Investment Loans Financing

Commercial loans or investment loans financing are either recourse or non-recourse loans. Recourse loans require the borrower to sign as a personal guarantor on the loan. As a personal guarantor of the loan if the business fails or the borrower defaults on the mortgage and the property goes to foreclosure the lender can legally come after the borrower’s personal assets. This means the lender can get a judgment against the borrower, garnish their wages and attache personal bank accounts. This extreme measure against the borrower is only implemented if the proceeds from the resale of the foreclosed property is not sufficient to cover the mortgage balance.

Most small balance commercial loans are recourse loans whether the business entity is a sole proprietorship, corporation or partnership with some exceptions. If multiple parties sign the mortgage note as gurantors then joint and several liability attaches to each party. This means no matter the percentage of ownership between the parties in the property pledge as collateral they are jointly and severally liable for any deficiency in satisfying the mortgage note. For example, if one partner has a 70 percent interest and the other only 30 percent, if the property forecloses and the 70 percent partner is bankrupt then the lender can collect the total amount due from the other partner.

From the lender’s perspective if the borrower’s wants the lender to partner with them through the financing of the property then the borrower should be willing to show personal responsibility and commitment to the business by signing a personal guarantee.

Non-recourse loans do not require personal gurantors. These types of loans stand on their own in that the property pledged as collateral is the sole security for the investment loan. A non-recourse loan allow the borrower to take on less personal risk and their personal assets are not at risk of attachement by the lender. If the property value declines due to market forces, the borrower will not be liable for the difference after the property resells.

There are certain types of properties that may qualify for a non-recourse loan if the borrower’s credit is excellent along with a stable history of income. These property types are self-storage units, golf courses, strip mall/shopping centers, mixed-use properties and apartment buildings. These properties are self sufficient in that they generate cash flow. In these tough economic times lenders will generally require a minimum of 1.25 Debt Service Coverage Rate (DSCR). This means the property will generate 25% more cash over and above the cash required to take care of the operating expenses of the property including the mortgage payment.

A critical element of a non-recourse loan is the value of the property that is being pledge as security. Lender will do its due diligence to ensure that the property has excellent value in the market place because if you default on the loan the property is what the lender is left with and of course they want to be able to sell the property quickly. Generally, a loan-to-value of less than 65% would be considered by the lender. The lower the loan-to-value the more attractive the property is because the lender has less risk.