Non-Recourse Loans On Multifamily Properties and Commercial Real Estate
A non-recourse loan on a commercial or multifamily property is a loan that does not require the personal guarantee of the borrower(s). To put it simply this increases investors/lender risk and reduces risk/liability to borrower(s). In the event of loan default, whatever money the bank does not recuperate from the property may be sought out directly via the borrower and his personal assets to make the lender whole. CMBS loans for example are generally non-recourse financial instruments. Agencies such as Fannie Mae, Freddie Mac, and HUD all provide non-recourse multifamily financing as well.
In the case of non-recourse commercial loans, the lender's only means for recuperation of lost investment and yield in the event of a default is the property itself and the income the property generates. This is obviously advantageous to borrowers because, who wouldn’t want less risk and exposure? Conversely non-recourse loans carry higher risks to lenders and investors. Because of this, the commercial lenders often require certain property types, and classes, in specific markets. More specifically than that, lenders are really looking to reduce leverage and increase DSCR (debt service coverage ratios).
Furthermore, non-recourse commercial mortgage loans are generally only available to borrowers that are very strong financially, because in those cases, a default is of course less likely as the borrower has the financial means to ensure the property’s income is used for the property. Lenders will also require a very experienced borrower for making a non-recourse loan.
To sum things up, non-recourse loans are harder to get, but are very much the norm in the market of commercial loans over $2 - $10 million. There is one caveat, or carve-out may be a better word. Most non-recourse loans come with bad-boy carve-outs, which provide the lender full recourse in the event a borrower is negligent or does anything fraudulent. These carve-outs can convert a non-recourse mortgage loan to a full-recourse loan in a moment’s time.
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