Recourse vs Non-Recourse Debt: Knowing This Could Save You

The main difference between recourse loans and non-recourse loans is the liability.

In a recourse loan, if the deal goes bad, the lender can come after your personal assets as collateral.

In a non-recourse loan, they can only take the property itself. They cannot, come after your personal assets.

In large multifamily real estate deals that are big enough to use Fannie Mae and Freddie Mac agency debt, it will almost always be non-recourse financing.

In residential, small multifamily and often in straight commercial buildings, it is recourse debt.

Can non-recourse debt ever become recourse debt?

Yes it can if terms have been violated. This is called a "Bad boy carveout." It includes terms such as if you commit fraud, steal, neglect the property maintenance to an extreme level etc.

In the 2008 crash, I have heard of instances where the banks were in deep trouble. They went to the fine print of the contract and tried to repossess properties that were under "technical default." This means that the net worth requirement was no longer met because asset prices were down. Even though loan payments were still being made on the property, the still targeted some owners. If this is the case with you, fight it with your attorney.

For the most part though, it will stay non-recourse as long as you don't break the bad boy carveouts.

As a limited partner, can I ever be liable for a general partner breaking the bad boy carveouts?

As a limited partner, your only risk is the money you invested in the deal. It is possible to lose 100% of this invested money, but in no way can your personal assets be liable.