One of the first questions investors ask me about commercial financing is:
“Am I personally responsible for this loan if something goes wrong?”
The answer?
It depends on how the loan is structured.
Understanding the difference between recourse and non-recourse financing before you sign can be just as important as the loan amount itself.
What’s the Difference?
With a recourse loan, the borrower or guarantor may be personally responsible for the debt if the property and its proceeds aren’t enough to repay what is owed, subject to the specific loan documents and applicable law.
A non-recourse loan generally limits the lender’s recovery to the property and other pledged collateral rather than making the borrower personally responsible for the full loan.
Sounds simple, right?
Not always.
Even non-recourse loans can include specific situations where a borrower or guarantor becomes personally liable.
For example, Fannie Mae’s current multifamily programs offer non-recourse financing with standard carve-outs for certain acts such as fraud and bankruptcy.
That’s why seeing the words “non-recourse” doesn’t mean you should stop reading.
Krystle’s Take
Here’s what I want investors to understand:
The loan with the best headline terms isn’t necessarily the loan with the best structure for you.
You need to understand what you’re personally guaranteeing, what happens if the investment doesn’t perform as expected, and exactly what could trigger personal liability.
Two lenders could look at the same commercial property and offer very different structures.
That’s why I wouldn’t evaluate a commercial loan based on the interest rate or loan amount alone.
The terms behind the loan matter too.
The Bottom Line
Before signing a commercial real estate loan, ask one very important question:
What am I personally responsible for?
Understand whether the loan is recourse or non-recourse, review the guaranties and carve-outs, and make sure you know what happens if the deal doesn’t go according to plan.
Because protecting your investment is important.
Protecting everything outside of it matters too.