Legal Definitions - nonrecourse note

A nonrecourse note is a type of loan where the borrower is not personally liable for the debt. If the borrower defaults on the loan, the lender's ability to recover their money is limited solely to the specific asset or collateral pledged for that loan. The lender cannot pursue the borrower's other assets, income, or personal property to satisfy the debt, even if the collateral's value is less than the outstanding loan amount. This means the risk of the loan's failure largely rests with the lender, as their recovery is capped by the value of the collateral.

Here are some examples to illustrate how a nonrecourse note works:

• Commercial Real Estate Development: Imagine a property developer secures a loan to build a new apartment complex. The loan agreement specifies it's a nonrecourse note, with the land and the future building serving as the sole collateral. If the developer faces financial difficulties and cannot repay the loan, the bank can only seize and sell the apartment complex. The bank cannot go after the developer's personal savings, other properties they own, or assets from their other business ventures, even if the sale of the apartment complex doesn't cover the full loan amount.

• Renewable Energy Project Finance: A consortium of investors forms a special purpose entity (SPE) to build and operate a large wind farm. They obtain a significant loan for the project, structured as a nonrecourse note, where the collateral is the wind farm itself and its future electricity generation contracts. Should the wind farm project fail to generate sufficient revenue to repay the loan, the lenders can only take control of the wind farm assets and its associated contracts. They cannot pursue the individual investors' personal wealth or other assets belonging to the companies within the consortium, as their liability is limited strictly to the project's assets.

• Specific Asset-Backed Business Loan: A small manufacturing company takes out a loan to purchase a highly specialized, expensive piece of machinery. The loan is structured as a nonrecourse note, with only the new machinery itself serving as collateral. If the company encounters financial trouble and defaults on the loan, the lender's only recourse is to repossess and sell that specific piece of machinery. The lender cannot claim other assets of the manufacturing company, such as its inventory, other equipment, or bank accounts, because the loan was explicitly nonrecourse and tied only to the purchased machinery.