Non Recourse Commercial Loans- How does it work?
A Guide To Non-Recourse Commercial Loans
What Is A Non-Recourse Loan?
A non-recourse loan is a loan that is repaid solely from the profits from the business venture or enterprise that it is funding. The borrower cannot be held personally liable for repayment of the loan and his personal assets cannot be seized in order to make good on the financial obligation.
However, these types of loans often require some type of asset of value as collateral. That asset will become forfeit in the event that the loan goes into default should the business or project the loan is funding not be profitable. This means that the asset can be seized in order for the lender to recover the loan amount. However, the lender cannot seize any other assets belonging to the business or the owner and only those assets stated as collateral in the non-recourse loan agreement.
These loans are ideally suited to fund expansion projects or new business ventures such as the purchase or development of a property that may take time to start being profitable. Depending on the terms of the loan, the borrower has some time to start making repayments on the loan in order for the business to become fully operational and begin earning a profit. Non-recourse loans are commonly used to finance real estate ventures including new developments, renovations, upgrades and property purchases.
There are a variety of different non-recourse commercial loans available:
Multifamily Non-Recourse Loans
Multifamily loans are aimed at purchasing multiple property units such as an apartment block or condominiums. The loans can also be used to finance smaller multi-unit properties consisting of 2 to 4 units. The repayments will come from any profits earned from renting or leasing these units. Profits from the sale of the units may also be purposed for repayment of the loan. The property itself will stand as collateral for the loan in the event of a default where the units will be re-possessed by the lender or loan provider should the borrower not make the required payments according to the non-recourse loan agreement.
Non-Recourse Construction Loans
Construction loans are commonly used to finance the development of property. These can include new developments or the renovation of an existing property or structure. However, they are more commonly used for the financing of new developments. Normally, the repayment of the loan will come from profits that are made from the sale of the property once it has been developed or renovated. However, if the property owner is purposing the development for leasing, then repayments may come from profits made from the rent that is earned. If the owner will be running a the business from the property that has been developed, profits from the operations will be used to repay the loan. The property will stand as collateral for the loan.
Non-Recourse Real Estate Loans
Real estate loans are aimed at financing the purchase of real estate whether developed or not. The lender will receive payment from any profit that is made from the sale of the property. If the property is developed, profits made from the development will serve to repay the loan. In the event that purchase of the property does not result in a profit, the real estate will stand as collateral for the loan and can be seized by the loan provider in order to recover their funds.
SBA Non-Recourse Loans
SBA or Small Business Administration loans lower the risk to the lender in providing a loan to a small business for the purchase of a fixed asset. A fixed asset is property, a buildings or structure and equipment like machinery that is or will become a fixed part of a structure. SBA does not actually provide the loan but rather facilitates a loan by guaranteeing a portion of the loan amount. There are certain criteria that must be met to be eligible or qualify for a non-recourse SBA loan.
In the case of a non-recourse SBA loan where the borrower defaults on their repayments or the business venture is unsuccessful, the government will be responsible for the guaranteed portion of the loan. However, the property that stands as collateral for the loan will be held for the non-guaranteed portion. The borrower is therefore still responsible for the repayment of the portion of the loan that is not guaranteed by the SBA.
Non-Recourse Development Loans
Non-recourse development loans are aimed solely at the development of a property for commercial or industrial use. The loans finance every aspect of the development from start to full operation. Commonly, repayments on the loan will only start once the operations have begun and have started earning a profit. Repayments will be made solely from the profits or the operation. In the event that the development fails and the operations do not begin or no profit is being made, the loan will be considered to be in default. The property standing as collateral for the loan will then be seized in order to recover the loan amount.
The type of non-recourse loan is largely dependent on the purpose of the loan and the terms and conditions of the loan will be outlined in the loan agreement.
Non-Recourse Loan Agreement
The non-recourse loan agreement will state the fixed asset that will stand as collateral for the loan. It should also verify that the lender can only seize the stated asset in the event of non-payment of the loan and that the borrower cannot be held personally liable for the loan and that no other assets may be seized to recover the loan amount. The agreement will include the terms and conditions for the seizure of the collateral such as the repayment period and when the loan can be considered to be in default.
There are a number of additional stipulations that can be added to the loan agreement:
Bad Boy Carveouts
A Bad Boy carveout provides the lender with a safety net in the event of fraudulent or negligent actions from the borrower that impacts the repayment of the loan. If a borrower is found to have committed fraud or been negligent, the lender can seize other assets or the personal property of the borrower to recover their losses. Any event that could prevent the repayment of the debt can be added as a bad boy carveout to the non-recourse loan agreement.
A non-recourse guaranty places certain or specific obligations on the borrower (guarantor) to the lender. These obligations may include a guaranty of performance or payment of the debt from any profits that are earned from the project or venture that the finance was provided for. Should the guarantor not fulfill their obligations according to the non-recourse loan agreement, the lender may recover the loan amount from the borrower in their personal capacity or seize other assets other than but not excluding the asset that stands as collateral for the loan.
Full Recourse Loans
Full recourse loans are loans where the lender has the right to seize any and all assets belonging to the borrower in order to recover the loan amount including any asset that has been stipulated as collateral for the loan should the borrower default on the loan. A non-recourse loan can be changed into a full recourse loan in the event that the borrower has failed to meet their guaranty obligations or entered into any Bad Boy carveout behaviors. This allows the borrower to recover their funds from any asset, including capital or cash held by the borrower or company that the loan was provided to.
How To Get A Non-Recourse Loan?
A non-recourse loan has many benefits for financing real estate investments or ventures and can provide a simple means to finance a project. For some, the benefits may almost seem to good to be true. However, it is the caveats of these loans that makes them worthwhile for lenders or financial providers. An agreement that meets with the non-recourse guaranty and does not infringe on any Bad Boy carveouts, is far more likely to be profitable and result in the loan being repaid in full to the lender without having to resort to seizing of collateral or other assets.
Non-recourse loans are available from a wide range of lenders such as traditional banks and other financial institutions. Products from different providers may differ with regards to the terms and conditions, collateral requirements, interest and other stipulations.
Private financial providers are a good place to find and apply for one of the above-mentioned types of non-recourse loans. At Neal Funding, we will advise you on the best type of loan to suit your needs and tailor a product to suit the requirements of the project or venture that requires funding. Traditional loan providers are far less flexible when it comes to refining the terms, conditions and stipulations of a non-recourse loan agreement.
To find out more about non-recourse loans and whether this is a suitable financing solution for your business venture, visit nealfunding.com.