Legal Definitions - nonrecourse

Nonrecourse refers to a type of debt or loan where the lender's ability to recover unpaid amounts is strictly limited to the specific asset or collateral pledged to secure the loan. This means that if the borrower defaults and the collateral's value is insufficient to cover the outstanding debt, the lender cannot pursue the borrower's other personal assets, such as their bank accounts, other properties, or wages, to make up the difference.

In essence, with a nonrecourse loan, the borrower's personal liability for the debt is limited to the collateral itself. This contrasts with a "recourse" loan, where the lender can typically pursue the borrower's other assets if the collateral's sale does not fully satisfy the debt.

• Example 1: Commercial Real Estate Development

  A real estate developer secures a loan to construct a new apartment complex. The loan agreement explicitly states it is a nonrecourse loan. If, due to unforeseen market conditions, the project fails, and the apartment complex is foreclosed upon and sold for less than the outstanding loan amount, the bank's recovery is limited to the proceeds from the sale of that specific property. The bank cannot pursue the developer's personal assets, such as their primary residence, personal investments, or other business ventures, to cover the remaining debt shortfall.

• Example 2: Project Finance for an Infrastructure Project

  A consortium of companies forms a new entity to build and operate a toll road. They secure a large nonrecourse loan from a group of banks to fund the construction. The loan is secured solely by the assets and future revenues of the toll road project itself. If the toll road generates less revenue than projected and cannot repay the loan, the banks can only claim the assets of the toll road project (the land, infrastructure, equipment, and future toll collections). They cannot seek repayment from the individual parent companies within the consortium beyond their initial equity contributions to the project entity.

• Example 3: Reverse Mortgage for Homeowners

  An elderly homeowner takes out a reverse mortgage, which is typically structured as a nonrecourse loan. This allows them to convert a portion of their home equity into cash without having to make monthly mortgage payments. When the homeowner eventually passes away or moves out of the home, the loan becomes due. If the home's value has declined and it sells for less than the total amount owed on the reverse mortgage, the homeowner's heirs are not responsible for paying the difference. The lender's recovery is limited solely to the proceeds from the sale of the home, and they cannot pursue the homeowner's estate or heirs for any shortfall.