Non-recourse CMBS loans

A non-recourse CMBS loan lets the lender recover only from the property if the loan defaults, not from the owners personally, except for listed carve-outs. Some carve-outs make the guarantor pay the lender’s actual losses (misapplied rents, waste, fraud); others spring full recourse for the whole loan (a voluntary bankruptcy filing, an unpermitted transfer). The guaranty and environmental indemnity spell them out.

What non-recourse means in the documents

The BANK5 2025-5YR14 prospectus describes it the way every conduit deal does: on default, recourse generally runs only to the mortgaged property and other pledged assets, so repayment depends on the property’s income and, at maturity, on its value or the borrower’s ability to refinance. It adds that while the loans are generally non-recourse, they carry carve-outs for liabilities such as borrower fraud and certain voluntary insolvency proceedings, often guaranteed by an affiliate of the borrower, and that such guaranties may be capped or limited (prospectus, risk factors).

Four documents carry the structure:

Document	What it does
Loan agreement, exculpation or limitation-of-liability section	Limits the lender to the property, then lists the carve-outs
Guaranty of recourse obligations	A creditworthy guarantor promises to pay for the carve-outs, with net worth and liquidity covenants
Environmental indemnity agreement	Borrower and guarantor cover environmental losses, usually surviving repayment
Borrower’s organizational documents	Single-purpose entity and separateness covenants the carve-outs protect

The two kinds of carve-out

Losses-only (guarantor pays the lender’s actual loss)	Full recourse (the whole loan becomes personal)
Fraud or intentional misrepresentation	Voluntary bankruptcy filing by the borrower
Misapplication or misappropriation of rents, security deposits, insurance or condemnation proceeds	Colluding in an involuntary bankruptcy filing
Physical waste of the property	Transfer of the property or a controlling interest without consent
Failure to pay taxes or insurance when cash was available	Unpermitted second mortgage or other debt
Removal of personal property or fixtures	Breach of single-purpose entity covenants that leads to substantive consolidation

The exact list and the split between the columns are negotiated loan by loan; the table shows the common pattern, not a standard every lender uses. The full-recourse column exists because those acts damage the lender’s ability to foreclose on a property it underwrote alone.

The single-purpose entity and why it matters

The lender’s non-recourse promise depends on the property sitting in a borrower that owns nothing else and cannot be dragged into a sponsor’s bankruptcy. Conduit loan sellers represent to the trust that each borrower meets single-purpose entity requirements (representation and warranty no. 33 in the prospectus’s Annex D-1), and Bank of America notes that borrowers are generally required to be single-purpose entities but not always bankruptcy-remote ones (p. 293). Typical separateness covenants: own only the property, keep separate books and accounts, do not commingle funds, hold itself out as separate, deal with affiliates at arm’s length, take on no other debt, and do not guarantee anyone else’s obligations. Larger loans add an independent director whose vote is needed to file bankruptcy, and a non-consolidation opinion.

“Non-recourse” has exceptions

The same prospectus discloses loans where the label bends (p. 223):

• The Prosper South Bend Apartments loan is 20% recourse to the carve-out guarantor.
• The Township Apartments and Hollyview Apartments loans were full recourse to the sponsor guarantors until the borrower showed the property was accepted into a local housing finance corporation program that exempts it from property tax.

The prospectus also flags a structural point: a payment guaranty from the sponsor can increase the risk that a bankruptcy court consolidates the borrower with the sponsor, which is why lenders limit them. And it lists loans that have no carve-outs or limited carve-outs in a separate “Non-Recourse Carveout Limitations” section (p. 218). If your loan is in a public deal, that section and Annex A-1 tell you what yours says.

Choosing and protecting the guarantor

• Who: the sponsor, a principal, or a fund or holding entity the lender accepts. The lender reviews the guarantor’s financial statements, credit, background and litigation.
• Covenants: minimum net worth and liquidity, tested periodically. There is no market-wide number; it is set in each guaranty.
• On a sale: an assumption usually requires a replacement guarantor acceptable to the servicer, and the original guarantor should insist on a release for acts after the transfer. CMBS loan assumption.
• On a workout: carve-outs matter most when a loan is in trouble, because actions taken under stress (sweeping rents, missing tax payments, a bankruptcy filing) can trigger them. Special servicing, deed in lieu.

What to negotiate before signing

1. Limit losses-only carve-outs to the lender’s actual losses, and full recourse to the acts that truly impair the collateral.
2. Make the bankruptcy trigger voluntary filings and genuine collusion, not any involuntary filing.
3. Tie misapplication carve-outs to cash actually available from the property.
4. Carve out immaterial or inadvertent SPE breaches that do not lead to consolidation.
5. Seek a cap on the guaranty or a sunset on the environmental indemnity after repayment with a clean report.
6. Confirm permitted transfers (estate planning, affiliates, minority interests) so routine changes do not trip full recourse.

Non-recourse against other lenders

Lender	Usual recourse
CMBS conduit	Non-recourse with carve-outs
Freddie Mac and Fannie Mae multifamily	Non-recourse with standard carve-outs (Freddie Mac term sheet)
Life company	Usually non-recourse with carve-outs
Bank	Set by each bank’s policy, which federal guidelines say must address limits on non-recourse lending and guarantor support (12 CFR part 365, Appendix A); often a personal guarantee
Bridge lender	Usually non-recourse with carve-outs, plus completion or carry guarantees

Changing a loan from recourse to non-recourse, or back, is not by itself a significant modification under the REMIC rules if the loan stays principally secured by real estate (26 CFR 1.860G-2(b)(3)(vi)). Nothing on this page is legal advice; have your counsel review the guaranty and indemnity. Comparisons: CMBS vs bank loans, pros and cons.