Non Recourse Loan Opinion?

[Britt Clark]

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]

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...