Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
While there are many different types of loan products available to lenders…all property debt tends to fall into one of two categories: recourse or non-recourse loans.
What is non-recourse financing?
Loans that do not require the borrower to guarantee the loan.
Essentially, with a non-recourse loan the lender cannot hold the borrower or guarantors liable in the event of default.
The collateral securing the loan (the real estate) is the sole source of repayment. The lender can seize and sell the property…but the lender cannot go after any of the borrower’s non-pledged property or assets.
Recourse vs. Non Recourse loans
Most lenders, particularly traditional banks, want some sort of guarantee that they’ll be repaid in the event that a commercial real estate deal does not perform as intended.
With recourse loans the lender has the ability to collect the difference between the sale price of the property and the amount owed on the note.
If the sale of the property is not sufficient to cover the balance owned on the note, the lender can go after the guarantor’s other assets – such as other pieces of real estate, retirement accounts, securities and more.
“Bad Boy” Carve Outs
In commercial real estate, most non-recourse loans will include what’s referred to as a “bad boy” carve out. This is essentially a clause that gives the lender recourse in the event that the borrower misbehaves for some reason.
Typical bad boy carve outs include actions such as fraud, misrepresentation, waste, negligence, misappropriation, or any sort of sale, encumbrance, or transfer without the lender’s prior consent.
Bad boy carve outs have become more common in recent years, as lenders have been pressured to issue more non recourse loans.
Non-recourse lenders typically fall into four different buckets: life insurance companies, debt funds, commercial banks, and government-sponsored entities.
Debt funds are primarily real estate investment companies that have moved into the lending business. Debt funds will typically do higher leverage, higher rate non-recourse loans because they are comfortable taking over the property or constriction property if the borrower defaults on the loan. Debt fund interest rates are typically 50 to 250 basis points more expensive on spread than traditional banks.
Some of the most prominent lenders in each of these buckets are:
Life Insurance Companies:
- Northwestern Mutual
- Pacific Life
- State Farm
- Starwood Capital
- Cross Harbor Capital
- Rubenstein Partners
- JPMorgan Chase
- Wells Fargo
- Fannie Mae
- Freddie Mac
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com