Full Recourse

Definition of Full Recourse

In the context of commercial mortgages, Full Recourse refers to a debt obligation where the lender has the legal right to pursue the borrower’s personal or corporate assets beyond the underlying collateral if the borrower defaults on the loan. In a full recourse arrangement, the borrower (and often individual guarantors) is held personally liable for the entire amount of the debt, regardless of the property's value at the time of foreclosure.

Detailed Description

When a commercial mortgage is structured as a full recourse loan, the property serves as the primary security for the debt. However, if the borrower fails to make payments and the lender forecloses on the property, the lender is not limited to the proceeds from the sale of that property. If the sale price of the commercial asset is insufficient to cover the remaining balance of the loan, a deficiency exists. Under a full recourse agreement, the lender can seek a deficiency judgment in court to seize other assets belonging to the borrower or the guarantors, such as bank accounts, other real estate holdings, or investment portfolios, to satisfy the debt.

Full recourse loans are common in scenarios where the lender perceives higher risk, such as construction projects, stabilized properties with high vacancy rates, or loans made to borrowers with less established credit histories. By requiring full recourse, the lender effectively shifts the financial risk from the institution to the borrower.

Key Characteristics of Full Recourse Mortgages

• Personal Liability: The borrower and any named guarantors provide a personal guarantee, putting their entire net worth at risk to back the loan.
• Lender Protection: These loans offer the highest level of security for the lender, as they have multiple avenues to recover the principal and interest.
• Lower Interest Rates: Because the lender's risk is mitigated by access to additional assets, full recourse loans often carry slightly lower interest rates or more favorable terms than non-recourse loans.
• Underwriting Focus: During the approval process, the lender will perform an extensive "deep dive" into the personal financial statements (PFS) of the sponsors to ensure they have sufficient liquidity and net worth to cover the debt in a worst-case scenario.

Full Recourse vs. Non-Recourse

The primary alternative to a full recourse loan is a non-recourse loan. In a non-recourse agreement, the lender’s only source of repayment in the event of default is the property itself. If the property is worth less than the loan balance during a foreclosure, the lender must absorb the loss and cannot pursue the borrower's other assets. However, even non-recourse loans typically include "bad boy carve-outs," which can convert the loan to full recourse if the borrower commits specific prohibited acts, such as fraud, gross negligence, or filing for voluntary bankruptcy.

Ultimately, Full Recourse commercial mortgages represent a significant commitment. Borrowers typically choose this path when they are confident in the project's success or when they need to secure financing that might otherwise be unavailable due to the specific risks associated with the commercial property.