What Is the Difference Between Recourse and Non-Recourse Loans?
If you are financing a commercial real estate investment, one of the most important distinctions you will encounter is whether your loan is recourse or non-recourse. This single factor determines how much personal financial risk you carry throughout the life of the loan, and it can dramatically shape your investment strategy.
A recourse loan gives the lender the right to pursue your personal assets if the property's value fails to cover the outstanding debt after a default and foreclosure. If the lender sells the property and there is still a shortfall, they can come after your bank accounts, other real estate holdings, and personal property to recover the remaining balance. In short, you are personally guaranteeing the full repayment of the loan.
A non-recourse loan limits the lender's recovery to the collateral property itself. If you default and the lender forecloses, they can only collect from the sale of that specific property. Your personal assets, savings, and other investments remain protected, even if the property sells for less than the outstanding loan balance.
According to a Federal Reserve study, non-recourse loans carry interest rates approximately 52 basis points higher than comparable recourse loans, reflecting the additional risk lenders assume when they cannot pursue personal guarantees.
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This distinction matters greatly for commercial real estate investors managing multiple properties and significant personal wealth. Choosing between recourse and non-recourse financing affects everything from asset protection planning to portfolio growth strategy.
Ready to explore your commercial loan options? Contact Clearhouse Lending to discuss whether recourse or non-recourse financing is the right fit for your next investment.
Which Is Better for Borrowers: Recourse or Non-Recourse?
The answer depends entirely on your financial situation, risk tolerance, and investment goals. Neither option is universally superior, and each comes with meaningful trade-offs.
When Recourse Loans Make Sense
Recourse loans are the standard offering from most commercial banks and local lenders. They offer several advantages:
- Lower interest rates - Because lenders face less risk with a personal guarantee backing the loan, they pass those savings along. The rate difference typically ranges from 25 to 75 basis points.
- Higher leverage - Recourse loans routinely allow 70% to 80% loan-to-value (LTV) ratios, while non-recourse lenders generally cap leverage at 55% to 65% LTV.
- More flexible terms - Banks offering recourse loans often provide greater flexibility on prepayment, loan modifications, and supplemental financing.
- Broader property eligibility - Recourse lenders will finance a wider range of property types, including value-add projects and assets in secondary markets.
When Non-Recourse Loans Are the Better Choice
Non-recourse financing becomes especially valuable when borrowers need to protect personal wealth and limit downside exposure:
- Asset protection - Your personal assets remain shielded from claims related to the financed property, which is critical for high-net-worth investors.
- Portfolio isolation - A default on one property does not threaten your other holdings or personal finances.
- Estate and tax planning - Non-recourse debt can offer advantages in estate planning and 1031 exchange structures.
- Institutional-quality financing - Non-recourse loans through CMBS, agency, or life company channels often come with longer fixed-rate terms (10 to 30 years) that provide payment stability.
For most experienced investors acquiring stabilized, income-producing properties valued above $2 million, non-recourse financing provides the best combination of asset protection and long-term stability. For newer investors or those purchasing transitional properties, recourse loans offer the accessibility needed to build a portfolio.
Use our DSCR calculator to evaluate whether your property's income supports non-recourse qualification thresholds.
What Are Bad Boy Carve-Outs in Non-Recourse Loans?
Non-recourse does not mean zero personal liability. Nearly every non-recourse commercial loan includes provisions known as "bad boy carve-outs" that can convert the loan to full recourse if the borrower engages in certain prohibited actions. These carve-outs prevent borrowers from taking advantage of the non-recourse protection through dishonest or harmful behavior.
Bad boy carve-outs fall into two categories: those that trigger full recourse liability (meaning the borrower becomes personally responsible for the entire loan balance) and those that create limited liability (where the borrower is responsible only for actual losses caused by the specific violation).
