One of the primary benefits of CMBS conduit loans is that they are non-recourse. As such, the borrower and guarantor (typically an individual who owns or controls the majority of the borrowing entity) are not personally liable for repayment of the loan in the event of default and foreclosure.
The non-recourse provision works well for partnerships of individuals in which no one partner cares to personally guarantee the loan. It also works well for institutional owners in which no individual employed by the institution is going to personally guarantee the loan. But from the individual owner I often get “I don’t need non-recourse, because I will never default, and if I did, I would just work out a payment plan with the lender.”
Well, defaults on loans with personal guarantees do often get worked out. Typically, on a loan default the property is foreclosed and sold, a deficiency judgment is filed against the guarantor based on the difference between the loan amount and the property sale amount, and the deficiency is settled (perhaps by splitting the difference). The deficiency judgment is paid and released, and life goes on. But recently I saw a situation that scared me to death.
A sponsor defaulted on a personally guaranteed loan in the amount of $15 million. The lender foreclosed on the property and . . . did nothing. The lender refused to sell the property and refused to negotiate a settlement on the guaranty. The sponsor could not get a commercial real estate loan on his other performing properties. Why? The net worth of the sponsor was less than $15 million and he would be insolvent if the lender collected on the entire $15-million guarantee. Although this was unlikely, since the judgment on the guarantee could not be determined, lenders were unwilling to make a guess.
Needless to say, this sponsor said he will never provide a personal guarantee on a commercial loan again.