Developers and investors often seek non-recourse debt, loans for which they are not personally liable. For investors in existing commercial property, that’s often achievable; the subject property (and its existing cash flow) may provide the lender sufficient collateral in case of a recovery. Developers seeking construction loans find non-recourse debt more difficult and, when found,
it typically comes at lower leverage and higher rate. From a lender’s perspective, this makes sense. Without a repayment guarantee, recovery from only the collateral of an incomplete project could lead to a loan loss. As such, truly non-recourse construction debt often prices at near equity yields. That onerous cost of capital is difficult for any pro forma to handle; only the most lucrative of projects can typically accept that pricing. To complicate matters, some lower cost construction loans without personal repayment guarantees often contain completion guarantees, putting the guarantor at risk. And these are still typically referred to as non-recourse debt.
So what is the difference between a repayment guarantee and a completion guarantee? Learn more.