Full Recourse Triggers
The following actions typically convert a non-recourse loan into full recourse:
- Voluntary bankruptcy filing - Filing for bankruptcy protection on the borrowing entity without lender consent
- Fraud or material misrepresentation - Providing false financial statements, inflated appraisals, or misleading information during the loan application or throughout the loan term
- Unauthorized transfer - Selling, transferring, or encumbering the property without lender approval
- Unauthorized subordinate debt - Taking on additional financing against the property without the primary lender's consent
- Violation of single-purpose entity (SPE) requirements - Failing to maintain the borrowing entity as a separate, bankruptcy-remote entity
Limited Liability Carve-Outs
These violations typically make the borrower liable only for the actual losses or damages incurred:
- Failure to maintain required property insurance
- Failure to pay property taxes, resulting in liens
- Misappropriation of rents or property income
- Environmental contamination or violations
- Failure to remit insurance proceeds or condemnation awards to the lender
- Physical waste of the property
According to ArentFox Schiff, lenders have been expanding the scope of bad boy carve-outs in recent years. Some now include penalties for late financial reporting, delayed tax payments, or failure to permit property inspections. Borrowers and their attorneys should review carve-out language carefully before signing.
Most non-recourse loans also require a carve-out guarantor, typically the principal or sponsor behind the borrowing entity. This individual personally guarantees the carve-out obligations, even though they are not personally liable for the loan balance itself (unless a carve-out is triggered). The guarantor generally must maintain a minimum net worth (often equal to the loan amount) and liquidity requirements throughout the loan term.
Are CMBS Loans Recourse or Non-Recourse?
CMBS (commercial mortgage-backed securities) loans, also known as conduit loans, are one of the most prominent sources of non-recourse financing in commercial real estate. When a CMBS lender originates a loan, that loan is pooled with other commercial mortgages and securitized into bonds sold to investors on the secondary market. Because investors in these securities rely on the collateral properties for repayment rather than personal guarantees, CMBS loans are structured as non-recourse by default.
This non-recourse structure is one of the primary reasons borrowers choose CMBS/conduit financing for stabilized commercial properties. However, CMBS loans do include standard bad boy carve-outs, so the non-recourse protection is not absolute.
Other Non-Recourse Loan Types
Beyond CMBS, several other commercial loan programs offer non-recourse terms:
- Agency multifamily loans (Fannie Mae and Freddie Mac) - These government-sponsored enterprise (GSE) programs provide non-recourse financing for apartment properties with 5 or more units, with LTVs up to 80% and fixed-rate terms of 5 to 30 years.
- HUD/FHA multifamily loans - Programs like HUD 221(d)(4) for construction and HUD 223(f) for acquisition/refinance are fully non-recourse, with LTVs up to 87% for market-rate properties and 90% for affordable housing.
- Life insurance company loans - Life companies provide non-recourse permanent financing for high-quality stabilized properties, typically with conservative LTVs (55% to 65%) and very competitive fixed rates.
- Debt funds and private lenders - Some institutional debt funds offer non-recourse bridge and transitional loans, though these carry higher rates and fees.
For a deeper look at how CMBS refinancing works, read our guide on CMBS loan refinancing and defeasance.
Recourse Loan Sources
In contrast, the following commercial loan types are typically recourse:
- Commercial bank loans - Most traditional bank commercial mortgages require personal guarantees
- Credit union loans - Similar to banks, credit unions usually require full recourse
- SBA loans - SBA 7(a) and 504 loans require personal guarantees from all owners with 20% or more equity
- Bridge loans from banks - Short-term bank financing almost always requires personal guarantees
- Construction loans - Due to the inherent risk of development projects, nearly all construction loans are full recourse
Considering a non-recourse commercial loan? Talk to our team at Clearhouse Lending about CMBS, agency, and life company options for your property.
What Are the Disadvantages of a Non-Recourse Loan?
While non-recourse loans offer significant asset protection benefits, they come with important trade-offs that borrowers should understand before pursuing this type of financing.
Higher Borrowing Costs
Non-recourse loans consistently carry higher interest rates than comparable recourse loans. The Federal Reserve estimates a premium of approximately 52 basis points on average. On a $5 million loan, that translates to roughly $26,000 per year in additional interest expense. Over a 10-year loan term, the cumulative cost difference can exceed $250,000.
