Navigating Non-Recourse Loans for Challenging Property Investments

With a recourse loan, if the property is sold or foreclosed for less than the debt, the lender can pursue the borrower, and any guarantor, personally for the shortfall. With a non-recourse loan, the lender agrees to look only to the property and other pledged collateral. Between the two sit carve-outs: specific acts that turn a non-recourse loan back into a recourse one.

This article is for borrowers comparing loan terms on apartment buildings, hotels and other commercial property. It explains what non-recourse really covers, how carve-outs and guarantees work, who offers non-recourse loans in Canada and the U.S., and what to negotiate. It is general information; recourse terms are legal terms, so have a lawyer review your documents.

What non-recourse means in practice

Michigan’s Nonrecourse Mortgage Loan Act gives a clear statutory description. A loan is non-recourse if its documents provide, among other things, that the lender will not seek a money judgment or deficiency judgment against the borrower, or that any judgment is enforceable only against the borrower’s interest in the mortgaged property and other collateral.[1] Most non-recourse loans elsewhere work the same way, through the loan documents rather than a statute.

Recourse and non-recourse loans compared

Recourse

• Borrower, and usually a guarantor, personally liable for any shortfall
• Common on bank and credit union loans and on construction loans
• Lender is more willing to lend on smaller or riskier deals
• Fewer structural requirements on the borrowing company

Non-recourse

• Lender’s recovery limited to the property and pledged collateral, apart from carve-outs
• Common on U.S. agency, life-company and CMBS loans on stabilized property
• Usually requires a single-purpose borrowing entity and a carve-out guarantor
• Often comes with lower leverage, stricter covenants or a higher price

Carve-outs: when non-recourse stops

A carve-out is, in the words of the Michigan act, a specific exception to the non-recourse provisions that creates personal liability of the borrower or a guarantor “if specified events occur.”[1] Lenders call them “bad-boy” carve-outs because most target conduct the borrower controls. Fannie Mae’s multifamily term sheet, for example, requires “standard carve-outs” for “bad acts” such as fraud and bankruptcy.[2]

Carve-outs usually come in two kinds:

• Loss carve-outs, where the guarantor pays only the lender’s actual loss. Typical triggers include misapplying rents or insurance proceeds, failing to pay property taxes when the property has the cash, waste, and environmental problems.
• Full-recourse triggers (“springing recourse”), where the whole loan becomes recourse. Typical triggers include a voluntary bankruptcy filing, an unpermitted transfer of the property or of control, and placing other debt on the property without consent.

The exact list, and the wording, is negotiable and varies by lender. A broadly worded carve-out can create liability the borrower never expected.

A cautionary case: Cherryland

In 2011, the Michigan Court of Appeals decided Wells Fargo Bank v. Cherryland Mall Limited Partnership. The borrower had an $8.7 million non-recourse CMBS loan on a mall near Traverse City; after default and foreclosure in 2010, about $2.1 million remained unpaid. The loan documents made the borrower and guarantor fully liable if the borrower lost its single-purpose-entity status, one of whose conditions was a covenant to stay solvent. The court held that the borrower’s insolvency breached that covenant, making the guarantor personally liable for the deficiency.[3]

The decision meant a property simply losing value could trigger full recourse. Michigan’s legislature responded in 2012 with the Nonrecourse Mortgage Loan Act, which bars a post-closing solvency covenant from being used as a non-recourse carve-out and makes any such provision invalid and unenforceable.[4] In 2013, ruling again in the Cherryland case, the Court of Appeals upheld the act, which the legislature had made retroactive, according to a law-firm summary of that decision.[5] The act applies only to Michigan property, so the lesson travels: read every condition that can trigger recourse, including those buried in the single-purpose-entity covenants.

Who offers non-recourse loans

• U.S. agency lenders. Fannie Mae offers non-recourse execution on most multifamily loans over $750,000, with standard carve-outs.[2] Other agency programs work on similar lines; check each term sheet.
• U.S. CMBS and life insurance companies, on stabilized commercial property and hotels.
• CMHC-insured loans in Canada. Under CMHC’s MLI Select, loans are recourse at the 50 and 70 point levels, and limited recourse only at the highest, 100-point level, for both existing properties and new construction.[6]
• Banks, credit unions, construction lenders and most private lenders usually require recourse or a personal guarantee, particularly for construction, renovation and transitional properties.

In practice, the properties that most need flexibility, those that are vacant, under renovation or in distress, are the least likely to get non-recourse terms. That is a trade-off to weigh when choosing between a cheaper recourse loan and a costlier or lower-leverage non-recourse one. See traditional vs. alternative lenders.

What to check and negotiate

Reviewing recourse terms before you sign

1. Find every recourse trigger

   Read the carve-out section, the guarantee and the single-purpose-entity covenants together. Liability can be created in any of them.

2. Separate loss carve-outs from full recourse

   Push for full recourse to apply only to the most serious acts, such as fraud and voluntary bankruptcy.

3. Limit the guarantee

   Ask for a cap, a burn-off once the property stabilizes, or a guarantee limited to carve-outs.

4. Tie triggers to your own acts

   Avoid carve-outs triggered by events you cannot control, such as a fall in value or the borrower’s inability to pay debts.

5. Check transfer and financing rules

   Know which ownership changes, refinancings or junior loans need consent, so that a routine transaction does not spring recourse.

6. Get legal advice

   Have a real estate finance lawyer review the documents in the jurisdiction where the property is located.

Sources

1. Nonrecourse Mortgage Loan Act (Excerpt), Act 67 of 2012, MCL 445.1592: Definitions — Michigan Legislature. Checked 2026-10-12.
2. Multifamily Term Sheet: Conventional Properties — Fannie Mae, 2026. Checked 2026-10-12.
3. Court finds recourse liability against a guarantor due to borrower insolvency (law-firm summary of the 2011 Court of Appeals opinion) — Butzel Long, January 27, 2012. Checked 2026-10-12.
4. Nonrecourse Mortgage Loan Act (Excerpt), Act 67 of 2012, MCL 445.1593: Post closing solvency covenant; prohibited use — Michigan Legislature. Checked 2026-10-12.
5. Michigan Court of Appeals Upholds Non-Recourse Mortgage Loan Act (law-firm summary of the 2013 decision) — CMDA Law, June 3, 2013. Checked 2026-10-12.
6. MLI Select — Canada Mortgage and Housing Corporation. Checked 2026-10-12.