Choosing recourse or non-recourse debt

The decision

This is a decision about what you lose in a bad outcome and what you give up in a good one. Recourse means the lender can come after you personally for a shortfall. Non-recourse means it can take the property, and you are only on the hook for the carve-outs. Price both sides before you pick a lender.

Step 1: measure your exposure

Illustration. You borrow $5,000,000 against a property worth $7,000,000. A downturn takes the value to $4,500,000 and the loan defaults.

Outcome (illustration)	Recourse loan	Non-recourse loan
Lender sells at $4,500,000, less 8% costs	Recovers about $4,140,000	Recovers about $4,140,000
Shortfall before interest and fees	about $860,000	about $860,000
Who absorbs it	You, as guarantor	The lender
If you trip a full-recourse carve-out (for example, a voluntary bankruptcy filing)	The same exposure	The whole $5,000,000 balance can become yours

The shortfall in a bad case is the number to weigh. If losing it would hurt your other holdings, non-recourse is worth paying for. Downturns do happen in pockets: Trepp reported CMBS office delinquency at 12.16% (as of September 30, 2026)², and FDIC data show 1.42% of bank non-owner-occupied commercial property loans noncurrent³.

Step 2: price what non-recourse costs

Non-recourse does not always mean a higher rate. Agency and conduit loans are often priced well. The cost shows up elsewhere:

Cost of non-recourse	Example
Prepayment premium	Freddie Mac Conventional Small: Yield maintenance until securitization, 2-year lockout, then defeasance; open final 90 days4
Minimum premium even when rates rise	Fannie Mae: a minimum premium of 1% of the balance5
Defeasance rules on CMBS	CMBS loans can defease only after at least 2 years from the securitization closing, not the loan closing6
Single-purpose entity and cash management	Separate borrower, separate accounts, lender consent to transfers
Third-party reports and legal	Full appraisal, condition, environmental, borrower counsel
Minimum loan size	Fannie Mae: Non-recourse available for most loans above $750,0001

A recourse bank loan, by contrast, commonly carries a step-down or short open prepayment period and lighter structure. If you might sell, refinance or recapitalize within a few years, that flexibility can be worth more than the guarantee costs you.

Step 3: match the structure to the deal

Your situation	Lean toward	Why
Long hold of a stabilized apartment building	Non-recourse agency	Long fixed rate; prepayment matters less
Several properties with one guarantor	Non-recourse	Keeps one loss from reaching the rest
Partners with very different net worth	Non-recourse	Nobody carries the others’ risk
Value-add or short hold	Recourse bank or bridge with limited guarantee	Prepayment freedom and speed
Small loan below agency non-recourse sizes	Recourse bank or credit union	Few non-recourse options
Credit or experience gap	Recourse, often with extra collateral	Private lenders take first mortgage, often with extra collateral, an ownership pledge or personal guarantees7

Step 4: if you sign, negotiate the guarantee

• Cap it. A fixed dollar amount or a share of the loan.
• Burn it off. Release or step down once the property meets a coverage or occupancy test for a set period.
• Split it. Several liability by ownership share instead of joint and several.
• Limit the carve-outs. Narrow the full-recourse triggers to acts you control, and make the others loss-based.
• Keep the release in writing. On a sale or assumption, the release of the old guarantor should be a closing condition.

Documents lenders review for guarantors

• Personal financial statement and schedule of real estate owned.
• Bank and brokerage statements showing liquidity.
• Contingent liabilities: every other guarantee you have signed.
• Credit report and background check authorization.

Pitfalls

1. Assuming non-recourse means no personal exposure. The carve-out guarantee is real and can become full recourse.
2. Ignoring contingent liabilities. Lenders add up your other guarantees; too many can cut your loan size.
3. Choosing non-recourse and then needing to exit early. The prepayment premium can be larger than the guarantee risk you avoided.
4. Missing the transfer clause. On non-recourse loans an unconsented change of ownership is often a full-recourse trigger.
5. Not reading which carve-outs are loss-based and which are full. That difference is the whole negotiation.