Not all commercial real estate loans are created equal. There can be a huge difference if you are a guarantor.
It is always important to be certain that you understand all of the terms of any loan that you are signing but it can be especially important with commercial real estate loans. Knowing the difference between a recourse and a non-recourse loan can have a huge impact on your responsibilities if your business should fail and not be able to repay a loan.
Recourse commercial real estate loans are where the borrower or the guarantor is personally responsible for repaying the loan if the collateral is not valuable enough to cover the outstanding balance. In this case, your business has failed and your property is no longer as valuable as it once was so the lender is not able to sell the property to recover the full balance of your loan. But because you agreed to a full recourse loan, the lender can come to you to repay the remaining balance. If you cannot pay then the lender can go after your personal assets to recover the money.
Non-recourse commercial real estate loans do not require the borrower or the guarantor to repay any outstanding balance on the loan. The guarantor is not personally responsible for the balance and none of their money or assets are at risk if the company fails and is unable to repay the loan. Even if the collateral does not cover the remaining balance on the loan, the borrower or guarantor is not forced to repay any additional money. The only exception to this is the bad boy clause that is designed to protect lenders.
The Bad Boy Clause
This is a clause that is added to non-recourse commercial loans to protect the lender from certain scenarios such as fraud. The idea is that a dishonest borrower can siphon money from a business before it fails to avoid having to pay the lender. The specifics of this clause vary from state to state but can include filing for bankruptcy, fraud or misrepresentation, failure to maintain proper insurance, failure to pay property tax and committing a criminal act. In essence this clause is there to make sure that a dishonest person cannot take advantage of a bad situation and swindle the lender out of money that should have been paid to them. If a business does fail but there is no fraud involved then the lender is simply out the money and the borrower does not have to pay any remaining balance.
Know Your Terms
As with any legal agreement, knowing the terms that you are agreeing to is critical. And the bad boy clause is nothing that any honest business person will ever need to worry about. That clause was only created to protect lenders from acts that are already illegal or simply dishonest. Sometimes a business will fail and in that event a non-recourse commercial loan protects the borrower and guarantor from any additional personal loss.
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
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.