Real estate financing may be structured as recourse or nonrecourse debt. The distinction determines whether a lender can pursue assets beyond the property securing the loan after a default.

What Is a Recourse Loan?

With a recourse loan, the borrower or guarantor may remain personally responsible for a deficiency if the lender forecloses and the collateral does not satisfy the outstanding debt.

For example, if a property securing a $1 million loan is sold after foreclosure for $800,000, the lender may be able to pursue the responsible parties for the remaining $200,000, subject to the loan documents and applicable law.

What Is a Nonrecourse Loan?

With a nonrecourse loan, the lender generally looks to the financed property and related collateral for repayment. If foreclosure proceeds do not cover the debt, the lender typically cannot pursue the borrower’s unrelated assets—unless an exception in the loan documents applies.

Nonrecourse does not mean consequence-free. The borrower can still lose the property, invested equity, reserves, and income associated with the asset.

Nonrecourse Carve-Outs

Most nonrecourse loans include carve-outs commonly called “bad-boy” provisions. These can create personal liability for certain actions, which may include:

• Fraud or intentional misrepresentation
• Misappropriation of rents or insurance proceeds
• Unauthorized transfers
• Failure to maintain required insurance
• Certain bankruptcy-related actions
• Environmental or other specified violations

Carve-outs vary significantly. Borrowers should have qualified legal counsel review the guaranty and all loan documents before closing.

Tax Treatment

Recourse and nonrecourse debt can produce different tax results following foreclosure, disposition, or debt cancellation. According to IRS Publication 4681, a disposition involving nonrecourse debt generally includes the full unpaid debt in the amount realized. Recourse debt may involve both a property disposition and cancellation-of-debt income.

Because the tax consequences depend on the transaction and borrower, investors should consult a qualified tax professional.

Choosing the Right Structure

Investors should compare more than the interest rate. Important considerations include:

• Personal guaranty requirements
• Nonrecourse carve-outs
• Leverage and pricing
• Reserves and reporting obligations
• Prepayment provisions
• Potential exposure following default

CoreVest offers both recourse and nonrecourse options for eligible rental portfolio loans. Availability and terms depend on the borrower, property, loan program, and transaction.

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This article is provided for informational purposes only and does not constitute legal, tax, investment, financial, or lending advice. Recourse obligations, guaranties, remedies, and tax consequences vary by loan documents, transaction, and jurisdiction. All loans are subject to underwriting, credit approval, eligibility requirements, and applicable terms and conditions.

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