Recourse vs. Non-Recourse Loans
Definition:
Recourse Loans allow the lender to pursue the borrower’s personal assets if the borrower defaults and the sale of the collateral does not cover the loan amount. Non-Recourse Loans, on the other hand, limit the lender's recovery to the collateral itself, meaning the borrower’s personal assets are protected in the event of a default.
🔍 Did You Know?
Non-recourse loans are often used for commercial real estate and are generally seen as more favorable for borrowers, but they typically have stricter underwriting requirements.
Examples:
Example 1:
A commercial real estate investor secures a non-recourse loan to purchase a shopping center, meaning that if they default on the loan, the lender can only seize the property but cannot go after their personal assets.
Example 2:
A borrower takes out a recourse loan to purchase an apartment building. If the borrower defaults and the property is not worth enough to cover the loan balance, the lender can sue the borrower for the remaining amount.
Why It’s Important:
Understanding the difference between recourse and non-recourse loans is crucial for institutional investors, as it affects the risk profile of a deal. Non-recourse loans provide greater protection for the borrower, while recourse loans give lenders more security.
Who Should Care:
- Institutional investors securing financing for large real estate deals.
- Developers determining loan structures for commercial projects.
- Lenders offering both recourse and non-recourse financing options.
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