Recourse and Nonrecourse Commercial Loans

By now, you know that commercial loans can be a real asset to your business ventures, but have you done all your homework on commercials loans? If you could use some brushing up, let us go over the differences between recourse and nonrecourse loans for commercial ventures.

Typically, when dealing with commercial loans you find people gravitating towards hard money, which is natural given how difficult it can be to work with traditional lending institutions. However, if you choose to go a different route i.e. more of a commercial mortgage route then you absolutely need to know the differences between recourse and nonrecourse.

For starters, a recourse loan, in essence, means that you, the borrower, are responsible for paying back the money you borrowed in addition to the collateral. In other words, if you cannot meet the terms of your loan, the collateral you provide or the commercial property itself will be liquidated and if the collateral does not cover the loan with interest then you are responsible for the deficit. You will, generally, find recourse loans with short-term loans such as construction loans or mini-perm financing.

Nonrecourse loans, on the other hand, are loans that you, the borrower, are not personally held liable for the outstanding balance. Moreover, you will see these particular kinds of loans with long-term financing. Of course, if you have to choose between these two financing options, it is no surprise that you would be interested in the financing that does not hold you personally accountable for any deficits. But, it is important to remember, that nonrecourse loans do not automatically mean you can never be held responsible. Thus, let us go over just how you can manage your nonrecourse financing expectations.

Nonrecourse Expectations

Your nonrecourse financing expectations need to be realistic—plain and simple. This means you need to be prepared for the fact that you can still be held liable under certain circumstances. These exceptions to the rule vary state by state but nonetheless tend to include fraud or misrepresentation, filling for bankruptcy, failure to pay your property taxes, failure to acquire and maintain required insurance, any environmental indemnification or committing a criminal act. Under these circumstances and even a few minor offenses such as failure to deliver financials to your lender, can all lead to you be held accountable. This is why it is so important to do your research, stay actively informed and consultant with experience professionals such as a seasoned real estate attorney.

Advice

In the end, both recourse loans and nonrecourse loans have their purpose i.e. there is a time and a place for both kinds of commercial financing. With that being said, it is helpful to understand the difference and when you will be held liable beyond the collateral that you have presented or beyond the value of the purchased commercial property. Nevertheless, if you still have questions about which kind of commercial financing will work best for your venture you should not hesitate to reach out to a reputable lender or experienced broker.

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.