Recourse vs. Non-Recourse
A recourse loan lets the lender pursue the borrower's personal assets if the property's value doesn't cover the debt after default. A non-recourse loan limits the lender to the collateral itself — with standard 'bad-boy' carve-outs that restore personal liability for fraud, misappropriation, or unauthorized transfers.
Banks typically require full or partial recourse, especially on construction and smaller balance loans. CMBS, life company, and agency loans are typically non-recourse.
Carve-out guarantees are not a formality: actions like filing bankruptcy to block foreclosure or diverting rents can convert a non-recourse loan into a personal obligation. Sponsors negotiate carve-out language carefully.
Frequently asked questions
Do recourse commercial loans get a lower interest rate than non-recourse loans?
Typically, yes. A Federal Reserve staff study estimated recourse loans price roughly 52 basis points lower than otherwise-similar non-recourse loans, because the personal guarantee reduces the lender's loss exposure. The actual spread shifts with lender, property type, and borrower strength, so treat it as a documented tendency, not a rate quote for any specific deal.
If non-recourse costs more, why would a sponsor choose it?
Because the discount on a recourse loan is the price of personal liability, not free money. Non-recourse keeps a default confined to the collateral, while a recourse loan exposes the sponsor's other assets if the property falls short after foreclosure. Sponsors with other assets to protect often pay the non-recourse premium deliberately.