Commercial mortgages are loans made to finance the purchase or refinance of commercial real estate, such as office buildings, retail spaces, or warehouses. The difference between full recourse, partial recourse, and non-recourse commercial mortgages lies in the level of liability that the borrower assumes for the loan.
1. Full recourse commercial mortgages:
With a full recourse mortgage, the borrower is personally liable for the full amount of the loan, including any deficiency if the property is foreclosed upon and sold for less than the outstanding balance. In other words, the lender can seek repayment from the borrower's personal assets in addition to the collateral (the property) in case of default.
2. Partial recourse commercial mortgages:
With a partial recourse mortgage, the borrower is liable for a portion of the loan amount, typically a percentage of the outstanding balance. In the event of a default, the lender can seek repayment from the borrower's personal assets for the portion of the loan that is recourse, and from the collateral for the non-recourse portion.
3. Non-recourse commercial mortgages:
With a non-recourse mortgage, the borrower is not personally liable for the repayment of the loan. Instead, the lender's only recourse is to foreclose on the collateral (the property) in the event of a default. If the property sells for less than the outstanding balance of the loan, the lender typically cannot seek repayment from the borrower's personal assets.
Non-recourse loans typically have more stringent underwriting requirements and higher interest rates than recourse loans since the lender is assuming a higher degree of risk. However, they offer borrowers protection against personal liability in the event of a default, making them an attractive option for commercial real estate investors.
If you have any questions about this article or would like to discuss a scenario of your own with our team, please feel free to contact Colin Dubel at colin@harborwestcommercial.com or 949-735-6415.