What is a non-recourse loan? Who are the non-recourse loan lenders? What interest rates and terms do they offer? What does it take to qualify? What is the difference between a non- recourse loan and a recourse loan?  Do you really need non-recourse?

 

Non- Recourse Loan Meaning/Definition:

A non-recourse loan is made to a single asset ownership entity like an LLC, an LP, or Corporation versus being made to an individual. Therefore, in the event of a non-cured default, the lender's only recourse is to take back the property (the collateral) and cannot go after the individual personally, as there is no personal guarantee involved.

 

A ‘Platinum’ Credit Score is Always Best

 

1. Where do you get a Non-Recourse Loan?

It is very unlikely that you can just walk into your bank and get one. The majority of commercial banks would feel naked without their personal guarantees, which is the foundation of a recourse loan. However, there are many more sources for non-recourse mortgages than you may think. These are listed below. And, I know you want to know the requirements for each lender so I have included this as well. No use applying for a mortgage that you will not qualify for. It will be helpful if you keep in mind that the one thing that non-recourse lenders love the most is a high- quality property or one that has a great upside like being in a good neighborhood with under market rents. If you can start out by getting these lenders excited about the property, you have a much better chance of having the other requirements fall into place.

 

Non-recourse mortgages are offered by Government-Backed Agencies, Wall Street Securitized Money, Insurance Money, Real Estate Investment Trusts (REIT’s) and private lenders. Why are these sources not easier to find? It’s just that most commercial real estate borrowers are still getting their loans from commercial banks which seldom offer non-recourse. Banks are regulated by the FDIC, which can make it miserable for smaller and weaker banks to take on higher risk deals. Therefore, these banks want to scare the bejesus out of you with their personal guarantees. Banks that have strong balance sheets, and high cash to loan ratios plus high deposit to loan ratios can offer non-recourse if they want too. Often though, they just do not feel safe doing so. If they have too much debt to write off annually due to non-preforming loans it makes them look very bad to their shareholders and bank regulators. Recourse is the largest weapon in their arsenal.

 

Independent mortgage banking firms and experienced commercial mortgage brokers can place your loan with Fannie Mae, Freddie Mac, and HUD if you are interested in non-recourse financing for an apartment building. These government-controlled agencies regulate the terms and conditions of the financing, but do not make the loans directly.

 

For all other commercial properties including multifamily, we are talking about retail, office, hospitality, industrial, self-storage and more, these are the non- recourse lending sources available in America: Commercial Mortgage-Backed Security Loans (CMBS), Life Companies, Real Estate Investment Trusts (REIT), and Private Lenders. Not many, but some commercial banks also make these loans and sometimes you can negotiate with them for partial non-recourse. At Apartment Loan Store, or another experienced mortgage-banking firm representing all these sources, you will be matched intelligently with the non-recourse loan program that is right for you.

       

Non- Recourse Loan Lenders

With Terms and Borrower Qualifications

 

I.       Fannie Mae (Multifamily Only)

Rates:  Fix Rate Term: 5 – 30 years

Interest Only Available      DSCR:  1.25      Assumable

Loan size:  $750,000 - $250,000,000      Territory:  Nationwide

Loan to Value:  Up to 80%      Amortization:  30 years

35% Commercial Space Allowed       Minimum Credit Score:  680

Net Worth Required:  Equal to the Loan Size    No Tax Returns required

 

II.       Freddie Mac (Multifamily Only)

Rates:  Fix Rate Term:  for 5 – 10 years.

Interest Only Available     DSCR:  1.25    Assumable

Loan size:  $1.000,000 - $100,000,000      Territory:  Nationwide

Loan to Value:  Up to 80%      Amortization:  30 years

25% Commercial Space Allowed       Minimum Credit Score:  660

Net Worth Required:  Equal to the Loan Size    No Tax Returns

 

III.       HUD/FHA (Multifamily Only)

Rates:  Fix Rate Term:  30 - 35 years. 

