Investing in a commercial real estate property can be an incredibly lucrative business venture. However, it requires a significant amount of financial backing, so many people seek financial assistance in the form of a recourse or nonrecourse loan. Nonrecourse loans are slightly more popular in the United States, though both types are viable options for commercial real estate financing. The following guide explores the differences between recourse and nonrecourse loans in regards to commercial real estate financing in the United States.
Nonrecourse loans
As we stated above, nonrecourse loans are slightly more common than recourse loans for commercial real estate financing. At face value, both loan types can appear quite similar. The main difference between recourse and nonrecourse loans becomes evident in the event of a default. In such a case, nonrecourse loans tend to benefit the borrower, while recourse loans tend to favor the lender. When taking out a nonrecourse loan, the borrower is required to offer collateral, generally in the form of a different property they may or may not own. If the borrower defaults on their loan, the lender is then able to seize and sell this collateral.
However, the lender is prohibited from collecting the difference between the amount for which they sell the property and the amount they’re owed. That is to say, if the lender sells the collateral property at a price that’s less than the amount of the loan, the lender cannot seek the deficient balance from the borrower. The borrower is therefore not held liable for the repayment of any outstanding balances on the loan.
Recourse
Like nonrecourse loans, recourse loans are also secured by collateral. The main distinction between recourse and nonrecourse loans as it relates to commercial real estate financing, therefore, generally emerges only in instances where the borrower still owes money after the lender has sold the collateral. Recourse loans enable the lender to pursue the borrower’s additional assets in order to secure full repayment of the loan. Recourse loans can pose a slightly lower risk to the lender, who can then often charge a lower interest rate as a result.
Important note
It’s crucial to note, however, that recourse and nonrecourse loans aren’t the only options for financing your business or commercial real estate property. Many other loan types may be available to you based on your business type and size and on your credit score. Small businesses, for example, may benefit from an SBA 504 or SBA 7(a) loan rather than a large recourse or nonrecourse loan. Choosing the best loan option for your business type will likely require a significant amount of research, as different loan types may benefit your business in different ways. Be sure to speak with a financial planning specialist to choose a loan type that’s best for your individual needs.