A loan where the borrower and guarantors are personally liable for repayment beyond the collateral itself.
The longer version
A recourse loan allows the lender to pursue the borrower or its guarantors personally if the collateral does not cover the debt. The property is the first source of repayment, and the guarantors' balance sheets are the second.
Recourse is usually provided through a guaranty rather than by the borrowing entity itself, since most borrowers are single-purpose entities with no other assets. A guaranty of payment makes the guarantor liable for the debt. A completion guaranty covers finishing construction. Partial recourse limits liability to a fixed amount or percentage of the loan.
Recourse is typical where the property alone does not yet support the loan: construction, heavy renovation, lease-up, and much bank lending. It often burns off as the risk falls, for example stepping down once a building reaches stabilized occupancy and coverage.
Because it shifts the analysis toward the guarantor, a recourse loan brings its own diligence: the guarantor's financial statements, contingent liabilities, liquidity and net worth covenants, and how often those must be reported after closing.
Common questions
- What is a recourse loan?
- A loan where the lender can pursue the borrower or guarantors personally for any shortfall after foreclosing on the collateral. It is usually backed by a personal or corporate guaranty.
- What is the difference between full and partial recourse?
- Full recourse makes the guarantor liable for the whole debt. Partial recourse caps liability at a fixed amount or percentage of the loan, often reducing as the property performs.
- When do lenders require recourse?
- When the property's income does not yet support the loan, such as in construction, renovation and lease-up, and in much bank lending. Stabilized properties more often qualify for non-recourse terms.
- What is a recourse burn-off?
- A provision that reduces or eliminates the guarantor's recourse once the property hits defined milestones, such as completion, stabilized occupancy or a coverage ratio.