Why are commercial real estate loans non-recourse?
A non-recourse commercial real estate loan does not give the lender any recourse against the borrower’s personal assets. If the borrower fails to make a payment or violates the terms of the arrangement, the lender may seize the property and other assets. Non-recourse loans are most commonly used for commercial real estate deals.
With a non-recourse loan, the lender is prohibited from going after the borrower directly to recoup the debt in the event that the borrower defaults on repaying the loan’s outstanding balance, plus accrued interest and legal costs.
Some non-recourse commercial real estate loans, such as multifamily loans, commercial mortgages, construction loans, and other loan funding sources, are fully non-recourse, which means that in the event of a missed payment or other breach of the payment agreement, the principal and interest balance due will be repaid in full by selling the included collateral (the property). Other non-recourse commercial real estate loan types include terms that enable lenders to assert claims against borrowers independent of the collateral, for instance in the event that a payment is missed. Investors who purchase commercial real estate from sellers who want a sizable down payment from the buyer will often use a non-recourse loan.
