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In the context of non-recourse loans, the principle is that the lender's recovery options are limited to the collateral itself in case of default, without recourse to the borrower's other assets. This means if a property secured by a non-recourse loan is sold for less than the outstanding loan balance, the lender typically absorbs the loss. However, the real-world application of this principle can be complex.
Based on the WSO discussions, it's crucial to understand that while theoretically, a non-recourse loan should allow a borrower to walk away from a loan with no further obligation beyond the surrendered collateral, there are often caveats. These can include "bad boy" carve-outs that could make the borrower personally liable if certain conditions are violated, such as fraud or gross negligence.
Before making a decision to sell for less than the balance on a non-recourse loan, it's advisable to:
Remember, each situation is unique, and the lender's response can vary based on the loan agreement, the borrower's relationship with the lender, and the specific circumstances of the property and market conditions.
Sources: https://www.wallstreetoasis.com/forum/private-equity/deals-death-and-deception-a-bankers-tale?customgpt=1, https://www.wallstreetoasis.com/forum/investment-banking/how-to-position-for-a-recession?customgpt=1, Commercial Real Estate Brokers: Cold Calling Advice, Smartest thing you've seen a rainmaker do to get a deal through, So you want to work in CRE Debt? Here are the options...
I mean, it sort of depends on what the loan docs say. You often don't have unilateral transfer rights, to avoid fraudulent conveyances and stuff like that...
not following here, you contractually owe debt service payments and the outstanding balance at maturity. if the outstanding balance is not paid, you are in default. if the loan is not assumable, you'd have to pay prepayment penalties as well...
If you owed you friend 10 dollars and you paid them 5 and said opps sorry what do you think would happen? Variety of answers, use your imagination.
Conceptually, you can do anything, practically, these actions come with consequences...
I’m confused by your question. I am a non-recourse lender and I have sold loans below par value and have done discounted payoffs. If you are looking for a Discounted payoff, I assume the lender will say no unless it is distressed and the NPV for the lender is higher to take the DPO than to take title.
Even if your NPV came back higher with a distressed sale, do you really want the guy who no longer has skin in the game to be the one to sell it for you and assume that’s the highest sale price? I doubt it unless you truly believe the property value is significantly less than that sole offer.
The Borrower has no financial incentive to ‘do right’ by the Lender in this scenario (absent reputation risk or if they’ve tripped carveouts), no Lender should want their loan’s final outcome decided by them when they can instead FC or DIL and control their own destiny/sale process. I also don’t know why a borrower would spend all the time and effort to sell an asset when they have no equity, they’d likely prefer to hand back the keys and focus on other assets that have hope.
It’s never this black and white where value is especially when distressed and not stabilized, which is more incentive for the Lender to not accept the first offer that doesn’t repay them back in full.
In reality these loans’ transfer provisions are usually ironclad and a non-permitted transfer like this would likely spring recourse/EoD if actually consummated (title wouldn’t be clean so wouldn’t happen without the Lender’s consent to release the lien)
Lender won’t release their lien unless they are paid off in full if you don’t have their approval for a short sale
Why is everyone so confused?
A non-recourse loan means you are not responsible for a deficiency if the property sells for less than the balance owed.
Has anyone successfully used this? Or does non-recourse only apply to foreclosures and no ability to pursue?
Non recourse doesn’t mean You can just sell your property at will without lender consent. If you’re underwater and give up, you can hand back the keys and walk away and if you haven’t tripped recourse, then that’s that and they won’t pursue the guarantors. That doesn’t entitle you to a DPO or short sale.
It’s crazy that ppl actually think there aren’t loan covenants besides dscr/dy in a 100+ page legal document defining their obligations in exchange for millions of dollars.
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