To Recourse or not to recourse

[Kurt Z.]

Curious to hear people's thoughts on recourse versus non recourse loans on apartment buildings. Pros/cons, etc. I have a great quote from First Republic but it is recourse. I can't decide if I really care. Only doing a 60% loan and property cash flows well.

[Brian Burke]

Recourse is one of many loan terms, along with amortization, interest rate, term, prepayment penalty, etc.

So just like anything else there are always trade-offs so it's not as simple as "you always want non-recourse."  Certainly I agree that non-recourse is a big deal, but the OP is asking about pros/cons.  The pros of the non recourse element are obvious. But as to the other elements there really are pros and cons.

Most fixed-rate non-recourse debt for multifamily carries a punitive prepayment penalty, or a complete prohibition on prepayment which forces you to defease the loan rather than prepaying it.  Prepayment penalties are often yield maintenance, which means essentially paying some or most of the interest almost all the way to term even if you pay it off. 

You can usually avoid the punitive prepayment penalties by using floating rate debt, which is an increasingly popular option.  But you lose the peace of mind of fixed rate.  Most non-recourse debt also has a short term, typically 5, 7, or 10 years which means that you'll have to sell or refinance at some point before the loan fully amortizes. 

So if your plan is to get fixed rate fully amortizing debt at the lowest rate, you'll most likely be stuck with recourse. If you don't mind a higher rate, prepayment restrictions and penalties, and a relatively short term, non-recourse is the way to go. Especially if you scale. 

Recourse debt counts against you as a contingent liability. The more contingent liabilities you stack up, the more nervous future lenders will become as they consider your suitability as a borrower. So, if you are going to buy a couple of properties and stop, recourse won't damage you (from the perspective of the contingent liability / future lending perspective). But if you are going to stack up a hundred million in debt, non-recourse will be the only way to get there.