Definition
Recourse refers to a loan structure in which the borrower (or guarantor) is personally liable for repayment beyond the collateral securing the loan. If the property does not fully satisfy the debt after foreclosure, the lender can pursue the borrower’s other assets to recover the deficiency.
How Recourse Works
- Full personal liability: borrower guarantees repayment of the loan balance.
- Deficiency judgments: lender may seek remaining unpaid amounts after collateral liquidation.
- Broader risk exposure: sponsor’s balance sheet may be at risk.
Recourse vs. Non-Recourse
- Recourse loan: lender can pursue borrower’s personal assets.
- Non-recourse loan: lender’s recovery limited to the property collateral, except for specific carve-outs.
Recourse loans typically offer lenders greater protection and may result in lower interest rates compared to non-recourse alternatives.
When Recourse Is Common
- Construction loans.
- Bridge financing.
- Smaller balance loans.
- Loans to less experienced sponsors.
Why It Matters
- Risk assessment: affects sponsor exposure and downside scenarios.
- Return expectations: increased personal risk may justify higher returns.
- Capital structure decisions: influences loan selection strategy.
Example
An investor obtains a $5 million recourse loan secured by an office building. If market conditions deteriorate and the property sells for only $4 million after foreclosure, the lender can pursue the borrower personally for the $1 million deficiency plus costs.
Investor Considerations
- Understand guarantor obligations.
- Stress-test downside scenarios.
- Evaluate insurance and asset protection strategies.
- Compare cost savings versus risk exposure.
Common Pitfalls
- Underestimating personal liability exposure.
- Confusing limited carve-out liability with full recourse.
- Ignoring cross-default provisions.
- Failing to document internal risk-sharing among partners.