California Real Estate Broker ExaminationFinancingHard
A real estate investor is considering purchasing a commercial property. The investor plans to finance the purchase using a non-recourse loan. Which of the following statements most accurately describes the implication of a non-recourse loan for the borrower?
- AThe loan typically has a higher interest rate and requires a larger down payment.
- BThe lender can only pursue the collateral (the property) to satisfy the debt in case of default.
- CThe borrower is personally liable for the entire loan balance.
- DThe borrower forfeits all equity in the property upon obtaining the loan.
Show answer & explanationAnswer & explanation
Correct answer: B. The lender can only pursue the collateral (the property) to satisfy the debt in case of default.
In a non-recourse loan, the borrower is not personally liable for the debt. If the borrower defaults, the lender's only recourse is to seize and sell the collateral (the property) to recover the outstanding balance. The lender cannot pursue the borrower's other assets.
Why the other options are wrong
- A. While non-recourse loans can sometimes have different terms, this is not a universal or defining characteristic. The primary implication is the limitation of liability.
- C. This describes a recourse loan, where the borrower is personally liable.
- D. Obtaining a loan does not mean forfeiting equity; equity is built as the loan is paid down or property value increases.
Non-Recourse Loan
A type of loan where the lender can only pursue the collateral (e.g., the property) for repayment, and cannot seek to recover any deficiency from the borrower's other assets.
- Borrower is not personally liable for the debt.
- Common in commercial real estate and some hard money loans.
- Lender bears more risk, so terms may be stricter.
Memory trick: Non-Recourse: 'N'o 'N'eed for 'N'ew assets.