Recourse or non-recourse: what each loan program asks you to sign

Who lends on which terms

Program	Repayment recourse	Notes
Bank commercial mortgage	Full, usually	Burn-off or cap negotiable at low leverage
Credit union commercial loan	Varies	A personal guarantee is not required, but a credit union that skips it must document offsetting mitigants
Fannie Mae small loans and DUS	Non-recourse	Non-recourse available for most loans above $750,000
Freddie Mac Conventional Small and Optigo	Non-recourse	Non-recourse except standard carve-outs
FHA 223(f), 221(d)(4), 223(a)(7)	Non-recourse	Non-recourse, with carve-outs for bad acts
CMBS conduit and SASB	Non-recourse	Carve-out guarantor required
Life insurance company	Non-recourse, usually	Carve-outs backed by a guarantor
Debt fund and institutional bridge	Non-recourse, usually	Completion guaranty on funded work
Construction loan (bank)	Full	Completion, carry and repayment guarantees
Non-bank DSCR loan	Varies	Many want a guaranty; some offer limited recourse at lower leverage
Hard money and private	Full	Often extra collateral: first mortgage, often with extra collateral, an ownership pledge or personal guarantees
SBA 504 and 7(a)	Full	Personal guarantees from principal owners

The pattern is simple. A lender that keeps the loan and knows the borrower asks for a guarantee. A lender that sells the loan into a program or a bond pool underwrites the property instead, and limits the guarantee to the acts the borrower controls.

The two kinds of carve-out

Non-recourse loans are not liability-free. They come with a carve-out guarantee, and its terms decide how much risk you actually carry.

Loss carve-outs. The guarantor pays the lender’s actual loss from a specific bad act: misapplied rents or security deposits, insurance proceeds not used to rebuild, waste, unpaid taxes when the property had the cash, environmental contamination. These are manageable if you run the property honestly.

Full-recourse carve-outs (springing recourse). The guarantor becomes liable for the entire loan if certain events happen: a voluntary bankruptcy, a collusive involuntary bankruptcy, a transfer or new debt without consent, and sometimes a breach of the single-purpose entity covenants. These are the clauses to negotiate hardest, because a technical breach can turn a non-recourse loan into a full guarantee.

Worked example: how guarantees limit your next loan

Illustration. An investor has $10,000,000 of net worth and $1,500,000 of cash. She owns three buildings financed with $2,500,000, $3,000,000 and $3,500,000 loans, and is applying for a $4,000,000 bank loan on a fourth. Assume the new bank’s policy asks guarantors to show net worth at least equal to the total debt they guarantee and cash of at least 10% of it.

Guarantor test (illustration)	All four loans recourse	First three non-recourse, new loan recourse
Debt under personal guarantee after the new loan	$13,000,000	$4,000,000
Net worth needed	$13,000,000	$4,000,000
Cash needed	$1,300,000	$400,000
She has	$10,000,000 net worth, $1,500,000 cash	same
Result	Fails the net worth test	Passes both, with room for more

Same investor, same properties, same cash. The only difference is whether the first three loans carried repayment guarantees. That is why owners building a portfolio move stabilized buildings into non-recourse debt as soon as they qualify: it frees personal balance sheet for the next acquisition.

Banks also run global cash flow: every payment on a loan you guarantee counts against the guarantor’s combined income. One weak property elsewhere can fail a strong new application.

How to cut a guarantee you have to sign

• Cap it. A guarantee limited to a share of the loan, or to a fixed amount.
• Burn it off. The guarantee falls away when the property hits a coverage or occupancy test for a set period.
• Limit it to completion. On a renovation or construction loan, guarantee completion and carry, not repayment.
• Spread it. Ask that each partner guarantee only their own share, not the whole loan jointly.
• Swap it for collateral. Some lenders accept extra cash collateral or a pledge of another property in place of a full personal guarantee.

The costs people miss on non-recourse loans

• Prepayment. Non-recourse programs protect their yield: Fannie Mae keeps a minimum premium of 1% of the balance⁶ even when rates have risen. Conduit loans defease, and CMBS loans can defease only after at least 2 years from the securitization closing, not the loan closing.
• Single-purpose entity. A separate borrower for each property, separate accounts, and lender consent to transfers.
• Size floors. Agency non-recourse begins at a modest size, and small loans have fewer non-recourse choices.
• Carve-out exposure. Read the full-recourse triggers line by line with counsel before you sign.

For the step-by-step version of this decision for one deal, including how to measure your downside, see choosing recourse or non-recourse.

Want to know which non-recourse programs your property qualifies for? Send the rent roll and the loan amount you need.