Bill White, Director of Commercial Real Estate Lending for Wells Fargo Private Bank, discusses financing options—recourse vs. nonrecourse loans and key considerations when financing commercial real estate.

Transcript: Financing Options for Commercial Real Estate

Hello, I’m Bill White, director of commercial real estate lending for Wells Fargo Private Bank.

As you review your financial plan and goals in light of the current environment, investing in commercial real estate is one option you might want to explore as an addition to your investment portfolio. Commercial real estate can help you optimize your investment portfolio yield by taking advantage of the historically low interest rates that we are experiencing.

If you are considering this type of investment, one of the most important decisions you will need to make is how to structure your borrowing.

In this webcast, I'll talk briefly about the two financing options available for commercial real estate investments—recourse loans and non-recourse loans.

So what’s the main difference between recourse loans and non-recourse loans?

With recourse loans, borrowers may be personally responsible for the difference between the sale price of the property and the amount owed to the lender. In other words, the deficiency. This provides the lender with a secondary source of repayment.

In the case of non-recourse loans, the lender is prohibited from collecting any shortfall in the difference between the sale price of the property and the amount borrowed. The lender’s only source of repayment is the property that was pledged as collateral.

At first glance, it may seem like a non-recourse loan is the ideal choice since it may eliminate the personal liability. However, since non-recourse lenders only have one source of repayment, they structure loans much differently than recourse lenders. As such, non-recourse loans come with certain restrictions and trade-offs.

On the flip side, one of the big benefits with recourse loans is the flexibility it offers, with regards to loan structure and pricing.

The key to determining which loan type is best for you depends on your investment objectives. As you think about investing and financing your commercial real estate investment, consider these following questions:

  • What kind of relationship, if any, do you want with the lender?
  • How important is it to have flexibility with the loan terms and structure?
  • How much personal risk are you comfortable taking on?
  • How long do you envision owning the property and do you want the flexibility to prepay the loan early?
  • How do you plan to manage your commercial real estate investments?

I encourage you to consult with your relationship manager to help you in making the decision that is right for you.

For more detailed information, you can access our white paper. Thank you for watching this webcast.