Lower Leverage
Because lenders cannot pursue personal assets in a default scenario, they mitigate risk by requiring larger equity contributions. Non-recourse loans typically cap at 55% to 65% LTV, compared to 70% to 80% for recourse loans. For a $10 million property, that means contributing $3.5 million to $4.5 million in equity for a non-recourse loan versus $2 million to $3 million for a recourse loan.
Stricter Qualification Requirements
Non-recourse lenders impose higher underwriting standards across multiple dimensions:
- Minimum DSCR of 1.20x to 1.35x (compared to 1.15x to 1.20x for recourse loans)
- Borrower net worth requirements, often equal to or exceeding the loan amount
- Liquidity requirements, typically 10% to 15% of the loan balance in post-closing reserves
- Property quality standards that exclude Class C properties, secondary markets, and niche asset types
- Minimum loan sizes that typically start at $1 million to $2 million for CMBS and $5 million for life companies
Prepayment Restrictions
Non-recourse loans, particularly CMBS financing, often include significant prepayment penalties:
- Yield maintenance - A formula-based penalty designed to make the lender whole for lost interest income
- Defeasance - Replacing the loan collateral with government securities, which can cost 5% to 10% of the loan balance
- Lockout periods - Periods (often 2 to 5 years) during which no prepayment is allowed at all
Recourse bank loans, by comparison, typically offer more flexible prepayment terms, with step-down penalties or no prepayment penalty after an initial period.
How Do You Qualify for a Non-Recourse Commercial Loan?
Qualifying for non-recourse financing requires meeting higher standards than most recourse loan programs. Lenders evaluate the property, the borrower, and the market to determine whether the collateral alone provides sufficient security.
Property Requirements
The property is the primary source of repayment and the lender's only real collateral, so it must meet rigorous standards:
- Stabilized occupancy - Most non-recourse lenders require occupancy of 85% or higher at closing, with at least 12 months of operating history
- Strong cash flow - A minimum DSCR of 1.20x to 1.35x, depending on property type and loan program
- Acceptable property type - Multifamily, office, retail, industrial, hospitality, and self-storage are common. Specialty properties may face additional scrutiny
- Quality location - Primary and strong secondary markets are preferred. Tertiary markets may require additional reserves or lower leverage
- Good physical condition - Properties must pass environmental assessments (Phase I, and Phase II if needed), property condition reports, and seismic assessments where applicable
Use our commercial mortgage calculator to estimate payments and see how different LTV levels affect your financing.
Borrower Requirements
Even though the loan is non-recourse, lenders still evaluate the borrower's financial strength for the carve-out guarantee:
- Net worth - Typically equal to or greater than the loan amount (some programs require 1.5x the loan balance)
- Liquidity - Post-closing liquidity of 10% to 15% of the loan amount in cash or marketable securities
- Experience - Demonstrated track record of owning and managing similar commercial properties
- Credit history - Clean credit with no recent bankruptcies, foreclosures, or deeds-in-lieu
- Single-purpose entity - Borrowers must form a bankruptcy-remote SPE (usually an LLC or LP) solely for holding the property
Documentation and Process
The non-recourse loan application process involves more documentation and longer timelines than recourse bank loans. Expect to provide:
- Three years of property operating statements and rent rolls
- Current year-to-date financials
- Borrower and guarantor personal financial statements
- Organizational documents for the borrowing entity
- Third-party reports (appraisal, environmental, property condition, survey)
The entire process from application to closing typically takes 60 to 120 days for CMBS loans and 90 to 180 days for agency or HUD financing. For a complete breakdown, read our guide on the commercial loan closing process and timeline.
How Does DSCR Affect Recourse and Non-Recourse Loan Decisions?
The debt service coverage ratio (DSCR) plays a central role in determining whether a property qualifies for non-recourse financing and at what terms. DSCR measures a property's net operating income (NOI) relative to its annual debt service, providing lenders with a clear picture of the property's ability to support the loan.
For non-recourse loans, lenders require higher DSCR thresholds because the property income is their primary (and essentially only) source of repayment.
A higher DSCR provides a larger cushion against income fluctuations. If a property earns a 1.35x DSCR, it means the property generates 35% more income than needed to cover debt payments, giving the lender confidence that the loan payments will still be met during periods of increased vacancy or rising expenses.
