Nonrecourse Debt

nonrecourse-debt The nonrecourse loan is considered a type of secured debt secured by a property that is not yours. If you don’t pay your debt in time, the borrower can seize the property, but only for that amount of money. In the case where the property doesn’t cover the loan balance (like prices dropping in the real estate) the lender will loose that difference in money between the price of the property and the loan balance. Most non-recourse debts are limited to a maximum of 50-60% from the property’s market value. This way the lender will be sure he will get his money back in a worst case scenario when the client can’t repay the debt. Of course, the owner of the property must accept to put his asset as collateral for your loan if you want to get the mortgage loan approved.

Non-recourse debts are designed and used to finance real estate projects where high capital expenditures are required, in uncertain revenue streams, long loan periods and stock loans. They can also be used in securities-collateralized lending structures. Since most of the commercial real estate is not owned by a single person but in a partnership structure, this type of debt limits personal liability and provides some advantages (no double taxation or loss pass-through) to the investment.

Companies define non-recourse debt as liability in their balance while the collateral is defined as asset.

If you want to sell this property you must respect the income tax law from your country, because there is a good chance you’d have to pay certain taxes based on the value of the property and other tax dispositions. This amount cannot exceed the amount calculated for your taxpayer’s adjusted basis. In general, this amount is the entire sum of cash you will receive from selling or renting the property.

No comments yet, be the first.

Leave a Reply