Recourse Loans vs. Non-Recourse Loans

There are two different kinds of debt: recourse and non-recourse.

Recourse debt is when the borrower is personally liable for the entire debt amount, regardless of the collateral or the security that's being offered on the loan.

Non-recourse debt just means that the borrower is not personally liable, and the the lender's only security is the collateral itself. 

But for most loans, recourse or non-recourse doesn't matter. The only time the difference between the two comes into play is in the event of foreclosure.

When a lender forecloses, they take the property back and they liquidate or sell it to recoup the money that they loaned to the borrower. For example, imagine a property is worth $1 million and the borrower  owes the bank $800,000. When the bank forecloses and they sell the property, they have enough to cover the money that they loaned out plus other expenses and costs.

But sometimes the property does hold its value. This can happen for a variety of reasons, such as mismanagement of the property or the borrower not having enough funds to maintain it properly. There are many different reasons why a property could lose value.

But let's say, in another example, that a property was originally worth $1 million, and the lender is owed $800,000. But over time, for whatever reason, the property decreased in value and is now worth $600,000. This difference here between what the property is worth and what the lender is owed is called a deficiency.

Important to note is that the deficiency isn't just the difference between the loan balance and the property's new value. In addition to the principle the bank is trying to recover, they are also owed accrued interest. Legal fees, late fees, and other expenses related to the foreclosure process. So in an example like this, that deficiency could very easily be three or $400,000 instead of just $200,000.

In the case of a recourse loan, the lender is able to sue the borrower for recovery of the deficiency amount. They can go after other assets, or other find other ways to get a judgment in court, to recover whatever the collateral did not cover. 

In a non-recourse loan, the lender is not able to go back to the borrower and sue them for the deficiency. The lender has no recourse against the borrower. Obviously, most borrowers would prefer to have a non-recourse loan, but not all lenders offer them.

If you are interested in finding the best loan option for your project, contact our friends at Evergreen Capital Advisors for a no-obligation consultation.

Trevor Calton is the founder of Real Estate Finance Academy. Since 1997, he has analyzed, acquired, or sold more than $5 billion of commercial real estate assets, financed over 500 commercial investment properties, and overseen the asset management of over 6000 units of multifamily housing.

He has been teaching commercial real estate classes and training professionals since 2005. His commercial real estate classes and real estate finance development program helps people at all levels develop a successful real estate investment strategy.