How it works
Recourse determines what happens after a foreclosure that does not make the lender whole. On a recourse loan, the lender takes the property, sells it, applies the proceeds, and then pursues the guarantor personally for the deficiency. On a non-recourse loan the lender's remedy stops at the collateral: whatever the property realizes is the lender's recovery, and the borrower's other assets are beyond reach.
Recourse is not binary in practice. Most commercial loans sit on a spectrum. Full recourse means the guarantor stands behind the entire debt. A partial or limited guaranty caps exposure at a percentage of the loan or a fixed dollar amount. A burn-down guaranty reduces exposure as the property hits performance milestones, often falling to zero once a stabilized DSCR is sustained. Even nominally non-recourse loans carry carve-outs for specific bad acts.
The trade is pricing and proceeds against personal exposure. Lenders price recourse debt more cheaply and often lend more against it, because their downside is backstopped by someone with assets. A borrower choosing non-recourse is buying protection, and pays for it in rate, in leverage, or both. For a sponsor with substantial net worth this is a real economic decision rather than a formality.
The practical significance is concentrated in downside scenarios that nobody underwrites carefully. A recourse guaranty on a single deal can reach the guarantor's other properties, their operating business, and personal assets. Sponsors who grow a portfolio on recourse debt accumulate cross-exposure: a failure in one deal can trigger claims that reach assets unrelated to it.
How it compares
| Structure | Lender's remedy on default | Typical use |
|---|---|---|
| Full recourse | Property plus the guarantor's personal assets for any deficiency | Bank construction lending, smaller balance loans |
| Partial / limited guaranty | Property plus a capped amount, often 25% – 50% of the loan | Bank lending to established sponsors |
| Burn-down guaranty | Exposure falls as performance milestones are met, sometimes to zero | Construction and lease-up deals |
| Non-recourse with carve-outs | Property only, unless a bad-boy act triggers liability | CMBS, agency, life company |
Common mistakes
- Assuming a non-recourse loan carries no personal exposure
- Carve-out guaranties create full personal liability for specific acts such as fraud, misappropriation of rents, or an unpermitted transfer.
- Signing a guaranty without reading how it terminates
- A burn-down guaranty that requires sustained performance can remain in force indefinitely if the milestone is never met.
- Ignoring cross-collateralization across a portfolio
- Recourse debt on one asset can reach equity in unrelated ones, concentrating risk the sponsor believed was diversified.
Frequently asked questions
- What does recourse mean on a commercial loan?
- It means the lender can pursue the borrower or guarantor personally for any shortfall remaining after the mortgaged property has been foreclosed and sold.
- Is a recourse loan cheaper than a non-recourse loan?
- Generally yes. Because the lender has an additional source of repayment, recourse debt is typically priced lower and may support higher leverage than a comparable non-recourse loan.
- What is a burn-down guaranty?
- A guaranty whose amount reduces as the property meets agreed performance milestones, such as achieving a target occupancy or sustaining a minimum debt service coverage ratio, and which may fall to zero once the asset is stabilized.