There are many benefits associated with using a non-recourse loan in commercial real estate:

• Investors can significantly increase their returns by taking on greater risks
• The terms of a non-recourse loan allow borrowers more flexibility when negotiating deals
• Non-recourse loans provide peace of mind during times of uncertainty, such as market fluctuations or economic downturns.

The Downsides of Using a Non-Recourse Loan in Multifamily Real Estate

While non-recourse loans can be an attractive option for multifamily investors, there are a couple downsides to consider.

First and foremost, if the loan is not repaid, the investor may lose the property used as collateral. While it's certainly a plus that a lender cannot pursue the investor's personal assets, the risk of losing a commercial real estate investment is still significant downside.

Secondly, most non-recourse loans have language built in that turns them into recourse financing should a borrower misrepresent the property or engage in fraudulent behaviors. These are typically known as bad-boy carve-outs, and, should the investor engage in prohibited actions, they could completely negate the advantages of using a non-recourse loan.

How to Choose the Right Non-Recourse Loan for Your Multifamily Investment

When investing in multifamily real estate, it is important to choose the right non-recourse loan. There are a number of factors to consider when choosing a loan, including the borrower's credit score and the available interest rates. It is also important to understand the terms of the loan so that you can make an informed decision about whether or not it is right for your investment.

Non-recourse loans provide investors with a high degree of security while still allowing them access to capital should they need it. However, understand that non-recourse financing may not be available to you if you do not have a significant amount of commercial real estate investing experience or have a spotty credit history.

In Conclusion

As a commercial real estate investor, it's important to have access to the best loans available. By understanding the different types of loans and how they can be used in your specific situation, you can make smart decisions that will help you grow your portfolio. If you're interested in learning more about non-recourse loans, fill in your details on the form below, and we'll be in touch.

Related Questions

What are the Benefits of Using a Non-Recourse Loan?

There are many benefits associated with using a non-recourse loan in commercial real estate: * Investors can significantly increase their returns by taking on greater risks; * The terms of a non-recourse loan allow borrowers more flexibility when negotiating deals; and * Non-recourse loans provide peace of mind during times of uncertainty, such as market fluctuations or economic downturns.

What are the advantages of non-recourse loans for multifamily investors?

Non-recourse loans offer multifamily investors the security of not having to repay any of their personal capital should the property they invested in become unsuccessful. The only loss would be the property itself, as that is used as the collateral. This can be a great option for investors who are comfortable with riskier investment plays, as it eliminates the need to worry about being personally on the hook for losses if something goes wrong.

The advantages of using a non-recourse loan in commercial real estate include:

• Investors can significantly increase their returns by taking on greater risks
• The terms of a non-recourse loan allow borrowers more flexibility when negotiating deals
• Non-recourse loans provide peace of mind during times of uncertainty, such as market fluctuations or economic downturns.

Source: How Non-Recourse Loans Can Benefit Multifamily Investors

What types of multifamily properties are eligible for non-recourse loans?

Non-recourse loans are typically available for multifamily properties that are stabilized and have a strong cash flow. These properties must also have a good occupancy rate and a history of successful operations. Additionally, the property must be located in an area with a strong real estate market and have a good reputation in the community.

For more information on non-recourse loans, please visit this page.

What are the risks associated with non-recourse loans?

The main risks associated with non-recourse loans are tied to the loan terms a borrower can receive. Because the risks to a lender are higher than with recourse debt, a lender will typically pass this on in the form of higher interest rates, or lower loan amounts relative to the property value to offset the risk. This typically makes non-recourse financing more expensive.

Another potential risk is tied to exceptions to the non-recourse clause in the loan. While it’s true that a lender generally cannot pursue a borrower’s personal assets or income outside of the property itself, most non-recourse loans include language for what are known as bad boy carve-outs. These provisions essentially state that, should the borrower misrepresent a property or themselves, or file fraudulent financial documents — like tax returns or financial statements — the borrower is no longer protected by the non-recourse clause and is fully responsible for the loan. They may also cover other acts, such as raising subordinate financing when it’s not allowed, or even paying real estate taxes late.

