A loan where the lender's remedy is the property itself, with the borrower and sponsors not personally liable except for negotiated carve-outs.
The longer version
A non-recourse loan limits the lender's recovery to the collateral. If the borrower defaults and the property is worth less than the debt, the lender takes the property and absorbs the shortfall, rather than pursuing the borrower's or sponsor's other assets.
That protection is real but conditional. Non-recourse loans carry carve-outs, often called bad boy carve-outs, that restore liability for specific acts: fraud, misapplication of rents or insurance proceeds, waste, unpermitted transfers, and environmental liabilities. Some carve-outs make the guarantor liable only for the lender's resulting loss. Others, typically including a voluntary bankruptcy filing, spring the entire loan to full recourse.
The structure is standard on stabilized commercial property, in CMBS, life company and agency lending, because the lender is underwriting the asset's cash flow rather than the sponsor's balance sheet. Construction and transitional loans are more often partial or full recourse, because the asset does not yet produce the income the loan relies on.
The negotiation is in the carve-out list and the guaranty. Sponsors push to narrow triggers to acts they control, to add knowledge and materiality qualifiers, and to cap loss carve-outs. Reading those provisions is where a non-recourse loan is actually defined.
Common questions
- What is a non-recourse loan?
- A loan where the lender's recovery on default is limited to the collateral. The lender can take the property but cannot pursue the borrower's or guarantor's other assets for a shortfall, except under the carve-outs written into the loan.
- What is the difference between a recourse and a non-recourse loan?
- With a recourse loan the lender can pursue the borrower or guarantor personally for any shortfall after taking the collateral. With a non-recourse loan it cannot, except for losses or full liability triggered by the carve-outs.
- What are non-recourse carve-outs?
- Exceptions that restore liability for specific borrower acts, such as fraud, misapplied rents, waste, unpermitted transfers or a voluntary bankruptcy. Some make the guarantor liable for the resulting loss; others spring the whole loan to full recourse.
- Which commercial loans are non-recourse?
- Most loans on stabilized income-producing property, including CMBS, life company and agency loans, because the lender underwrites the property's cash flow. Construction and transitional loans are more often partial or full recourse.
- The CRE due diligence checklistEvery phase of diligence, organized the way deals close.
- The commercial loan closing checklistWhat goes on the list and who owns each line.
- What lenders should look for in a due diligence data roomA lender's room is not an M&A room.
- UnderwritingWhere this sits in the credit decision.