Interest Only Available     DSCR:  1.176    Assumable

Loan size:  $3,000,000 - $150,000,000      Territory:  Nationwide

Loan to Value:  Up to 85%      Amortization:  35 years

25% Commercial Space Allowed       Minimum Credit Score:  660

Net Worth Required:  Flexible          No Tax Returns

 

IV.       CMBS (All Commercial Property Types)

Rates:  Fix Rate Term:  for 5 or 10 years

Interest Only Available     DSCR:  1.25    Assumable

Loan size:  $2,000,000 - $500,000,000      Territory:  Nationwide

Loan to Value:  Up to 75%      Amortization:  25 - 30 years

Unlimited Commercial Space Allowed       Minimum Credit Score:  680

Net Worth Required:  Flexible    No Tax Returns

 

V.       Life Companies (Most Commercial Property Types)

Rates:  Fix Rate Term:  for 5 – 25 years

DSCR:  1.30    Assumable

Loan size:  $5,000,000 - $750,000,000      Territory:  Nationwide

Loan to Value:  Up to 70%      Amortization:  20, 25 and 30 years

Unlimited Commercial Space Allowed       Minimum Credit Score:  720

Net Worth Required:  Equal to 1.5% of Loan    Tax Returns Required

 

VI.       REIT’s (Multifamily Preferred, but other types considered)

Rates:  Fix Rate Term:  for 5 – 15 years

DSCR:  1.30    Assumable

Loan size:  $3,000,000 - $30,000,000      Territory:  Nationwide

Loan to Value:  Up to 75%      Amortization:  30 years

25% Commercial Space Allowed       Minimum Credit Score:  700

Net Worth Required:  Equal to the Loan Size   Tax Returns Required

 

VII.       Commercial Banks (All Commercial Property Types)

Rates:  Fix Rate Term:  for 5 – 10 years

DSCR:  1.25 – 1.35    Not Assumable

Loan size:  $1,000,000 - $25,000,000      Territory:  Regional (Call Us)

Loan to Value:  Up to 75%      Amortization:  30 years

25% Commercial Space Allowed       Minimum Credit Score:  700

Net Worth Required:  Equal to the Loan Size    No Tax Returns

 

VIII.       Private Funds (All Commercial Property Types)

Rates:  Fix Rate Term:  for 1 – 4 years

Interest Only               DSCR:  1.25    Not Assumable

Loan size:  $1,000,000 - $250,000,000      Territory:  Nationwide

Loan to Value:  Up to 75%      Amortization:  Interest Only

Commercial Space Allowed       Minimum Credit Score:  Negotiable

Net Worth Required:  Negotiable    Tax Returns May Be Required

 

Eight (8) Non-Recourse Loan Qualifications

I. Property Must Have Strong Historical Financials – This is required for permanent non-recourse financing on stabilized properties. If you think about it, the lender is really making the loan to the property, not the individual borrower.  Therefore, it is important for the subject property to have strong current and historical income. For most loan programs a 1.25 Debt Service Coverage Ratio or higher is preferred. Higher means that the property has extra net income to cushion a rainy day. A non-recourse bridge loan used to rehab and/or increase occupancy does not need strong historical income if the property is in a good location and rental occupancy and comps are strong.

 

II. Rent Concessions Should Be Minimal – A rent concession is a financial incentive to the tenant to sign a lease. Concessions range from free internet and cable TV for 6 months which is not a problem to the lender, to one or more free month’s rent when you sign a lease. If the majority of the tenants are getting rent concessions, the lender will annualize this and take the amount off the gross rental income, which can lower your loan amount. Lenders will review the leases to look for rent concessions. 

 

III. Property Should Have Good to Excellent Collections – Just because a tenant is on the rent roll does not mean they are paying the rent, or paying the rent on time. Non-recourse lenders will be looking for signs of no pays and slow pays.  This is why these lenders prefer good safe neighborhoods in strong economic markets. Again, they are firstly making the loan to the property and to you secondly. A trailing 12-month report showing actual gross rental income will be compared month by month to the total gross income on the rent roll. If there is a large disparity between what was collected and what should have been collected this will be a red flag to the lender and up to a year of bank statements will likely be required to verify collections. For a permanent loan, If the lender determines that the property is financially distressed (due to low rent collections) they will not make the loan.  It would then make sense to apply for a bridge loan.

