Everything You Need to Know About Non-Recourse Bridge Loans
If you’re planning the purchase of a commercial property as a short-term investment, such as a purchase and renovation project, you’ll no doubt be assessing your short-term financing options. One such option you may be considering is a commercial real estate bridge loan. This is a popular choice for investors wanting to quickly purchase and renovate or reposition a property before reselling or securing longer-term finance. Commercial real estate bridge lenders might offer you one of two options – a non-recourse bridge loan or a recourse bridge loan. So, what’s the difference? And is a non-recourse bridge loan right for you?
Non-recourse bridge loans vs recourse bridge loans
The key difference between non-recourse bridge loans and recourse bridge financing is liability. With a non-recourse bridge loan, you – as the borrower or guarantor – are not personally liable for the repayment of any outstanding loan balance. Should the need arise, your non-recourse bridge lender will be able to take back the property being your collateral for the loan but that’s it. If there’s a shortfall once the property has been sold, the lender cannot come after you personally and therefore takes the loss.
A recourse bridge loan, on the other hand, means the lender can legally come after your personal assets, wages, and bank accounts to recover the outstanding debt. A range of recourse options for the bridge loan provider are available, including:
- Filing a lawsuit to foreclose the loan, take possession of the property and hold the borrower or guarantors personally liable for any outstanding debt once the property has sold
- Filing a lawsuit against the sponsor to recover payment of the debt in full
- Filing a lawsuit against the sponsor or guarantor with the most assets (in the event multiple sponsors have signed joint and several personal guarantees)
Accordingly, sponsors of a recourse bridge loan risk losing their savings, retirement funds, houses, vehicles and whatever else they own. This is why non-recourse bridge loans should always be your first preference.
So, in summary, a non-recourse loan means agreeing to limited recourse and therefore an insurance policy for you. While it would be a shame to lose your property, it’s much better than losing the property as well as your personal assets, as is the case for a recourse loan. The flip side is that a non-recourse loan is likely to attract higher interest rates and fees, costing you more than a recourse bridge loan but, given the risks involved, it’s certainly worth it.
A non-recourse bridge loan does not mean no personal liability at all
It would be wrong to assume that you’ll have no personal liability whatsoever when you take on a non-recourse bridge loan. Thanks to the “Bad Boy carve outs” or the “Bad Boy Guaranty”, you’ll be personally liable in a number of circumstances. These carve outs have been designed to protect the lender from any dishonest activity and mean your commercial bridging finance lender will have personal recourse if you:
- Commit fraud or misrepresentation
- Engage in criminal activity on your property
- Do not purchase adequate insurance as per the lender’s requirements or allow your insurance policy to lapse
- Intentionally fail to pay your property taxes over a long period of time
- Receive environmental indemnification
- File for bankruptcy on the property
- Do not allow the lender to conduct inspections as required
Bad Boy carve out clauses vary from state to state and often includes numerous minor provisions. So, just like with any loan, be sure to read the fine print.
Other things to note about non-recourse bridge financing
- Non-recourse bridge loans can be used for a range of commercial real estate investments, including hotel financing, resort financing, condo financing, hotel construction loans, apartment loans and more.
- Non-recourse commercial mortgage bridge loans can be difficult to obtain and usually require you to have experience with investing in commercial real estate, a satisfactory net worth and good credit score. However, typically a non-recourse bridge loan or other short-term non-recourse loan can be secured even if you have a not-so-great credit score.
- When acquiring commercial non-recourse bridge loans you may be required to have more funds than just a portion of the purchase price. Services specific to real estate property types include hotel bridge loans, multifamily bridge loans and apartment bridge loans in an array of commercial realty.
Talking to an expert commercial bridge lender will help shed some light on non-recourse bridge loans and whether these are the best options for you. Get in touch with Alpha and we’ll answer any questions you might have or help you apply for a non-recourse bridge loan today.