Is Non-Recourse Financing Right for You? | Commercial Real Estate Loans (2024)

FAQs

Is Non-Recourse Financing Right for You? | Commercial Real Estate Loans? ›

The main disadvantages of a non-recourse loan are tied to the loan terms a borrower can receive. Because the risks to a lender are higher than with recourse debt

A non-recourse loan is a loan secured by collateral, which is usually some form of property. If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.

As noted, many traditional banks avoid making non-recourse loans altogether. However, an individual or business with an excellent credit history might persuade a lender to agree to a non-recourse loan. It will come with a higher interest rate.

Non-recourse loans offer several benefits to businesses planning large projects, including different tax considerations, and the ability to avoid payment until the project comes to fruition. While it's never ideal to default on a loan, a non-recourse loan can save your other assets from seizure in the event of default.

Commercial loan loan-to-value ratios generally fall into the 65% to 80% range.

The main disadvantages of a non-recourse loan 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.

Debt Service Coverage Ratio (DSCR)

When leveraging your investment property with a non-recourse loan, it is important to know if the property is capable of covering all its expenses from the rental income produced. This is measured by taking the gross rental income minus all typical operating expenses such as: Taxes.

(B) Qualified nonrecourse financing For purposes of this paragraph, the term “qualified nonrecourse financing” means any financing— (i) which is borrowed by the taxpayer with respect to the activity of holding real property, (ii) which is borrowed by the taxpayer from a qualified person or represents a loan from any ...

The main advantage of non-recourse loans is that they offer the guarantor protection from personal liability. The borrower's personal assets are secure in the event of foreclosure. The lender will not recover their money if the assets are liquidated, and the carve-out guarantee isn't violated.

There are 12 states that, by law, only allow nonrecourse loans. These are known as “nonrecourse states,” and they include Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington.

What are the disadvantages of non-recourse factoring? ›

You are not required to repay a non-recourse loan if you lose your case. You are only required to repay a non-recourse loan if you settle or win your lawsuit.

While there can be some exceptions to this, non-recourse loans are tax-free on a general principle. Non-recourse loans being tax-free is a great plus. Defaulting on a loan is never optimal, but with non-recourse loans, tax is avoided, and you can focus on your financial well being.

A non-recourse loan is a loan where the borrower is not personally liable for repayment. This means that if the borrower defaults, the lender can only collect from the property itself, not from the borrower's other assets. This offers a significant advantage to the borrower.

What is a good interest rate for a small business loan? A reasonable interest rate for a small business loan or line of credit is between 3% and 17%, while an SBA 7(a) loan rate is capped between 11.5% and 16.50%. However, you could expect to pay 35.4% or higher with a bad credit business loan.

In general, commercial loan LTV ratios fall between 65% and 80%. Multifamily housing is offered at an average of 73% LTV and is often maxed out by conventional lenders at 80%. Offices, industrial properties and self-storage come in around 68% LTV.

A nonrecourse debt (loan) does not allow the lender to pursue anything other than the collateral. For example, if a borrower defaults on a nonrecourse home loan, the bank can only foreclose on the home. The bank generally cannot take further legal action to collect the money owed on the debt.

Non-recourse loans are riskier for lenders, which means they are more difficult to qualify for and carry higher interest rates. Recourse loans are riskier for buyers but they offer lower interest rates.

SBA has no recourse (or will demand compensation or payment) against individuals, shareholders, members, or partners of an eligible recipient unless the 'covered loan' proceeds are used for unauthorized purposes (see above). There are no personal guarantee requirements and no collateral requirements for 'covered loans.