Recourse or Non-Recourse

[Tony Castronovo]

I'm currently in a recourse loan on a MF property and in the middle of refinancing. As I evaluate loan offers I am getting both recourse and non-recourse offers. Of course I understand the desire to have a non-recourse loan.  But seems that these inherently come with pre-payment penalty terms, where the recourse loans have no pre-payment penalties.  Is this just how it works or is it negotiable?

[James Kojo]

Recourse vs non-recourse is more about the personal guarantee than it is about pre-payment penalties.

For the record, I have both, but I'm in the process of switching most of them out for non-recourse agency debt.

A very important factor to consider (maybe the most important?) is how much risk you're putting your own net-worth in. As investors and entrepreneurs, we naturally see the upside. At the same time, most of us have been around long enough to remember 2008, so we know bad things happen. A non-recourse loan allows you to limit some of your downside while you're playing offense (shooting for above average returns.)

On the other hand, if you have a net-worth that you're willing to put on the line for any particular deal or have sufficient fire-walls in place, then you can be more aggressive.

At this point in the cycle, I would advise caution. Play defense even when you're playing offense.

Hope that helps!

James Kojo