While all CMBS loans are non-recourse, there is a caveat. Nearly all non-recourse commercial real estate loans have provisions whereby if the individual(s) who own the property (known as the “sponsors”) commit what is referred to in the lending industry as “bad person acts,” then the loan can be converted to recourse.
These non-recourse carve-out guarantees for bad person acts are designed to require the sponsor (“guarantor”) to repay the loan if the borrower commits any of the specified bad acts, or if the borrower takes steps to prevent the lender from foreclosing on its collateral, such as filing for bankruptcy. Today, a loan commitment for a typical non-recourse commercial real estate loan often includes at least two types of carve-out guarantees: one for borrower acts that trigger full recourse liability to the guarantor, and another more limited variety that is usually tied to actual damages incurred by the lender arising out of a specific bad act by the borrower.
Full recourse liability is usually triggered because the borrower transfers or liens the lender’s collateral without its knowledge, or voluntarily files a petition for reorganization or bankruptcy. In contrast, borrower actions that result in limited recourse are usually classic bad acts like fraud, waste, misappropriation of funds, failure to pay taxes or maintain insurance, or amending key leases without lender consent. Because these things are usually within the borrower’s control, the principal guarantors are frequently not concerned about “bad person” guarantees and mainly focus on the ability to hand ownership back to the lender without further liability in the event the guarantor is unable to pay the mortgage.