Recourse vs Non-recourse

As a borrower, the decision to execute a loan with either a bank, life insurance company, CMBS, or a debt fund can take some research and time to review the different terms and rates. Below we will outline who executes recourse and non-recourse loans:

Who usually provides recourse?

Banks: Particularly all banks that do construction or bridge loans.

Who usually provides non-recourse?

Life Companies: Primarily provide non-recourse with a few exceptions such as deals in the $2 million and under range.

CMBS: They are known to primarily only provide non-recourse. Because there is so much structure in their loans, there is no need for recourse.

Debt Funds: Depends on the fund, but generally yes. There are some bridge players (particularly for smaller deals or deals that have construction) that will use recourse to gap over certain events (like leasing concerns).

Who does recourse suit best?

Recourse suits borrowers whose loans are small in comparison to their overall portfolio. It also suits borrowers who carry modest leverage but use recourse to improve on deal terms.

Who does non-recourse suit best?

Non-recourse suits borrowers who have small stakes in a deal (they are a manager of the deal but the main equity contributor is someone else). It caters to borrowers who need to keep their exposure to recourse limited so that they can borrow on recourse loans (like construction or lines of credit). Large deals are generally non-recourse as they can be too big for a single borrower to fix in the case that an issue arises. Non-recourse works best when you have a lot of members of the borrowing entity, or when you have a manager who has an even or lesser share than the investors and it would be unfair for that manger to shoulder the recourse.

What type of deal works best with either recourse or non-recourse?

Construction generally requires recourse. Single-tenant net-leased deals, a Walgreen's for example, can generally get better and longer amortizations than deals that are non-recourse.