Recourse vs. Non-Recourse Loan

Recourse describes what a lender can go after if a loan defaults and the collateral does not cover the debt.

With a recourse loan, the borrower is personally liable for the full debt. If the lender forecloses and sells the collateral for less than what is owed, it can seek the shortfall, called a deficiency, from the borrower's other assets. Most small business loans are recourse, and owners often add a personal guarantee on top.

With a non-recourse loan, the lender agrees to look only to the collateral. If the sale falls short, the lender takes the loss. Non-recourse terms are common on stabilized commercial real estate, especially loans held by insurance companies or packed into commercial mortgage-backed securities. The borrower is usually a single-purpose entity that owns only the property.

Here is the difference in numbers. A lender makes a hypothetical $5,000,000 loan on an office building. The borrower defaults, and the building sells for $4,000,000. On a recourse loan, the lender can pursue the $1,000,000 gap. On a non-recourse loan, it generally cannot.

Most non-recourse loans include carve-outs, often called "bad boy" provisions. If the borrower commits fraud, diverts rents, transfers the property without approval or files for bankruptcy, part or all of the loan becomes recourse. A sponsor usually signs a carve-out guarantee to back these provisions.

Why it matters for lenders

Recourse changes how a loan is underwritten. On a non-recourse loan, the property must carry the risk alone. Lenders lean harder on loan-to-value limits, debt coverage and the quality of the cash flow, and they usually charge for the added risk.

It also shapes what happens after a default. With recourse, the lender has more leverage in a loan workout because the borrower's other assets are at stake. With non-recourse, the lender's options are mostly the property and any carve-outs. State law adds another layer: some states limit deficiency claims in certain foreclosures, so the documents and the property's location both matter.

How it works in practice

A commercial real estate lender books two loans in the same month. One is a full-recourse loan to a local investor with a personal guarantee. The other is a non-recourse loan to a single-purpose limited liability company (LLC), backed by a carve-out guarantee from its sponsor.

At boarding, the loan record notes the recourse type, the guarantors, the guarantee limits and each carve-out trigger. If a default occurs, the asset manager sees right away whether to pursue a deficiency, invoke a carve-out or focus on the property.

When this detail lives only in legal documents, collections teams waste weeks finding out what remedies they have, and may miss a carve-out the borrower already triggered.