# Understanding Non-Recourse Finance: Benefits and Comparison with Recourse Loans

> **Definition**
>
> Imagine you want to develop a shopping center. While there's the promise of rent from tenants, while the center is still being built, there is no income generated. Enter the non-recourse loan. This loan product is only repaid once the project its funding is complete.

## What Is Non-Recourse Finance?

 Non-recourse finance involves a loan where repayment comes only from the project's earnings. Such loans are generally secured by collateral.

[Non-recourse loans](https://www.investopedia.com/terms/n/nonrecoursedebt.asp) are commonly used to finance commercial real estate and projects with long lead times. Unlike conventional loans, the repayment depends on the success of the project being funded.

### Key Takeaways

*   Non-recourse loans are characterized by their repayment terms, which rely solely on the project's profitability and prevent lenders from pursuing a borrower’s other assets in case of loan default.  
    
*   Projects funded through non-recourse finance typically involve substantial collateral and may attract higher interest rates due to the elevated risk for lenders.  
    
*   These loans find frequent use in industries with long project timelines, such as real estate and construction, where they offer financial breathing room due to delayed repayment schedules.  
    
*   There are significant tax treatment differences between non-recourse and recourse loans in the U.S. which can impact a borrower's financial planning and liability in the event of default.  
    
*   Unlike recourse debt, forgiveness of non-recourse loans upon default does not result in additional tax liability for the borrower, providing a distinct financial advantage.

## How Non-Recourse Finance Works

Non-recourse financing is a branch of commercial lending that is characterized by high [capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp), distant repayment prospects, and uncertain returns.

In fact, it is similar in character and risks to venture capital financing. For example, say a company wants to build a new factory. The borrower presents a bank with a detailed plan for the construction, in addition to a business plan for the greatly-expanded production that it will enable the company to undertake. Repayment can be made only when the factory is up and running, and only with the profits of that production.

The lender is agreeing to terms that do not include access to any of the borrowers' assets beyond the agreed upon [collateral](https://www.investopedia.com/terms/c/collateral.asp), even if they default on the loans. Payments will only be made when and if the funded projects generate revenue. If a project produces no revenue, the lender receives no payment on the debt. Once the collateral is seized, the bank cannot go after the borrowers in hopes of recouping any remaining losses.

> **Important**
>
> Non-recourse loans and recourse loans are subject to different tax treatments in the U.S.

## Applications of Non-Recourse Loans

Compare a non-recourse loan with the more conventional loan, in which the borrower must begin repaying immediately and in installments every month thereafter. Not surprisingly, interest rates are generally higher on non-recourse loans to compensate for the elevated risk. Substantial collateral is also required.

Non-recourse loans commonly finance commercial real estate and projects with long timelines. In the case of real estate, the land provides the collateral for the loan. They also are used in the financial industry, with securities used as collateral.

## Key Considerations in Non-Recourse Lending

Non-recourse loans and recourse loans are subject to different tax treatments in the U.S. Non-recourse loans are considered to be paid in full once the underlying asset is seized, regardless of the price at which the asset is sold.

In the case of recourse debt, if the financial institution forgives any part of the debt after [the associated asset is seized and sold](https://www.investopedia.com/terms/l/limitedrecoursedebt.asp), the forgiven amount may be treated as ordinary income that the debtor must report to the Internal Revenue Service.

## Are Non-Recourse Loans Taxable?

If you default on a non-recourse loan, the amount forgiven or canceled is not taxed.

## What Industries Use Non-Recourse Loans?

Non-recourse loans are very popular in the real estate industry, in addition to other industries that have long project timelines. Since there may not be any income at the beginning of the project, a non-recourse loan gives a measure of breathing room to project financers.

## Can a Lender Come for My Personal Assets With a Non-Recourse Loan?

No. A non-recourse loan is secured only by the listed collateral. A mortgage is a good example. If you default on your mortgage, the bank can seize the house to recoup their investments, but they can't seize your car or bank accounts.

## Final Thoughts on Non-Recourse Finance

Non-recourse loans allow businesses to finance projects with high capital expenditure and uncertain returns, allowing them to defer repayment until the project is profitable. If the project fails, lenders can only seize the collateral for the loan, without taking other assets of the borrower. These loans are commonly used in real estate and for projects with a long timeline.

  
However, they tend to have higher interest rates and collateral requirements than other commercial loans. They also have different tax considerations than typical loans.  

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Recourse vs. Nonrecourse Debt](https://apps.irs.gov/app/vita/content/36/36_02_020.jsp)."
>     
> 2.  Internal Revenue Service. "[Home Foreclosure and Debt Cancellation](https://www.irs.gov/newsroom/home-foreclosure-and-debt-cancellation)."