What 'non-recourse' actually means in construction
Non-recourse in commercial lending means the lender's remedy on default is limited to foreclosing on the property, the lender cannot pursue the sponsor's personal balance sheet for any shortfall. This is the standard structure for institutional permanent debt and most bridge loans.
In construction lending, non-recourse is almost always paired with a completion guarantee. The completion guarantee is a separate recourse obligation: the sponsor (or a creditworthy guarantor) personally guarantees that the project will be built to plan, on budget, and on schedule. If construction stalls or runs materially over budget, the guarantor must fund the shortfall.
Bad-boy carve-outs
Both non-recourse and recourse loans typically include bad-boy carve-outs, specific actions by the sponsor that trigger personal recourse. Standard carve-outs include fraud, misappropriation, voluntary bankruptcy filing, unauthorized transfer of the property, and environmental liabilities.
Carve-outs are negotiable. Aggressive lender forms include carve-outs for cash flow mismanagement and material litigation; sponsor counsel typically pushes back to limit carve-outs to clearly intentional misconduct.
Frequently asked questions
- Do non-recourse multifamily construction loans require completion guarantees?
- Yes. Virtually all institutional non-recourse construction loans, multifamily or otherwise, require a completion guarantee from the sponsor or a creditworthy guarantor. The completion guarantee survives the non-recourse nature of the loan.
- Who can provide a completion guarantee?
- The completion guarantor must have demonstrated financial capacity to cover potential cost overruns. This is typically the sponsor principals personally, the sponsor's parent entity if it has sufficient net worth, or a third-party guarantor with appropriate balance sheet.
- Are construction loans interest-only during construction?
- Yes. Construction loans are interest-only during the construction period, with interest funded from an interest reserve held by the lender. Amortization (if any) only begins after stabilization, and most construction loans are paid off at completion through a refinance into permanent debt.
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