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When you are looking for business funding for a commercial mortgage, it is important to know the loan terms that will be required of you. One of the most important to understand is whether your commercial real estate loan is designated as recourse or non-recourse.

Recourse Commercial Mortgages
A recourse loan requires that the borrower is personally liable for the balance of the loan. That means that if the loan goes into default, the lender can seize and liquidate not only the collateral associated with the loan but also the borrower’s personal assets, like a home residence, investment funds, bank account cash, and even cash-out values of life insurance policies. Recourse loans are often employed with construction loans and mini-perm loans where the collateral is being built or not yet fully functioning. This reduces the risk for lenders that they will take a loss if the loan goes into default. While this may seem incredibly risky for the borrower, if the loan is properly underwritten, the chances of default will be small.

Non-Recourse Commercial Mortgages
With non-recourse loans, the borrower is not held personally responsible for the repayment of the loan. These types of commercial mortgages are commonly associated with permanent real estate loans on existing properties that are already generating income. If the borrower defaults on the mortgage, the lender will be able to seize and sell the property to recoup its losses. If the entire balance is not covered by that sale, however, the lender does not have the right to go after any of the borrower’s personal assets.

There are exceptions to the non-recourse clause that protect the lender from fraud and negligence on the borrower’s part. These are called “bad boy guaranties” or “carve out provisions.” Here are a few of the main triggers for the bad boy guaranty: any fraud or misrepresentation by the borrower, a bankruptcy filing, lack of required property insurance, failure to keep current with property taxes, committing any criminal actions, refusing to allow lender inspections, and incurring any environmental indemnifications.

In either case, borrowers should take extreme care to read and understand all provisions of their commercial loans to prevent any unwanted financial surprises.


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