A non-recourse commercial loan limits the lender to the property and its other collateral, but only until the borrower or its principals do one of the things listed in the carve-out section. Some carve-outs make the borrower liable for the lender's actual loss from the act. Others, often called springing recourse, make the entire loan a personal obligation, and the guarantor who signed the carve-out guaranty stands behind both.
The carve-out section deserves the same attention as the rate, the term and the prepayment terms. This guide walks through how the carve-outs are structured, using Fannie Mae's published standard loan agreement as the reference because its text is public, then shows what each tier costs in a default and which triggers catch sponsors without any bad intent.
How a non-recourse loan is written
The non-recourse promise is a single clause with exceptions attached. In Fannie Mae's Multifamily Loan and Security Agreement (Non-Recourse), Form 6001.NR, Section 3.01 says that neither the borrower nor any of its directors, officers, managers, members, partners, shareholders, trustees, trust beneficiaries or employees has personal liability for the debt, and that the lender's only recourse is the mortgaged property and other collateral. The same section then says that limit is subject to the exceptions in Article 3, and that it does not limit the lender's rights against the guarantor.
Section 3.02 holds the exceptions, and it splits them into two lists:
- 3.02(a), personal liability based on the lender's loss. The borrower is liable for the portion of the debt equal to the loss or damage the lender suffers from the act.
- 3.02(b), full personal liability for the mortgage loan. The borrower becomes personally liable for all of the indebtedness.
These are often called "loss" carve-outs and "full recourse" or "springing" carve-outs. Other lenders' documents use their own labels, and the items on each list, and which list an item sits on, differ from loan to loan.
The two lists in Fannie Mae's standard agreement
| Tier | Trigger in Form 6001.NR | Exposure |
|---|---|---|
| Loss-based, 3.02(a) | Not turning over, on the lender's demand after an event of default, rents the lender is entitled to and tenant security deposits not properly applied under the leases | Lender's loss |
| Loss-based | Failing to maintain required insurance | Lender's loss |
| Loss-based | Failing to apply insurance or condemnation proceeds as the documents require | Lender's loss |
| Loss-based | Failing to deliver required books, records, statements and reports | Lender's loss |
| Loss-based | Not applying rents to operating expenses and debt service when due | Lender's loss |
| Loss-based | Waste or abandonment of the property | Lender's loss |
| Loss-based | Grossly negligent or reckless unintentional material misrepresentation or omission in reporting or consent requests | Lender's loss |
| Loss-based | Claims under a tenant opportunity-to-purchase law | Lender's loss |
| Full recourse, 3.02(b) | Breaching the single-asset entity requirements in Section 4.02(d) | Entire debt |
| Full recourse | A transfer the documents do not permit (a foreclosure conveyance is excluded) | Entire debt |
| Full recourse | A bankruptcy event; an involuntary filing counts only if the borrower, guarantor, Key Principal or an affiliate consented to, encouraged or actively participated in it | Entire debt |
| Full recourse | Fraud, written material misrepresentation or material omission in applying for or creating the loan | Entire debt |
| Full recourse | Fraud, or intentional material misrepresentation or omission, in ongoing reporting or consent requests | Entire debt |
| Full recourse | A division of the borrowing entity the documents do not permit | Entire debt |
Two other provisions matter as much as the lists. Section 3.03 makes the borrower fully liable for its indemnity obligations, including the separate environmental indemnity, and those are not capped by the loan amount. Section 3.04 lets the lender pursue the borrower personally without first foreclosing on the property or pursuing the guarantor, and the borrower waives any right to offset the property's value against that liability.
The agreement also carves back some protection for the borrower. The items on turning over rents and security deposits, applying insurance and condemnation proceeds, and applying rents to expenses and debt service do not apply to the extent the borrower lacks the legal right to direct those funds because of an involuntary bankruptcy that occurred without the consent, encouragement or active participation of the borrower, guarantor, Key Principal or a borrower affiliate.
Who is on the hook
The borrowing entity signs the loan agreement, but a single-asset borrower that has defaulted rarely has anything other than the property. The guarantor is where a carve-out claim gets paid.
Fannie Mae's Multifamily Selling and Servicing Guide, Part III, Section 902, requires lenders to obtain a Non-Recourse Guaranty on Form 6015 from each Key Principal, and Fannie Mae lists Form 6015 as the "Guaranty of Non-Recourse Obligations." Its Guide defines a Key Principal as a person who controls or manages the borrower or the property, is critical to its operation, or may be required to provide a guaranty. Other lenders use the same structure under names such as recourse carve-out guaranty or bad boy guaranty.
That is why the guarantor's balance sheet is reviewed even on a non-recourse loan. Our guide to how lenders evaluate sponsor guarantees covers the net worth and liquidity review and the main guaranty types.
A worked example: one default, three outcomes
Assume a $10,000,000 non-recourse loan on a multifamily property goes into default. By the time of the foreclosure sale, $350,000 of default interest, late charges and legal fees has accrued, so the debt is $10,350,000. The property sells for $8,200,000, and sale and foreclosure costs take 4%, or $328,000. All figures are illustrative.
| Line | Amount |
|---|---|
| Outstanding principal | $10,000,000 |
| Accrued default interest, charges and fees | $350,000 |
| Total debt | $10,350,000 |
| Foreclosure sale price | $8,200,000 |
| Less sale and foreclosure costs (4%) | ($328,000) |
| Net recovery | $7,872,000 |
| Deficiency ($10,350,000 − $7,872,000) | $2,478,000 |
What the guarantor owes depends on what happened before and during the default:
| Scenario | Carve-out tier | Guarantor exposure |
|---|---|---|
| A. The property simply underperformed; rents went to the lender on demand and reporting stayed current | None | $0 (the sponsor loses its equity, and the lender absorbs the $2,478,000 deficiency) |
| B. After the lender's default notice, the borrower kept $180,000 of collected rents and used them elsewhere | Loss-based | $180,000, the lender's loss from the diverted rents |
| C. A year earlier, a member sold part of its interest in the borrower without the lender's consent, and the documents did not permit the transfer | Full recourse | $2,478,000, the entire deficiency |
Scenario C is the one to plan around. The transfer did not cause the default and may have had nothing to do with the property's performance, yet it turned a $2.48 million loss the lender had agreed to bear into a personal obligation. Under Section 3.04 the lender also does not have to foreclose first, so the claim can arrive while the property is still being marketed.
