Partial Recourse

Detailed Description of Partial Recourse

Partial recourse structures are common in commercial real estate to balance the risk between the lender and the developer or investor. Under these terms, if a default occurs and the sale of the property does not cover the outstanding mortgage balance, the lender has a legal right to seek a deficiency judgment against the guarantor’s personal assets, but only up to a pre-defined limit.

There are several ways a partial recourse obligation can be structured in a commercial loan agreement:

• Percentage-Based Recourse: The guarantor is liable for a fixed percentage of the loan (e.g., 20% or 25%). If the property is sold at a loss, the guarantor must pay that specific percentage of the remaining deficiency out of pocket.
• Capped Dollar Amount: The recourse is limited to a specific dollar amount. For example, on a $10 million loan, the guarantor may agree to a $2 million recourse cap.
• Burn-off Provisions: The recourse obligation may "burn off" or decrease over time as certain milestones are met. Common triggers for reducing recourse include reaching a specific Debt Service Coverage Ratio (DSCR), achieving a certain occupancy level, or paying the loan principal down to a specific balance.
• Standard "Bad Boy" Carve-outs: Even in loans that are primarily non-recourse or partial recourse, lenders almost always include "carve-out" provisions. These clauses state that the loan reverts to full recourse if the borrower commits specific "bad acts," such as fraud, misappropriation of insurance proceeds, or filing for voluntary bankruptcy.

Lenders often require partial recourse when a project carries higher risk, such as ground-up construction or a value-add repositioning where the property is not yet generating sufficient cash flow to cover the debt. For the borrower, agreeing to partial recourse can be a strategic move to secure higher leverage (a higher loan-to-value ratio) or a lower interest rate than what would be available on a strictly non-recourse basis.

Ultimately, a partial recourse agreement provides the lender with an additional layer of security and ensures that the borrower remains financially committed to the project's success, while still protecting the majority of the borrower’s personal wealth from a total market collapse.