The Advantage of Non-Recourse Loans Over Personal Guarantees
When it comes to real estate deals, buyers tend to consider how much personal liability they are willing to sign off on should the investment fail. One of the biggest questions people ask when seeking a commercial real estate loan is whether they should expose themselves to personal guarantees or do they insist upon non-recourse loans. While each option has its own set of pros and cons, there are a number of reasons why non-recourse loans may be a better fit for some borrowers.
So, why exactly do non-recourse loans tend to be the superior option? Let’s start by taking a look at the main differences between the two and how each type of loan works.
Non-recourse loans vs. personal guarantees
When obtaining a commercial real estate loan, borrowers normally have two options—non-recourse loans and personal guarantees (also referred to as “recourse loans”). There are many differences between the two, the most prominent of which is the types of assets a lender can repossess should the borrower fail to repay the loan.
Both non-recourse and recourse loans require some sort of collateral in order to secure a loan, some asset that can be seized by the lender. In the case of recourse loans, the lender can continue to seek assets until the loan has been considered repaid. But with non-recourse loans the lender is out of luck, the borrower is safe.
How non-recourse loans work
Non-recourse loans are more protective of the borrower than the lender because non-recourse loans are not personally guaranteed by the borrower. Instead, they are made out to single-asset ownership entities such as Limited Partnerships (LPs) or Limited Liability Companies (LLCs).
In the case that a borrower fails to make an interest payment against a non-recourse loan, the lender can take the collateral back. What lenders cannot do in a non-recourse loan is go after a borrower personally, which means a borrower’s personal assets are never at risk should a business venture fail.
Why choose a non-recourse loan?
There are many reasons to consider securing non-recourse loans as opposed to recourse loans. For one, since personal assets are not tied to the loan, the borrowers can take bigger risks with investing.
Another advantage of this type of loan is that it allows the borrower to sell their share of a commercial property that is underwritten with a non-recourse loan without worrying about future liabilities. In other words, it enables borrowers to have more freedom and flexibility in commercial real estate transactions. Finally, non-recourse loans come with estate planning benefits and are generally a wiser option for those who are planning for the future.
Non-recourse loans aren’t for everyone, but for those who don’t want to provide a personal guarantee, it can be highly beneficial to secure this type of loan from a private lender like iBorrow. Weigh the pros and cons, and you’ll likely find that non-recourse lending is the most attractive option—especially if you tend to be risk-averse.