 

IV. Property Should Be in Good Condition – And, again, the lender is making the loan to the property first, so having the subject property in good condition is essential for a permanent loan. A hold back from the loan proceeds can usually be arranged for immediate repairs as long as this is a reasonable amount and not too large. A non-recourse bridge lender will allow you to put the property in good condition if there is a lot of deferred maintenance as long is the property is in a good location.

 

V. Property Should Be in a Good Location – This is again obvious since the lenders only recourse is to take the property back if it is non-preforming and a default cannot be cured. Preferred properties are located in larger cities where there are plenty of jobs. Properties that are in high crime neighborhoods, low-income neighborhoods, have high vacancy and low rent submarkets may not qualify.

 

VI. Property May Need Professional Management – If you have experience managing a similar type and size of commercial property you can likely qualify to manage it. Otherwise, a professional management company will be required.  If you live far away from the property or in another state the lender will likely require you to use professional management.

 

VII. Property Will Need Good Quality Tenants – Anyone can rent an apartment unit. As mentioned above, non-recourse lenders require that multifamily properties have tenants that pay the rent reliably and on time.  Lenders want a majority of annual leases, but some month-to-month tenancy will be allowed for loans on apartment buildings. For all other commercial property types, the quality of the tenant and the quality of the lease is very important. Here is an example of a property that will not qualify:  A retail strip mall has a majority of mom & pop businesses that are on month-to-month or annual leases. Non- recourse lenders prefer that there be some national tenants that have good credit ratings and 5 years or more left on their leases. Having an anchor tenant like a grocery chain is even better. Single tenant properties with a good tenant credit rating can work. Single Credit tenants with high credit ratings such as Wal-Mart and Walgreens, with 10 years or more left on the lease are every non-recourse lender’s dream.   

 

VIII. Key Principals Will Need Good Financial Strength, Good Credit, and Experience – Most non-recourse lenders require the key principals to have a combined net worth equal to the size of the loan, have at least a year of post-closing mortgage payments in cash, and have credit scores of 680 on up.  Experience of at least 2 years owning and/or managing a similar type and size property is preferred. 

 

What is the Difference Between a Non-Recourse and a Recourse Loan?

I. A recourse loan is made to the individual and requires a personal guarantee by all key principals. Most recourse lenders require that the guarantee cover 100% of the principal balance plus any additional expenses should there be a foreclosure or repair to the property that the borrower has neglected. Proportional guarantees between more than one key Principal or partial recourse can in some cases be arranged. In the case of a non-curable default, the lender will not only have the right to foreclose on the subject property and sell it, but also if there is a deficiency (they sell the property for less than you owe them), they can go after any of your personal assets. They can go after your home, your vacation home, your autos, RV’s and all your personal bank and security accounts. Also, your child’s 529 Education bank account.

 

II. A Non-Recourse Loan is made to a single asset entity like an LLC. If you default on a non-recourse loan the lender’s only recourse is to take the property back. They cannot go after any of your personal assets.

III. A Non-Recourse Loan May Be More Difficult to Qualify For. This is because the loan requires the property to be in a larger city, be in good condition (unless you are applying for a bridge loan to rehab the property), and have good historical financials. Most non-recourse loans do not require tax returns, but they do require strong borrower financials and experience.

 

IV. A Recourse Loan May Have Lower Loan Expenses. Non-recourse loans typically charge more for lenders’ legal, property condition and engineering reports, appraisals and ancillary loan expenses compared to community banks doing recourse lending.   

 

Is a Non-Recourse or Recourse Loan Right for You? Benefits of a Recourse Loan

The number one benefit of recourse loans is that they are so plentiful. All banks make them and you will have many more loan programs to choose from. In addition, they tend to have much lower loan expenses for loan fees, third party reports like appraisals, loan processing and legal. If you have always had recourse loans and know that the subject property is just about never going to fail, a recourse loan could be just fine for you.

Another benefit of recourse lending is if the subject property is in a smaller population center. Banks are located right there and know the market. Non- recourse lenders mostly like larger MSA’s. 