DSCR-based loan programs are available through multiple channels and can be structured as non-recourse for qualifying properties. These programs focus primarily on the property's cash flow rather than the borrower's personal income, making them attractive for investors who want to scale their portfolios.
For borrowers whose properties fall slightly below non-recourse DSCR thresholds, there are several strategies to improve qualification:
- Reduce the loan amount to lower debt service and increase DSCR
- Choose a longer amortization (30 years vs. 25 years) to reduce monthly payments
- Select an interest-only period to temporarily boost DSCR during the initial loan term
- Increase property NOI through rent increases, expense reduction, or improved occupancy before applying
What Should You Know About the Complete Recourse vs Non-Recourse Comparison?
To make a well-informed decision, here is a comprehensive side-by-side comparison of recourse and non-recourse commercial loans:
| Feature | Recourse Loans | Non-Recourse Loans |
|---|---|---|
| Personal Liability | Full personal guarantee required | Limited to bad boy carve-outs only |
| Interest Rates | Lower (typically 25-75 bps less) | Higher (premium for reduced lender recourse) |
| Loan-to-Value (LTV) | 70%-80% | 55%-65% (up to 80% for agency multifamily) |
| DSCR Requirement | 1.15x-1.20x minimum | 1.20x-1.35x minimum |
| Minimum Loan Size | No minimum (varies by lender) | $1M-$5M typical minimum |
| Prepayment Flexibility | Step-down penalties or none | Yield maintenance, defeasance, or lockout |
| Closing Timeline | 30-60 days | 60-120 days (CMBS), 90-180 days (HUD) |
| Property Types | Broad (including transitional) | Stabilized, income-producing properties |
| Borrower Net Worth | Varies | Equal to or greater than loan amount |
| Typical Sources | Banks, credit unions, SBA | CMBS, agency, life companies, HUD |
| Best For | New investors, value-add, smaller deals | Experienced investors, stabilized assets |
| Assumability | Generally not assumable | Often assumable (with lender approval) |
Explore permanent loan options at Clearhouse Lending for both recourse and non-recourse structures tailored to your investment.
What Are the Most Common Questions About Recourse and Non-Recourse Loans?
Can a loan be partially recourse and partially non-recourse? Yes. Some lenders offer partial recourse structures where the borrower guarantees a percentage of the loan (for example, 25% or 50%) rather than the full amount. This hybrid approach balances asset protection with the lender's need for additional security, and it often results in better pricing than full non-recourse financing.
Do non-recourse loans affect my credit score differently than recourse loans? Both loan types can affect your credit if you personally guarantee any portion or sign as a carve-out guarantor. However, non-recourse loans held by a separate LLC may not appear on your personal credit report unless a carve-out is triggered and the lender pursues a personal judgment.
Can I refinance a recourse loan into a non-recourse loan? Absolutely. Many investors initially acquire properties with recourse bank financing, stabilize the asset, and then refinance into non-recourse CMBS, agency, or life company debt. This is one of the most common strategies for transitioning from recourse to non-recourse financing as a property matures.
What happens if my non-recourse loan goes into default? The lender can foreclose on the property but generally cannot pursue your personal assets. However, if any bad boy carve-outs have been violated, the loan may convert to full recourse. The foreclosure itself may also trigger tax consequences, including cancellation-of-debt income.
Are non-recourse loans available for all property types? No. Non-recourse financing is most readily available for multifamily, office, retail, industrial, and hospitality properties. Specialty property types such as gas stations, car washes, and single-tenant buildings may have limited non-recourse options and often require recourse financing.
What is a carve-out guarantor and do I need one? A carve-out guarantor is an individual (typically the loan sponsor or principal) who personally guarantees the bad boy carve-out obligations in a non-recourse loan. Virtually every non-recourse commercial loan requires at least one carve-out guarantor who must maintain a minimum net worth and liquidity level throughout the loan term.
Ready to find the right commercial loan structure for your investment? Get in touch with Clearhouse Lending today to compare recourse and non-recourse options and secure the best terms for your property.