A Non Recourse Loan or a Non Recourse Debt is that kind of loan where the borrower provides loan to the borrower by taking an asset as security. In a Non Recourse Loan, if the borrower does not repay the loan amount, the only course that the lender can take is by taking control of the Security and selling it. One of the important feature of a Non Recourse Loan is the high risk factor associated with it.
Key Features of a Non-Recourse Loan
|Associated Risk||Very High|
|Interest Rates||Medium to High|
|Loss to Lender||In Few Cases|
Why is a Non Recourse Loan High in Risk
When a borrower fails to repay the Non Recourse loan amount, the only option the lender will have is to sell the asset that is secured against the loan.
Therefore, in few cases the asset market value might have dipped and the lender might end up receiving amount less than the original loan amount.
For Example, Before the Financial Crisis in 2008, many banks have lent Non Recourse loans taking homes as security.
After 2008, the market values of real estate has dropped significantly and the bankers have ended up receiving only 20-30% original loan amount.
Why are Real Estate Loans are mostly Non Recourse Loans
Every deal is different, commercial loans can be full recourse, partially recourse, or non-recourse depending on the deal.
The amount of recourse, economically speaking, is a function of what a competitive market will bear. If another lender is willing to risk making a non-recourse loan at a competitive interest rate, the recourse-only lender offering similar leverage and interest rate will lose that opportunity.
It’s rare, and probably unnecessary, for a commercial loan to be full recourse based solely on investment performance. Full recourse is typically reserved for when the borrower commits a crime like fraud, neglect or intentional waste. Most commercial loans are fully recourse for any losses due to fraud.
The most common form of non-fraudulent recourse for a commercial loan is partial recourse, or a limited guaranty for some minimum recoverable amount from the borrower in the case where the lender experiences a loss.
Sometimes this is a guaranty of the borrowers personal assets, but lenders may also require a pledge of equity in other properties owned by the same borrower, which increases the collateral base for the loan where the primary property value is insufficient.
Even in the absence of fraud, full recourse isn’t really required based on the low likelihood that the lender will lose 100% of the investment in the event of a foreclosure. Even in the stuy-town deal, widely considered one of the worst real estate deals of all time, the “salvage” value, while representing an atrocious loss, was still almost half of the principle loan balance, for example.
Non Recourse loans generally preclude the lender from collecting any shortfall between the sale of the property and the amount that is owed to the lender. The lenders source of repayment is the actual property that was pledged as collateral in the loan documents.
You can learn the differences and characteristics between recourse and non-recourse by reading a great blog below.
Non Recourse Loan for Commercial Industries
Non-recourse exists, but is uncommon. Additionally, you have a bigger issue to address. Few institutions finance 100% of a purchase. The industry standard on NOO property is 75-80%. This leaves you as the potential purchaser needing to demonstrate that you have 12M in liquid assets to be able to inject into the purchase. Not to mention any potential reserves.
If you are telling me that someone is selling a 60M project for 40M, then I am telling you there is something amiss.
Conclusion : Non Recourse Loan
This Article on Non Recourse Loan has been written by Prof. Welking. If you have any further questions on Non Recourse Loan related matters or Non Recourse Debt, post your questions below on our comments section.