A non-recourse loan is a type of loan where the lender is only able to recoup their investment from the sale of the collateral property in the event of a default. This means that the borrower is not personally liable for any losses incurred by the lender. Non-recourse loans are the opposite of recourse loans, which allow a lender to seize and sell a borrower’s personal property. Most CMBS financing, Fannie Mae® and Freddie Mac® multifamily loans, mezzanine loans, life company loans, and HUD multifamily loans are generally non-recourse financial instruments.

Sources:

• apartment.loans/posts/what-are-non-recourse-loans
• www.multifamily.loans/non-recourse-commercial-loans

The primary benefit of non-recourse loans is that they provide a greater degree of protection for the borrower. Without a personal guarantee, the lender cannot seize the borrower's personal assets if they default on the loan. This can be especially beneficial for developers who are just starting out and don't have a lot of assets to protect.

Advantages of Non-Recourse Loans for Borrowers include:

• Lack of any personal liability
• Ability to borrow more
• Less complicated for a syndication or partnership

The main risks associated with a non-recourse loan are tied to the loan terms a borrower can receive. Because the risks to a lender are higher than with recourse debt, a lender will typically pass this on in the form of higher interest rates, or lower loan amounts relative to the property value to offset the risk. This typically makes non-recourse financing more expensive.

Another potential risk is tied to exceptions to the non-recourse clause in the loan. While it’s true that a lender generally cannot pursue a borrower’s personal assets or income outside of the property itself, most non-recourse loans include language for what are known as bad boy carve-outs. These provisions essentially state that, should the borrower misrepresent a property or themselves, or file fraudulent financial documents — like tax returns or financial statements — the borrower is no longer protected by the non-recourse clause and is fully responsible for the loan. They may also cover other acts, such as raising subordinate financing when it’s not allowed, or even paying real estate taxes late.

In order to qualify for non-recourse financing, commercial lenders often have strict eligibility requirements. Most non-recourse programs can only be utilized for the financing of certain property types and classes. For example, a borrower might find it much easier to secure non-recourse financing for a class A office or multifamily property in a major MSA (i.e. New York or Los Angeles), while a class B retail property in a small market is likely to not qualify for non-recourse lending.

In general, eligible properties for non-recourse loans include:

• Class A office properties
• Multifamily properties
• Retail properties

In order to qualify for a non-recourse loan, commercial lenders often have strict eligibility requirements. Most non-recourse programs can only be utilized for the financing of certain property types and classes, such as class A office or multifamily properties in major MSAs (i.e. New York or Los Angeles). The income that a commercial property produces (both past and present) is also a determining factor. Additionally, lenders tend to analyze the requested amount of leverage. Non-recourse commercial mortgage loans tend to have higher interest rates than their recourse counterparts, and are also generally only available to borrowers that have a very strong financial profile. Lenders can be pretty strict about this, the thought process being that a default is significantly less likely in this scenario because the borrower has the financial means to make sure that the property’s income is reinvested into the property. Aside from strong finances, commercial mortgage lenders also require a very experienced borrower with ample "skin in the game" for non-recourse financing.