Benefits of a Non-Recourse Loan 

The number one benefit of a non-recourse loan is asset protection. Should the subject property fail and go through a foreclosure and there is a deficiency after the lender sells the property, your other assets will not be at risk. All you have to do is turn the property over to the lender, which although painful is nothing compared to the time and legal expense involved with a foreclosure.

    Non-Recourse Protects Your Investors

If you are using investors for some of the down payment, it will be much easier to attract them because they will not be risking their personal assets by guaranteeing a loan. The majority of our developers who come to Apartment Loan Store for a commercial construction loan use investors for a portion of the down payment. They tell us they would not be able to do this if we did not provide a non-recourse construction loan roll over to a non-recourse permanent loan.

Estate planning is another important benefit. You can pass the property and the loan on the property onto your heirs (see more on this below).

 

When Can a Non-Recourse Loan Become Full Recourse? And The Bad Boy Carve Outs

Often when our borrowers read their loan documents; they come across what our industry calls “The Bad Boy Carve Outs” and the documents that turn the property over to the lender if there is a default. Though one may think that the loan really does have recourse. Actually, if the borrower commits fraud and does not take care of their obligations these non-recourse loans can revert to recourse.

 

The Bad Boy Carve Outs – The lender will have the right to make the loan full recourse if one or more of the following occur:

I.     The borrower is engaged in criminal activity on the property

II.     The borrower commits fraud by purposefully misrepresenting the property financials, their personal financials when they are applying for the loan or when they are doing the annual financial reporting.

III.     The borrower continually does not pay property taxes on the subject property.

IV.     The borrower changes the insurance without lender approval and it no longer meets the lender’s insurance requirements.

V.     The borrower does not allow the lender or the lenders agent to inspect the property when given notice to do so.

VI.    The borrower has the single asset entity like an LLC that owns the property directly declare bankruptcy.

VII.   The borrower is in violation of the environmental indemnification.

 

Why Non-Recourse Loans Benefit Estate Planning

Most commercial real estate borrowers do not think much about what happens to their loan if they die. They often assume that when their heirs inherit the property they inherit the loan as well. Unfortunately, if there is a recourse loan in place, this might not be the case. The heirs will likely have to qualify with similar qualifications as the original borrower. If the heirs do not qualify, the loan can be called. Think about what a nightmare this can be for your heirs if they have to scramble at the 11th hour to find a loan.

                                                                                                     

With a non-recourse loan, the loan is made to a single asset entity like an LLC, not an individual or individuals. Therefore, the heirs inherit the LLC that owns the property. In most cases the financial qualifications of the heirs is not questioned as long as the loan payments continue to be made on time.

Recourse loans have from quarterly to annual reporting requirements for property financials and borrower financials. The loan documents for these recourse loans specify that should the property or the borrower no longer be solvent and no longer qualify for the loan, that the loan can be called due and payable. After all, the lender has made the loan to a property and the key Principal that qualified. If that person dies, the lender is going to want to make sure the heirs also qualify.

Non-recourse loans also have annual reporting requirements but, in most cases, they are just for the property financials. Most of these loans did not require tax returns on individuals, so they will not require these for the borrower’s heirs. 

 

Non-Recourse Loans for Self-Directed IRA’s and 401k’s

Many IRA Investors do not know that they can convert their self-directed IRA account from a bank or security investment to an investment in real estate.

This is the case for 401K Solo accounts as well. The value of your retirement can grow exponentially because it will not only generate income that will be reinvested until retirement age, but also the value of the property usually goes up.

The government does not allow you to take out recourse financing for this purpose, which would use personal financial resources along with the subject property to qualify for the loan. The lender can only use the IRA’s financial ability and the financial strength of the subject property to qualify for the loan.

The lender is not allowed to have the borrower sign a personal guarantee. This as you can imagine requires substantial risk on behalf of the lender. For this reason, non-recourse lenders that lend to Self-Directed IRA’s will likely prefer a multifamily property with strong financials in a good neighborhood. Additionally, and in order to further lower the risk most of these non-recourse lenders require a larger down payment – typically 35% to 50%.