Recourse vs. Non-Recourse Multifamily Loans: Guaranties and Carve-Outs
Two apartment loans with similar amounts and payments can expose the borrower to very different personal risk. Under a full-recourse loan, the lender may be able to pursue the borrower or guarantors personally if the loan is not repaid. Under a non-recourse loan, the lender generally looks to the property itself, subject to important exceptions. Understanding how non-recourse multifamily loans work, and what carve-outs and guaranties may still apply, is an important part of comparing financing options.
This article is a general overview for owners and buyers of existing, stabilized multifamily properties. Loan documents vary widely, and the enforceability and effect of recourse provisions depend on the specific documents and applicable state law. Borrowers and guarantors should have qualified legal counsel review all loan and guaranty documents before signing. Nothing here is legal advice or a commitment to lend.
Full Recourse
With a recourse loan, if the property is sold or foreclosed and the proceeds do not cover what is owed, the lender may seek the shortfall from the borrower or guarantors. Recourse is frequently provided through a personal guaranty from the principals. Some loans are partially recourse, with the guaranty limited to a portion of the debt or reduced over time.
Non-Recourse
With a non-recourse loan, the lender’s remedy for a payment default is generally limited to the property and its income. The borrower is frequently a single-purpose entity that owns only the property. Non-recourse terms may be available to some borrowers depending on the lender, the property’s performance, loan size and the sponsor’s experience and financial strength.
What Carve-Outs Are
Non-recourse loans generally include exceptions, called carve-outs, under which the borrower or a guarantor may become personally liable. These are sometimes described as bad-boy provisions. Examples that may appear in loan documents include:
- Fraud or intentional misrepresentation
- Misapplication of rents, insurance proceeds or security deposits
- Unpermitted transfers of the property or ownership interests
- Voluntary bankruptcy filings
- Failure to pay property taxes or maintain insurance
- Waste or physical damage caused by the borrower
- Environmental liabilities
Some carve-outs make the guarantor liable only for the lender’s losses, while others may trigger liability for the full loan. The exact language matters, which is why counsel should review it.
Environmental Indemnities
Lenders may also require a separate environmental indemnity from the borrower and principals. This obligation can survive repayment of the loan. Its scope should be reviewed carefully with counsel and considered alongside environmental due diligence.
Trade-Offs to Weigh
Non-recourse loans may come with stricter underwriting, more extensive reporting, reserve requirements, cash management provisions and prepayment terms that limit flexibility. Recourse loans may offer more flexibility in some cases but increase personal exposure. The right choice depends on the borrower’s goals, risk tolerance and plans for the property. Our article on multifamily loan requirements explains what lenders review, and our article on multifamily debt service coverage explains how loans are sized.
Recourse in Refinancing and Assumptions
When refinancing, owners may have an opportunity to revisit recourse terms. When assuming an existing loan, the buyer may need to provide new guaranties, and the seller may seek a release from existing ones, subject to lender approval. See our articles on multifamily refinancing and multifamily seller financing and loan assumptions.
Larger Transactions
Larger apartment acquisitions or portfolios may involve more complex structures and negotiated guaranty terms. Our page on middle market financing describes options for larger transactions.
US Professional Funding helps investors finance the acquisition of existing, stabilized apartment buildings and can help borrowers compare financing structures. Learn more about our multi-family acquisition financing.
