is about whether the sponsor signs a personal or corporate guarantee and what that guarantee covers.
Common forms
| Form | What it commonly means |
|---|---|
| Full recourse | Guarantor is liable for the full loan balance |
| Partial recourse | Guarantor is liable for a set amount or percentage |
| Burn-off recourse | Recourse reduces or ends once the property hits a performance target |
| Non-recourse with carve-outs | No personal liability unless the borrower does specific "bad boy" acts |
| Springing recourse | A carve-out that makes the whole loan recourse if triggered |
Bad-boy carve-outs
Even non-recourse loans almost always carry carve-out guarantees. Typical carve-outs include fraud, misappropriating rents or insurance proceeds, unauthorized transfers or additional debt, voluntary bankruptcy and environmental issues. Some carve-outs make the guarantor liable for the lender's losses. Others spring the full loan balance to recourse. The difference matters a great deal.
Completion guarantees
On construction loans, lenders commonly require a completion guarantee: the sponsor promises to finish the project and cover cost overruns. Construction loans often carry some payment recourse as well.
Who typically offers what
General patterns, not rules:
- Banks often require full or partial recourse, especially on smaller loans or transitional assets.
- CMBS and agency loans are typically non-recourse with standard carve-outs.
- Life companies often lend non-recourse on lower-leverage, stabilized assets.
- Bridge and construction lenders vary widely.
Why it matters
Recourse is often a trade-off against price and leverage. A sponsor may accept recourse to get a lower rate or higher proceeds from a bank, or pay more for a non-recourse loan to protect personal assets. Brokers should know where the client stands before going to market.
Common mistakes
- Reading "non-recourse" and stopping. The carve-out list is where the real risk sits.
- Not asking the sponsor's preference. Some sponsors won't sign recourse at any price.
- Overlooking guarantor tests. Lenders often require the guarantor to maintain minimum net worth and liquidity for the life of the loan.
In the package
State the recourse the sponsor will accept in the loan request, and compare it across lenders on each term sheet.