Legal Definitions - nonrecourse loan

A nonrecourse loan is a type of loan where the lender's ability to recover their money if the borrower defaults is strictly limited to the specific asset pledged as collateral for that loan. This means that if the borrower fails to repay the loan, the lender can only seize and sell the collateral to satisfy the debt. The lender *cannot* pursue the borrower's other assets, income, or personal property to cover any remaining balance if the collateral's value is insufficient to fully repay the loan. The borrower's personal liability is therefore restricted to the collateral itself.

• Example 1: Commercial Real Estate Development

  A real estate development company obtains a loan to construct a new office building. The loan agreement explicitly states it is a nonrecourse loan, with the newly constructed office building serving as the sole collateral. If the development company faces financial difficulties and defaults on the loan, the bank's recovery is limited to foreclosing on and taking ownership of the office building. The bank cannot pursue the personal assets of the company's owners, other properties owned by the company, or its general corporate funds to cover any remaining debt if the sale of the office building doesn't fully repay the loan.

• Example 2: Investment Property Mortgage

  An individual investor purchases a secondary property, such as a rental duplex, and secures a nonrecourse mortgage for it. Should the investor encounter financial hardship and default on this specific mortgage, the lender can only seize and sell the rental duplex. The lender cannot place a lien on the investor's primary residence, garnish their wages, or seize other personal assets to recover any shortfall between the sale price of the duplex and the outstanding loan amount.

• Example 3: Project Finance for a Renewable Energy Plant

  A consortium of investors secures a loan to build a large-scale wind farm. This loan is structured as nonrecourse, with the wind farm project itself (including the land, turbines, and associated infrastructure) as the collateral. If the wind farm project fails to generate sufficient revenue and the consortium defaults on the loan, the lenders can take control of the wind farm. However, they cannot pursue the individual investors' personal wealth, other business ventures, or unrelated assets to make up for any losses incurred on this specific project loan.