The Appeal of Non-Recourse Repayment Options

ATLANTA, GA—When selecting a financial institution for a CRE loan, 79% of U.S. CRE developers would be more likely to choose a bank that offered a non-recourse repayment over one that did not, according to a recent study commissioned by the LGIS Group, a commercial real estate finance company.

The current CRE market is characterized by high levels of liquidity that is fueling increased competition for banks and credit unions from new players that are entering the industry.

The new players coming into the CRE lending space are mainly non-banks, fintechs and other alternative lenders.

“These include debt funds, debt REITs and private lenders—all of which are in no way held to the same regulatory scrutiny and standards as traditional financial institutions,” David Eichenblatt, president and founder of LGIS Group, tells GlobeSt.com. Unlike many banks and credit unions, these lenders do frequently offer non-recourse options for their loans, but at much higher interest rates, significantly increasing the costs for borrowers, he says. These finance providers also tend to offer more debt dollars—i.e. higher leverage, he adds.

Eichenblatt believes that traditional financial institutions won’t start offering non-recourse repayment options in the near future partly due to regulation as non-recourse repayment options are currently not recognized as a part of the approved lending policies by the FDIC and OCC.

“The other factor is that this is an industry that can be slow to innovate, especially in how loans are processed,” says Eichenblatt. “While most CRE lenders do accept co-guarantors or substitute guarantors—basically other individuals offering up their own balance sheets—this is at best an imperfect and highly inefficient system,” he says. There are significantly higher costs for everyone—often with points in, points out and a piece of the deal, he notes. “It also doesn’t increase the probability of collection or help avoid the frustration, the sunk time and costs associated with it.”

Banks and credit unions recognize the need to adapt to keep pace with today’s changing market, and they’ve done so in almost every other area of banking. Until now, however, they haven’t had an alternative to the personal guarantee requirements when it comes to CRE lending, Eichenblatt says.

He went on to say that, in his opinion, today’s banks and credit unions should update their methods to compete before more of these non-banks and alternative lenders take their market share.

“What’s more, it took these new players only a few years to go from basically a non-factor to a significant threat, so financial institutions need to act now, or risk getting left behind.”

The study was conducted online by The Harris Poll.