Choosing recourse or nonrecourse bank financing

Choosing recourse or nonrecourse financing is a decision about whose assets support which obligations. The sponsor should compare proceeds and carrying cost with the liabilities it is agreeing to assume. A proposal described as nonrecourse may still contain important guaranties or indemnities, while a recourse proposal may limit a particular payment obligation by amount or by defined conditions.

Begin with the borrower entity. Property debt remains an obligation of that entity even when the lender's recovery against a separate sponsor is limited. Then identify every guarantor and indemnitor, the obligations each covers, and the events that change its exposure. The financing label should follow that analysis rather than substitute for it.

Separate the obligations before comparing offers

A payment guaranty concerns the debt or a defined portion of it. A completion undertaking concerns delivering the project and paying the covered completion costs. A carry guaranty can cover specified operating or debt-related expenses. Holland & Knight's Florida construction-loan explanation discusses completion and carry obligations as separate concepts.^[1] Its account is a Florida practice explanation, not a rule that every U.S. bank loan includes identical promises.

The distinction has a concrete legal illustration. In the 2012 New York appellate decision Turnberry Residential v. Wilmington Trust, the court analyzed a completion guaranty that expressly excluded debt service from its defined covered costs and required reading the related agreements together.^[2] The case involved a Las Vegas resort, not a multifamily program. It shows why the guaranty's definition and incorporated documents matter; it does not establish universal completion-guaranty language.

Nonrecourse also needs a scope. Freddie Mac's April 2026 fixed-rate term sheet describes nonrecourse financing except for standard carve-out provisions.^[3] The term sheet is program-specific and points readers to controlling guide requirements. It supports a limited proposition: nonrecourse does not mean an absence of all exceptions. A bank proposal's exceptions must be read in its own documents.

Determine what is capped and what is outside the cap

Assume an illustrative $80 million property loan with a payment guaranty capped at $12 million. Also assume a separately documented completion obligation and carry obligation that are expressly outside that payment cap. These are negotiated example terms, not customary thresholds.

If the lender has a $20 million debt loss, the payment guaranty's assumed cap limits that particular obligation to $12 million, subject to the other stated terms. It does not automatically limit separately covered $5 million completion costs and $2 million carry costs. If all three obligations are independently triggered and there is no offset or overlap, the assumed combined exposure is $19 million.

That figure should not be treated as an automatic claim in a real default. The documents may contain limits, credits, avoidance of double recovery, available loan funds, conditions or defenses. The point is that a cap attached to one provision is not necessarily an aggregate cap across the package. Ask counsel to identify how each dollar would be allocated under a specific stress scenario.

The Turnberry court limited the use of the guaranty proceeds to the contractual covered project costs even while upholding continuing obligations.^[2] That illustrates both sides of document precision: obligations can survive events the sponsor did not expect, and the permitted use of recovery can remain limited. Neither result can be inferred from the word completion alone.

Compare the economics on equal assumptions

Suppose Proposal R lends $80 million at an assumed constant 6.75 percent interest-only rate with negotiated payment recourse. Proposal N lends $75 million at an assumed constant 7.10 percent interest-only rate with limited sponsor recourse. Ignore fees, taxes, amortization and exit costs. These rates are invented inputs for comparison.

R's annual interest is $5.4 million. N's is $5.325 million. R has a lower rate but requires $75,000 more interest each year because it lends $5 million more. If total transaction uses are $120 million, R requires $40 million of equity and N requires $45 million. The extra debt therefore trades a $5 million reduction in equity against different debt expense and liability exposure.

A sponsor should assess the value of retaining that $5 million alongside the potential guaranty obligation. There is no arithmetic conversion that makes a contingent guarantee equivalent to a fixed interest payment. The guarantee may never be called, but it may also become payable when the sponsor's other assets are under stress.

OCC CRE guidance identifies borrower or guarantor liquidity and net-worth covenants among possible loan terms.^[4] Evaluate those requirements together with the promised support. A recourse package that requires liquidity the sponsor cannot preserve may constrain the business even before any payment guarantee is enforced.

Model the sponsor's ability to perform

Prepare a schedule of existing debt, guarantees, expected contributions and accessible cash. Do not count equity in a different property as though it were cash available tomorrow. Identify restrictions on distributions, partner approvals, sale timing and debt repayment that stand between an asset and usable funds.

Suppose the sponsor has $6 million of eligible liquidity and expects a $7 million combined construction and carry demand under the assumed stress. Even a payment guarantee with a large cap does not provide the missing $1 million. The sponsor needs a financing source, additional capital or a revised obligation. A stated net worth can support the credit discussion without solving a near-term cash demand.

The bank's repayment analysis also matters. OCC guidance calls for analysis of income, repayment capacity and relevant stress conditions.^[4] A guarantee should not be used in the sponsor's own decision model to conceal a property that cannot service or refinance its debt. It is a second source of support with its own limits and costs.

Negotiate release conditions that can be demonstrated

A guaranty may reduce or end after specified milestones, but the milestone must be defined. Physical completion, lien-free completion, occupancy, sustained coverage and principal repayment can be different conditions. Determine the required evidence and who decides whether it is satisfactory.

If release requires both completion and three months of a specified coverage level, finishing construction alone will not achieve release under that assumed language. If the lender must issue written confirmation, assign someone to request and retain it. A business-plan spreadsheet should not show guaranty relief before the contractual conditions are met.

Holland & Knight's explanation ties construction obligations to the project documents and discusses the importance of budgets and defined conversion requirements.^[1] Use that framework to reconcile the completion definition, carry period and permanent financing. Avoid a gap in which the building is complete but sponsor support continues through an uncertain stabilization period.

Make the choice with a liability map

The decision file should name each obligor, covered obligation, cap, trigger, duration and release condition. Add the financing comparison showing net proceeds, equity, annual payments and expected exit. Flag provisions where one obligation incorporates another document or sits outside an assumed cap.

For a program described as nonrecourse, confirm the actual carve-outs and indemnities rather than relying on the short term sheet.^[3] For a bank recourse loan, confirm any reduction or release mechanism in the signed guarantee. The appropriate choice is the package the sponsor can support while preserving the intended investment plan and its broader obligations.