Triggers that catch sponsors without bad intent
Several full-recourse items can be triggered by ordinary business decisions made without checking the loan documents first.
Transfers of interests. Check how the documents define "transfer." The definition can reach changes in ownership of the borrower, not only a sale of the property. Admitting a new investor, buying out a partner, moving interests into an estate-planning trust or recapitalizing the sponsor entity can each be a transfer that needs consent unless the documents list it as permitted. Ask the lender before closing which transfers are pre-approved and which need consent.
Single-asset entity covenants. Commingling the property's cash with an affiliate's, paying an affiliate's bills from the property account, guaranteeing another entity's debt or taking on debt outside the permitted categories can breach Section 4.02(d)-type covenants. Our article on single-purpose entity requirements lists the separateness covenants lenders typically require.
Additional financing. Mezzanine debt, a second mortgage or a preferred equity investment with remedies against the borrower can be both a transfer and a debt-limit breach unless the senior lender has approved it in writing.
Bankruptcy decisions. A voluntary filing is a Bankruptcy Event under Section 3.02(b). Fannie Mae's agreement also reaches an involuntary filing that the borrower, guarantor, Key Principal or an affiliate consented to, encouraged or actively participated in. A sponsor considering a filing to stop a foreclosure should model the guaranty claim before deciding.
Entity divisions. Fannie Mae's form includes a "Division" trigger, which covers a statutory division, available in some states, of one entity into two or more. A reorganization that uses it without consent is a full-recourse event under Section 3.02(b).
Reporting. Late or incomplete financial reporting is a loss-based item, but intentional misstatements in reporting or consent requests move to the full-recourse list.
When a solvency covenant becomes a recourse trigger
The best-known dispute over springing recourse came from Michigan. In Wells Fargo Bank v. Cherryland Mall Limited Partnership, the mortgage required the borrower, as part of its single-purpose entity covenants, to remain solvent. The Michigan Court of Appeals held in 2011 that the borrower's insolvency breached that covenant and made the loan fully recourse, so the guarantor was liable for the entire deficiency regardless of why the borrower became insolvent. The parties had stipulated to a deficiency of $2,142,697.86 on an $8.7 million loan.
The Michigan Legislature then passed the Nonrecourse Mortgage Loan Act, effective March 29, 2012. It bars a post-closing solvency covenant, meaning a term that relates solely to the borrower's solvency after the loan is funded, from serving as a non-recourse carve-out on a commercial loan secured by Michigan real property. The act does not reach covenants against filing a voluntary bankruptcy or colluding in an involuntary one. On remand in April 2013, the Court of Appeals applied the act to the pending case, held that the guaranty provisions based on the solvency covenant were unenforceable, and rejected the lender's constitutional challenges.
The act applies only to Michigan property. Outside Michigan, the result depends on the loan documents and state law. Fannie Mae's current form keeps solvency out of the Section 4.02(d) covenant list; solvency appears as a representation in Section 4.01(f), made as of the effective date of the loan. Other lenders' documents may still include an ongoing solvency or adequate-capital covenant, and sponsors should find out which list it sits on.
What to ask before signing
The carve-out section is negotiable within limits that differ by capital source. Capital providers set the final terms after underwriting. Questions worth putting to the lender and to your own counsel:
- Which items are loss-based and which are full recourse, and does any item on the full-recourse list turn on something other than the sponsor's own deliberate act?
- Which transfers of interests in the borrower are permitted without consent: estate planning, transfers among existing members, new passive investors below a threshold, a change of the managing member?
- Do the single-asset entity covenants include solvency, adequate capital or payment of debts as they come due, and are they framed as covenants or as closing representations?
- Is there a notice and cure period before a loss-based or SPE breach becomes a recourse event?
- Is environmental liability a separate indemnity, and does it survive repayment or foreclosure?
- Is the guarantor's liability capped, and do the guaranty and the loan agreement define the guaranteed obligations the same way?
These questions matter most on bridge loans and refinancings, where business plans can change mid-term and may involve recapitalizations or new partners. The controlling terms are in your loan documents.
Bottom line
A non-recourse loan protects the sponsor only as long as the carve-outs are not triggered. Loss-based carve-outs cost what the act cost the lender. Full-recourse carve-outs reach the entire debt, which after a foreclosure sale is the whole deficiency; in our example that is $2,478,000 against $180,000 for diverted rents. The full-recourse list is mostly about control: who owns the borrower, what else it does, what other debt it takes and whether it files for bankruptcy. Read Article 3, or its equivalent, before closing, and check any transfer, new financing or restructuring against it before the sponsor acts.
Sources checked November 2, 2026. Loan document forms and guide sections are revised periodically; the section numbers above refer to Fannie Mae Form 6001.NR and the Multifamily Selling and Servicing Guide as published on that date.