Non Recourse Loan Opinion?

Question

I’ve been in discussion with several lenders recently as I build my multi-year business plan. Lima One offers a program that has non-recourse loans that can be used within an LLC. Of course, there is a cost to this and the rates are currently between 6.75% - 8.25% for a 30 year fixed.

Now, before you blast me with that’s a crazy interest rate range, please consider the following:

1. rates are probably going to be higher in the next few years.

2. Locking in a 30 year amortization, commercial non-recourse loan now at 6.75% (assuming you have 740 credit score) might be a smart business strategy for the risk averse.

3. non-recourse loans mean no personal guarantee by borrower. Very difficult to find this type of loan on RE

The big thing for me is you don’t have to personally guarantee the loan. If you use a lot of leverage to build a portfolio the non-recourse loan seems something to consider as a risk mitigation strategy even at the higher rates.

Thoughts?

Patricia Steiner · Answer

Britt, I'm just seeing your post this morning...not sure why it didn't post higher up the forum list but you pose some great questions here.  I have no experience with Lima One; I am a former long-time senior banker, my family has been in real estate investing way before me (like 50 years) - and non-recourse is definitely worth paying a higher interest rate.  When your business liability is commingled with your personal debt it makes the most simple loan request - like for a car loan - get very "entertaining" as your recourse debt counts as part of your overall personal obligations.  Non-recourse is always preferred.

While I'm okay with the higher interest rate for a 30-year fixed term, I would be more concerned about the points charged by the lender.  What are the total costs of the mortgage?  What might be quoted at a 6-something rate actually is something quite vulgar by the time the points and other fees are disclosed/added in.  The lender knows that you won't be holding the mortgage 30-years from now so they want to be paid more upfront.  It increases their profitability - but definitely not yours.

Again, non-recourse is a fiscal no-brainer.  A higher interest rate to secure non-recourse is worth it.  Negotiating other costs - especially points - would be my concern.

Hope this helps...

Account Closed · Answer

Britt, I have 5 houses in my self directed IRA LLC. North American Savings Bank (NASB) has the best interest rate I've found so far at 5.3% fixed rate. They are easy to work with and easy to find online. The next best rate I've found other than them is 6.2% but that is with buy down points and higher origination fees.

Ken Price · Answer

@Britt Clark I’m also having difficulty finding non recourse commercial debt in the ~$300k loan amount. It has to be non recourse for me since it’s inside of an IRA.

I’d like to have a couple 8-12 unit assets under my belt before tackling the bigger assets where its easier to get Fannie Mae non recourse funding (>$775k loan).

Does anyone have experience with commercial non recourse loans less than the $775 threshold?

Mark Creason · Answer

@Britt Clark

@Patricia Steiner

Are you saying that Lima will do 30 year terms or 30 year amortizations.  A 6.75% 30 year fixed term would be priced accordingly at 6.75% for non-recourse.  People have been saying rates are always going up but rates have been at historically low rates for the last 7 years at least.  I think rates will stabilize for the next 12 months as the FED has said they are done raising rates for 2019.

Mark

Britt Clark · Answer

Patricia - thank you so much for the input!

Britt Clark · Answer

@Mark Creason - it is an actual 30 year term loan. It is not a balloon arrangement that comes due within a 5-10 year term. I was thinking the rate might be good too considering where rates are headed. Most lenders do 5-10 year balloon terms based on a 20-30 year amortization.

Britt Clark · Answer

@Tom Keating - I'm looking at much lower loan values than $1mm. I'm looking at properties that are less than $100k.

Tom Keating · Answer

Non-recourse 30-yr amortization is very common in commercial real estate for loan $1mm and up.  6.75% is fairly high for a commercial real estate loan in this market.

Tom

Britt Clark · Answer

I’m disappointed nobody has feedback. Does anyone have experience with a non-recourse loan with Lima One or another lender? I realize this is higher cost financing and might not be popular for that reason. But, I’m curious how others feel in paying more for a loan you don’t have to personally guarantee. Thanks

Non Recourse Loan Opinion?

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