Definition

A recourse loan is a commercial real estate loan in which the borrower personally guarantees repayment, meaning the lender can pursue the borrower's personal assets if the loan defaults and the property doesn't cover the balance. A non-recourse loan limits the lender's collection to the property itself; if the property doesn't cover the loan, the borrower walks away.

In a recourse deal, you're risking the building plus everything else you own. In a non-recourse deal, you're risking the building, and that's it.

Tyler's Take

The recourse vs. non-recourse decision is one of the most consequential and most underestimated decisions a CRE borrower makes. Most beginners take whatever the bank offers without realizing how different the two structures are when something goes wrong.

Here's the trade-off in plain English: non-recourse loans almost always carry slightly higher interest rates and tighter loan-to-value ratios than recourse loans. The lender is taking more risk, so you pay for that protection. As a borrower, you have to decide whether the rate spread is worth the asset protection.

For my own deals, the rule I use is: if the deal is small enough that I can afford to lose my equity, I'll take recourse to get the better rate. If the deal is large enough that personal liability could ruin me, I'll pay up for non-recourse every time. There's a personal psychology to it. I can sleep through a bad year on a recourse loan if it's a small piece of my net worth. I can't sleep through it if my house and savings are on the line.

For Nashville deals in 2026, I see local and regional banks doing recourse loans up to about 75% LTV at competitive rates, and CMBS or life company non-recourse loans capping out around 65-70% LTV with rates 25-75 basis points higher depending on the asset and the borrower. Above $5M, non-recourse becomes much more accessible. Below $2M, you're almost always looking at recourse from a community bank.

How Recourse Loans Work

In a recourse loan, the borrower (or a guarantor) signs a personal guarantee, also called a "PG." If the borrower defaults:

1. Lender forecloses on the property.

2. Property is sold at auction or by short sale.

3. If the sale doesn't cover the loan balance plus fees, the lender pursues the guarantor for the deficiency.

4. The guarantor's personal assets are exposed: bank accounts, other real estate, business interests, sometimes even retirement accounts depending on jurisdiction.

Most local and regional bank loans on smaller commercial properties are recourse. It's the default for community bank lending in Nashville.

How Non-Recourse Loans Work

In a non-recourse loan, the lender's only collateral is the property itself. If the borrower defaults:

1. Lender forecloses on the property.

2. Property is sold.

3. If the sale doesn't cover the loan, the lender absorbs the loss. The borrower has no further obligation.

4. Borrower's personal assets are protected.

Non-recourse is standard for CMBS (commercial mortgage-backed securities), life insurance company loans, agency debt (Fannie/Freddie multifamily), and most institutional financing above $5M.

Bad-Boy Carve-Outs

Almost every "non-recourse" loan has carve-outs. These are specific bad acts that flip the loan into recourse if they happen. Common carve-outs include: fraud or intentional misrepresentation, misappropriation of rents or insurance proceeds, voluntary bankruptcy filing, failure to maintain insurance, environmental contamination, unauthorized transfer of the property, and failure to pay taxes that result in a lien.

The lawyers call these "non-recourse with bad-boy carve-outs." If you trigger a carve-out, the lender can come after you personally even on a non-recourse loan. Read the carve-out language carefully.

Worked Example

I'm buying a $2,000,000 retail building in Nashville with $500,000 down and a $1,500,000 loan.

Option A: Local bank recourse loan
  75% LTV, 6.25% rate, 25-year am, 5-year term, full PG

Option B: Life company non-recourse loan
  65% LTV (need extra $200k equity), 6.75% rate, 25-yr am, 7-yr term, no PG

Option A: Lower rate, lower equity check, but my house is on the line. Option B: Higher rate, bigger equity check, but I sleep at night.

For a $2M deal that's a piece of a larger portfolio, I'd take A. For a $2M deal that represents most of my net worth, I'd take B without hesitation.

Common Mistakes

1. Assuming non-recourse means zero personal risk. It doesn't. Bad-boy carve-outs are real and they get triggered more often than people think.

2. Paying for non-recourse on a deal that doesn't justify it. If the rate spread costs you 50 bps and your equity check is small, the math may not work.

3. Signing a recourse loan without understanding the deficiency exposure. Get a lawyer to review.

4. Cross-collateralizing. Some lenders will tie multiple properties together so a default on one can trigger foreclosure on the others. Avoid this when possible.

Frequently Asked Questions

Is non-recourse always better than recourse?
No. Non-recourse usually carries a higher rate and lower LTV. If the deal is small relative to your net worth, the cost of non-recourse may not be worth it.

What's a bad-boy carve-out?
A specific list of borrower actions (fraud, misappropriation of rents, voluntary bankruptcy, environmental issues, etc.) that, if triggered, flip a non-recourse loan into a recourse loan.

Are CMBS loans recourse or non-recourse?
CMBS loans are non-recourse with bad-boy carve-outs. They're a primary source of non-recourse capital for stabilized commercial properties.

Can I negotiate a recourse loan into non-recourse?
Sometimes. With strong credit, low leverage, and a stabilized asset, some banks will offer "burn-off" recourse, where the personal guarantee drops away once the loan hits a certain LTV or DSCR threshold.

Does the SBA 504 program offer non-recourse loans?
No. SBA 504 and SBA 7(a) loans are recourse, with full personal guarantees from any owner with 20% or more equity in the borrowing entity.

Run Your Own Numbers

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Related Terms

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