Construction Loans Part 3: Recourse vs. Non-Recourse Explained
Recourse loans allow lenders to pursue borrowers’ personal assets beyond the property collateral if default occurs, while non-recourse loans limit recovery to foreclosing on the property alone. Randy Efron from Skylatus Property Capital details how this dynamic plays out in construction financing.
Repayment Guarantees in Action
A repayment guarantee exposes borrowers to personal liability for loan shortfalls. For instance, if a $10 million construction loan yields only $8 million upon foreclosure sale, recourse lenders can claim the $2 million difference from personal assets; non-recourse lenders absorb the loss.
Bank construction loans typically carry full recourse for added security, offering lower rates. Higher-priced lenders provide non-recourse options but charge premiums to offset risk.
Completion Guarantees: The Universal Caveat
Nearly all construction loans—recourse or not—require completion guarantees. Borrowers personally assure on-time, on-budget project delivery per approved plans, covering overruns from their own funds.
Lenders demand this because loans rely on projected stabilized value. Budget excesses erode loan-to-value ratios (loan amount ÷ project value), heightening risk until certificate of occupancy.
Key Trade-Offs for Borrowers
| Guarantee Type | Scope | Duration | Borrower Impact |
|---|---|---|---|
| Completion | Project finish on time/budget | Expires at CO | Overrun liability |
| Repayment | Full loan recovery | Loan term | Personal assets at risk |
Recourse offers cheaper debt but higher personal exposure; non-recourse provides protection at higher cost.
Contact Randy Efron at randy.efron@skylatus.com for construction financing strategies at Skylatus Property Capital.
