Recourse in commercial real estate financing is when the lender has the right to pursue the borrower's personal assets in the event of default. This is in contrast to non-recourse loans, which limit the lender's ability to pursue the borrower's personal assets and instead can only go after the collateral, the property.

When taking out a recourse loan, it is important to understand the potential liabilities that could arise. Recourse loans are typically more risky for borrowers, as lenders may pursue a borrower’s personal assets in the event of default. This means that if the collateral is insufficient to cover the outstanding loan amount, a lender could attempt to recover losses by going after a borrower’s personal assets, including wages. Additionally, borrowers should be aware that certain activities, such as fraud or misrepresentation of financial strength, could trigger a bad boy carve-out, which would allow the lender to pursue recourse options. Knowing the potential liabilities associated with a recourse loan is critical for any borrower looking to explore their commercial real estate finance options.

The primary benefit of recourse financing is that it provides more security for the lender. With a personal guarantee, the lender can seize the borrower's personal assets if they default on the loan. This can be especially beneficial for lenders who are looking to minimize their risk. Additionally, recourse financing can enable an investor to borrow more, as the debt is tied to the borrower's income or total assets.

For more information on non-recourse financing, please see this article and this article.

At its core, the difference between the two types is relatively straightforward: If a borrower defaults on a recourse loan, a lender can pursue the borrower’s personal assets — even wages — if the collateral is insufficient to cover the outstanding debt. With a nonrecourse loan, the lender is limited to the collateral itself to recoup losses.

Typically, most bank, bridge and construction loans are recourse, while Fannie® Mae®, Freddie® Mac®, HUD/FHA multifamily and CMBS loans are generally nonrecourse — though exceptions are not rare.

Because of the difference in risk to borrowers and lenders, there are some key differences in loan terms and requirements. In brief:

While borrowers broadly prefer nonrecourse financing, lenders favor recourse loans due to lower risks. Due to this imbalance, these types of loans tend to have rather different terms associated with them.

Different Loans for Different Assets: While recourse loans are widely used for most asset classes, nonrecourse lenders are typically far more selective, generally opting to finance stronger, lower-risk properties with one eye fixed on a market’s overall strengths and outlook.

For example, the owner of a stabilized Class A multifamily property in Manhattan may have little trouble landing a nonrecourse loan, but a first-time investor seeking a hotel refinance in suburban Boise, Idaho, would likely have little choice but to look to recourse financing.

Recourse financing requires the borrower or borrowers to personally guarantee the funding amount against their own assets. This ensures that should the borrower default on the loan, lenders can seek financial damages from the borrowers directly. In some situations, a lender may originate recourse financing that may transition into a nonrecourse loan once certain conditions have been met. For example, let’s say an investor takes a recourse loan to acquire and upgrade a dated multifamily asset. The lender may stipulate that the financing can become a nonrecourse loan once the property has stabilized at, say, an occupancy rate of 90% or higher for a three-month period following capital improvements. In most situations, the asset will also need to achieve a certain debt service coverage ratio, or DSCR, during that same timeframe: usually 1.20x or 1.25x.