Background

Non-recourse loans are a common financing tool in commercial real estate and certain project financings. They first grew in popularity in the late 20th century as lenders and investors structured deals to allocate risk to the asset rather than the borrower. Today, non-recourse structures remain attractive to investors who want to use property as the primary security while limiting personal exposure.

How non-recourse loans work

  • Collateral-focused repayment: The lender takes a security interest in an asset (most often real estate). If the borrower defaults, the lender’s remedy is to seize and sell the collateral. The lender cannot legally pursue the borrower’s other personal assets for a deficiency, except where the loan documents create exceptions. (See IRS guidance on disposition of property and debt treatment: https://www.irs.gov.)
  • Common carve-outs: Lenders typically require exceptions to full non-recourse protection. Typical “carve-outs” (also called “bad-boy” carve-outs) make guarantors personally liable for losses caused by fraud, intentional misconduct, environmental contamination, failure to maintain insurance, or voluntary transfer of the collateral. Read loan covenants closely—these carve-outs are contractually defined.
  • Pricing and covenant trade-offs: Because non-recourse lenders can only rely on the asset, they often charge higher interest, require larger down payments, stricter loan-to-value limits, or tighter covenants.

Real-world examples

  • Commercial developer: In a deal I worked on, a developer obtained a non-recourse loan for an office building. When market rents fell, the sponsor handed back the building after negotiations; the lender took the property and could not pursue the sponsor’s unrelated personal assets because the loan had narrow carve-outs and no personal guarantee.
  • Distressed sale vs. cancellation of debt: If a lender forecloses and sells the collateral, the tax result is generally treated as a disposition of property, which can create gain or loss on the transaction. If instead a lender cancels a debt without foreclosure, cancellation-of-debt income rules may apply. Tax consequences vary—consult a tax advisor and see IRS resources (https://www.irs.gov).

Who uses non-recourse loans and who benefits

  • Typical borrowers: Commercial real estate investors, developers, and project finance entities. Large-scale asset-backed deals and syndicated loans commonly use limited or full non-recourse structures.
  • Who benefits: Borrowers who want to limit personal liability and preserve personal assets if an investment fails. Lenders benefit by taking an interest in a clear asset with predictable recovery mechanics.

Key risks and common misconceptions

  • Not absolute protection: Non-recourse is not a blanket shield. Carve-outs, personal guarantees, environmental indemnities, and statutory exceptions (which vary by state) can create personal liability.
  • Not common for personal loans: Most residential mortgages and consumer loans are recourse loans unless state law or the lender’s policy provides otherwise.
  • Watch for “springing recourse”: Some agreements are non-recourse until a specified event (fraud, misappropriation, breach) triggers recourse against the borrower or guarantor.

Practical tips and negotiation strategies

  1. Read the loan documents line-by-line: Identify every carve-out and event of default that could trigger recourse. In my practice I’ve seen unexpected clauses that expand guarantor exposure.
  2. Negotiate carve-out limits: Seek to narrow bad‑boy carve-outs, add cure periods, and cap the guaranty exposure where possible.
  3. Verify collateral valuation and LTV: Lenders demand conservative valuations. Use an independent appraisal and stress-test downside scenarios.
  4. Consider insurance and environmental audits: Lenders often require environmental indemnities—obtain Phase I/II assessments to reduce surprises.
  5. Seek legal and tax advice: Non-recourse treatment has legal and tax consequences; engage counsel and a tax professional before signing.

Frequently asked questions

  • Are non-recourse loans truly non-recourse everywhere? No. The degree of protection depends on the loan contract, state law, and whether guaranties or carve-outs apply.
  • Can a lender still sue me after foreclosure? Only if the loan documents or state law permit deficiency judgments or carve-outs that make you liable. Otherwise, the lender’s primary remedy is the collateral.
  • Are interest rates higher on non-recourse loans? Often yes—lenders price the added risk of asset-only recovery via higher rates, stricter covenants, or larger equity requirements.

When to choose a non-recourse loan

Choose non-recourse financing if you need to limit personal liability and the project has strong, clearly identifiable collateral. If you cannot obtain fully non-recourse terms, consider limited-recourse structures and negotiate specific protections for sponsors.

Internal resources and further reading

Authoritative sources

Professional disclaimer

This article is educational and does not constitute legal, tax, or financial advice. Loan terms and state laws differ—consult an attorney and your tax advisor to determine how a non-recourse loan would apply to your situation.