Non-Recourse Construction Loans

By: Justin Laub

“What’s the difference between Santa Claus and a non-recourse construction loan?” The answer: the non-recourse construction loan actually exists. That certainly wasn’t the case in 2009-2010, even for the most blue chip of borrowers. Only in the past couple of years have these blue chip borrowers been able to access non-recourse construction loans, though only for low-leverage deals in the most prime locations of major markets. For the rest of the developers out there, they either had to sign full-recourse or wait until the capital markets improved dramatically to get a construction loan for their project.

shutterstock_128384549Well, the wait is over. Banks are wading back into the non-recourse waters for middle market developers. If a project can show some combination of pre-leasing, pent-up demand, a good location, sponsorship track record, and a meaningful equity contribution, then you have a case for a non-recourse construction loan in the current market. You don’t need to have all of the above but rather some combination of these merits to get you over the finish line with a non-recourse loan.

As an example, our firm recently secured a non-recourse construction loan for a strip retail center in a commuter suburb of the Dallas-Ft. Worth area. The deal had a few of the merits noted above, such as 65% pre-leasing, a location along a defined retail corridor of a fast-growing commuter suburb, and significant equity contribution. Aside from the non-recourse aspect of the loan, the rest of the terms were in line with what you might expect for a full-recourse bank loan.

The development market is back in full force, especially in regions with strong population and economic growth such as Texas. For certain property types in the right location, it is not unheard of to find a local bank that is willing to fund a non-recourse construction loan on a fully speculative development. The lending market is by no means at the point where non-recourse construction loans are the norm, but it is certainly inching in that direction. Whether that kind of market is ultimately good for everyone or not is a much longer conversation, one we can save for an extended fireside chat over a glass of single-malt scotch.

In the meantime, if you are planning a development project and want our perspective on the current lending market – recourse, non-recourse, or otherwise – please contact me at Jlaub@metcapital.com or any of the other Senior Directors at our firm, www.metcapital.com

Posted on by Scott Lynn in Commercial Real Estate Finance Comments Off on Non-Recourse Construction Loans