What are the requirements for obtaining a non-recourse loan?

In order to qualify for a non-recourse loan, commercial lenders often have strict eligibility requirements. Most non-recourse programs can only be utilized for the financing of certain property types and classes, such as class A office or multifamily properties in major MSAs (i.e. New York or Los Angeles). The income that a commercial property produces (both past and present) is also a determining factor. Additionally, lenders tend to analyze the requested amount of leverage. Non-recourse commercial mortgage loans tend to have higher interest rates than their recourse counterparts, and are also generally only available to borrowers that have a very strong financial profile. Lenders can be pretty strict about this, the thought process being that a default is significantly less likely in this scenario because the borrower has the financial means to make sure that the property’s income is reinvested into the property. Aside from strong finances, commercial mortgage lenders also require a very experienced borrower with ample "skin in the game" for non-recourse financing.

Sources:

• What are Non Recourse Loans?
• Non-Recourse Loans

What are the differences between recourse and non-recourse loans?

At its core, the difference between the two types is relatively straightforward: If a borrower defaults on a recourse loan, a lender can pursue the borrower’s personal assets — even wages — if the collateral is insufficient to cover the outstanding debt. With a nonrecourse loan, the lender is limited to the collateral itself to recoup losses.

Typically, most bank, bridge and construction loans are recourse, while Fannie® Mae®, Freddie® Mac®, HUD/FHA multifamily and CMBS loans are generally nonrecourse — though exceptions are not rare.

Because of the difference in risk to borrowers and lenders, there are some key differences in loan terms and requirements. In brief:

	Recourse Loan	Nonrecourse Loan
Risk Profile	Riskier for borrowers	Riskier for lenders
Default Event	Lenders may pursue a borrower's personal assets	Lenders may generally only pursue a loan's collateral.
Borrower Profile	Typically less experienced	More experienced, financially stronger
Interest Rate	Generally lower	Generally higher
Asset Types	Any	Often restricted to "strong" assets and locations
LTV	Generally higher	Generally lower
Examples	Most bank loans, bridge loans, construction loans	Most Fannie Mae®, Freddie Mac®, CMBS loans

While borrowers broadly prefer nonrecourse financing, lenders favor recourse loans due to lower risks. Due to this imbalance, these types of loans tend to have rather different terms associated with them.

Different Loans for Different Assets: While recourse loans are widely used for most asset classes, nonrecourse lenders are typically far more selective, generally opting to finance stronger, lower-risk properties with one eye fixed on a market’s overall strengths and outlook.

For example, the owner of a stabilized Class A multifamily property in Manhattan may have little trouble landing a nonrecourse loan, but a first-time investor seeking a hotel refinance in suburban Boise, Idaho, would likely have little choice but to look to recourse financing.

What are the benefits of non-recourse loans for multifamily investors compared to other financing options?

Non-recourse loans offer multifamily investors the security of not having to repay any of their personal capital should the property they invested in become unsuccessful. This can be a great option for investors who are comfortable with riskier investment plays, as it eliminates the need to worry about being personally on the hook for losses if something goes wrong.

The benefits of using a non-recourse loan in multifamily real estate include:

• Investors can significantly increase their returns by taking on greater risks
• The terms of a non-recourse loan allow borrowers more flexibility when negotiating deals
• Non-recourse loans provide peace of mind during times of uncertainty, such as market fluctuations or economic downturns.

For more information, please see this article on the benefits of non-recourse loans for multifamily investors.

In this article:

1. What Is a Non-Recourse Loan?
2. When Should Multifamily Investors Use a Non-Recourse Loan?
3. The Benefits of Using a Non-Recourse Loan in Multifamily Real Estate
4. The Downsides of Using a Non-Recourse Loan in Multifamily Real Estate
5. How to Choose the Right Non-Recourse Loan for Your Multifamily Investment
6. In Conclusion
7. Related Questions
8. Get Financing