The current environment of higher interest rates and decreasing valuations tends to open the door to negative media headlines. One such headline, “Recourse Only: Investor’s Worst Fear,” explained that more lenders are pushing more recourse loans. This, in turn, is causing fear among investors, developers and owners.
But this is just one headline and just one side of the story. Experts told Connect CRE that, on the one hand, recource lending is becoming more prevalent. But on the other hand, this increase shouldn’t generate an automatic panic among borrowers, especially non-recourse ones.
The Current Recourse Environment
For those in the back of the room, recourse financing allows a lender to seize assets if a borrower should happen to default on their loan. That can mean assets beyond the original loan collateral could be at risk under recourse guidelines.
And the current situation, combined with more lender pull back means that recourse is “indeed becoming a more prominent aspect of loan discussions, compared to the past,” said Maverick Commercial Mortgage’s Ben Kadish.
But isn’t a new scenario. Recourse lending has been around for a while. It’s also been around to an extent in non-recourse agreements. According to Jeff DeHarty with Northmarq, “banks, credit unions and a few life insurance companies have typically required some levels of personal guarantees within their loan structures.” He went on to explain that some recourse lenders had been amenable to limited structures allowing for burn-down or burn-off provisions relative to project performance. But these days, lenders are less willing to consider those levels of burn-down. “Complete recourse burn-off is less available,” DeHarty pointed out.
On the other hand, non-recourse lenders aren’t making a sudden about-face and insisting on recourse-lending. Bryan Kenny with Bandon Capital pointed out that recourse lending is just one of many tools that lenders use to analyze risk to determine financing. “Generally, a non-recourse lender coming to a downturn won’t all of the sudden say ‘well, guess what? Now we need to focus on recourse loans,’” he said.
Ivan Kustic agreed, noting that “generally speaking, and for the most part, there continues to be two types of lenders for commercial properties, recourse and non-recourse. Kustic, who is with MetroGroup Realty Finance, said that some lenders have offered both types of loans, and those loans vary hugely in areas including duration, covenants and assumability. Furthermore, “underwriting standards may dictate loan performance more so than the owner guaranteeing the loan,” Kustic explained.
Recourse Has its Uses
But the situation isn’t black or white. “Every lender is likely request recourse if they believe they can secure the same comparable pricing from sponsors without compromising their loan terms,” Kadish pointed out.
Furthermore, Kenny pointed out that recourse lending can provide a level of comfort to the lender. “When someone signs recourse alone, it means they’ve got extra skin in the game,” he explained. “It means they’re going to watch that property a bit closer.”
DeHarty noted that some of it also needs to come from the borrower. Every commercial real estate transaction is being heavily scrutinized by lenders these days, meaning that “a borrower’s willingness – or lack thereof – in providing personal loan repayment guarantees can affect a variety of loan terms.”
From the borrower side, recourse could prove to be beneficial. “Interestingly enough,” said Kenny, “we’re seeing more borrowers who might have historically trended toward non-recourse lenders beginning to consider recourse as an option.”
And Will James, Kenny’s Bandon Capital colleague, said that issuing a “lender are moving more toward recourse financing” blanket statement fails to realize the broad spectrum that is commercial real estate and CRE financing.
“This isn’t really about lenders saying ‘we want more recourse’ as much as the requirements will vary, asset type by asset type,” he said. For example, anything office will be difficult to finance, whether recourse or non-recourse, he continued. Plus there are times in which a borrower might decide on a recourse loan for certainty of execution. “A lot of times, that might not be full recourse,” James explained. “It could be partial recourse, and in a single-action state (like California), that’s not necessarily super meaningful at the end of the day.”
Maverick Commercial’s Kadish agreed. “In scenarios where borrowers are faced with a choice between opting for recourse loans or injecting additional equity, they need to carefully evaluate whether injecting more equity to avoid recourse is worthwhile, or to embrace recourse and retain ownership of the property.”
But as with any type of financing, there are borrower risks. As such, “commercial real estate owners should be cognizant of the downside risks associated with recourse loans and at what levels of recourse they’re willing to provide,” DeHarty suggested.
Does Recourse Make CRE “Intimidating?”
The above-mentioned article concluded with the line that “if the CRE space wasn’t intimidating before, it certainly was now” – all due to lender increases in recourse financing.
The truth is – not so much. Yes, the current capital environment is challenging. There is absolutely no doubt of this. But “in talking daily with a great deal of our capital sources we remain confident that lending on commercial real estate continues to be a good investment and provide in their opinion a good risk-based return when matched against other asset classes in their portfolios,” Kustic said.
Bandon’s James and Kenny are also positive in their remarks, noting that while the acquisitions market has slowed, there are refinances coming up.
Along those lines, “recourse” shouldn’t be equated to “panic in the street.” Certainly for non-recourse borrowers, “recourse” can “cause some of them to freak out,” Kenny said. “But for people who sign recourse on a regular basis, they’re just fine. It’s really a non-issue.”
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