Most Commercial Mortgage Loans are Recourse Loans These Days
Normally when you borrow money, you have to pay it back; but this is not true of a non-recourse loan. If a non-recourse commercial real estate loan goes bad, the commercial lender cannot go after the borrower personally. The lender's sole recourse is to attach the rents and then foreclose on the property.
A recourse loan is just the opposite. Suppose a commercial real estate lender makes a $10 million commercial loan, and the loan goes bad. The commercial lender forecloses, but it still loses $2 million when the property goes to a Sheriff's Sale. If the loan is a recourse loan, the commercial lender that just took a $2 million haircut can attach the assets of the borrower. It can attach the debtor's wages, foreclose its lien on the debtor's house, and foreclose on other properties owned by the debtor. It can seize the debtor's expensive cars, his boat, and his valuable stamp collection. The debtor promised to pay, so he has to pay.
Is a recourse loan the same thing as a personal guaranty? They are close, but they are not exactly the same thing. If a loan is a recourse loan, the commercial lender can go after the debtor for any deficiency judgment. However, the debtor might be a corporation or a limited liability company. In this case, the commercial lender can go after the assets of the corporation or the LLC that used to own the commercial property, but it cannot go after the assets of the investors in the corporation or the LLC.
However, if the commercial lender also obtained a personal guaranty from each of the major investors in the corporation or the LLC, then the commercial lender could indeed go after the wages, the home, the other real estate, and the expensive toys of the personal guarantors.
Before the Great Recession, conduits originated about half of all commercial real estate loans. These conduit loans were non-recourse. Unfortunately, the commercial mortgage-backed securities (CMBS) market collapsed under the weight of the sub-prime crisis, and all conduit lending ceased. As of today, conduit lending has not restarted. As a result, few remaining commercial lenders will make non-recourse loans.
Life companies will make non-recourse loans, but they simply don't make many loans, and the loans they do make are very, very conservative. Few life companies will make commercial mortgage loans today much higher than 55% loan-to-value, and their minimum loan is often $5 million.
Most commercial real estate loans made today by banks are recourse loans. Personal guaranties are also required on most commercial loans from banks. However, if the loan is large and the collateral is very, very desirable, banks will sometimes make non-recourse loans.
Few hard money lenders will make non-recourse loans, but Blackburne & Sons will make a non-recourse loan for a slightly larger fee, if the loan is highly desirable. Need a commercial loan that is non-recourse? Please call George Blackburne, III (the old man) at 574-360-2486 or email him at george@blackburne.com.
