Money & Finance › Commercial real estate lending › Recourse vs. non-recourse loans: is the owner personally liable?
Personal guarantees: full, limited and burn-off
· Concept
Fact, law or dataA rule, statute, definition or measured number.
A separate promise by an owner or parent company to pay the lender if the borrowing LLC cannot.
See it on the Money & Finance map →How it works
A full payment guaranty makes the guarantor liable for the whole loan. A limited guaranty caps it, for example at 25–50% of the balance or a fixed dollar amount. A burn-off guaranty shrinks or ends once the property hits targets, such as DSCR above 1.40x, or after a set time. Others cover only completion of construction, carrying costs or environmental problems. Guarantors usually must keep minimum net worth and cash, send yearly statements and, in California, waive anti-deficiency defenses.
Why it matters
The guarantee, not the LLC, is what puts an owner's other assets at risk, and its terms are often more negotiable than the interest rate.
Facts, rules and data
Guaranty agreements; California Civil Code 2856, which lets guarantors waive suretyship and anti-deficiency defenses; and lawsuits enforcing guarantees after foreclosures.
Debates and risks
How hard lenders pursue guarantors after a loss varies widely; many settle for less than the full guaranty to avoid costly collection.
Connections (9)
▸Recourse vs. non-recourse loans: is the owner personally liable? is usually decided by Personal guarantees: full, limited and burn-offFact, law or data
The connection
The borrower is usually a single-purpose LLC whose only asset is the building, so the lender can always take the property. Whether it can reach anything else depends on who guarantees the loan. A full guaranty makes it full recourse; a limited or burn-off guaranty makes it partial; a carve-out guaranty alone leaves it non-recourse.
When and why
In nearly every US commercial property loan; the guaranty is a separate document the owner or parent company signs at closing.
How we know
Loan and guaranty documents, and court cases in which lenders sue guarantors for deficiencies after foreclosure.
Debates and risks
California's anti-deficiency rules protect borrowers but not guarantors who waive them; courts still test how far those waivers reach.
▸Bank balance-sheet loans from community and regional banks usually require Personal guarantees: full, limited and burn-offFact, law or data
The connection
A bank that keeps the loan wants a second source of repayment and an owner with skin in the game. So most bank CRE loans to smaller owners carry a personal guarantee, plus yearly financial statements and minimum net-worth and cash tests. Strong, low-leverage deals can negotiate limited or burn-off guarantees.
When and why
Standard practice at US community and regional banks; regulators' loan-grading guidance counts guarantor strength.
How we know
Bank term sheets and loan policies, and the 2023 interagency workout statement, which weighs guarantor support when grading CRE loans.
Debates and risks
How much guarantees are worth in practice is unclear; banks often settle for less than the full guaranty after a loss.
▸SBA 7(a) loans: the all-purpose small-business loan (to $5 million) require, from every 20% owner, Personal guarantees: full, limited and burn-offFact, law or data
The connection
SBA rules require an unlimited personal guarantee from every owner of 20% or more, and lenders may ask smaller owners too. So even when the borrower is an operating company, the owners' personal assets back the loan. After a default, the SBA pursues guarantors to recover its guaranteed share.
When and why
In every 7(a) loan under SBA's SOP 50 10 rules; the guaranty is a separate SBA form signed at closing.
How we know
SBA's SOP 50 10 and its standard guaranty forms (SBA Form 148), plus SBA and Treasury collection actions against guarantors.
Debates and risks
How aggressively the SBA and Treasury collect from guarantors after defaults, and how often they settle for less, is not well reported.
▸Personal guarantees: full, limited and burn-off pierce the liability shield of Single-purpose entity (SPE) borrowers: one building, one LLCFact, law or data
The connection
An SPE limits the owner's risk to its equity in one building. A personal guarantee reaches past that shield: the owner promises, as an individual, to pay what the LLC cannot. A $5 million full guaranty puts the owner's other buildings, savings and home at risk if the loan fails.
When and why
Standard in bank loans to small and mid-size owners; CMBS and life-company loans usually use only limited carve-out guarantees.
How we know
Guaranty agreements signed at closing, and court judgments against guarantors after foreclosures.
Debates and risks
How often lenders actually collect in full on guarantees, rather than settling, varies widely and is not tracked publicly.
▸Personal guarantees: full, limited and burn-off are a lender's way around California's one-action and anti-deficiency rulesFact, law or data
The connection
California law shields the borrowing LLC from a deficiency after a trustee's sale. Lenders get around it by having owners sign separate guarantees that waive anti-deficiency and suretyship defenses, as Civil Code 2856 allows. After foreclosure, the lender can then sue the guarantor for the shortfall.
When and why
California lending practice since Union Bank v. Gradsky (1968), which made such waivers essential; now expressly allowed by Civil Code 2856.
How we know
Standard California guaranty forms include 'Gradsky' and Section 2856 waivers, and appellate courts regularly enforce them.
Debates and risks
Courts still test whether a guarantor is really the borrower in disguise, a 'sham guaranty' that loses the waivers' force.
▸'Bad-boy' carve-outs: when a non-recourse loan springs recourse are a narrow kind of Personal guarantees: full, limited and burn-offFact, law or data
The connection
A carve-out guaranty lies dormant: the guarantor owes nothing unless a listed act occurs. A full payment guaranty, by contrast, is owed as soon as the loan defaults. Some loans combine a carve-out guaranty with a limited payment guaranty.
When and why
Signed at closing by a key principal or parent company, typically in CMBS, life-company and debt-fund loans.
How we know
Standard guaranty forms and court rulings that distinguish contingent carve-out guaranties from payment guaranties.
Debates and risks
A narrow-sounding guaranty can become full liability through broad triggers, so how narrow it really is depends on the drafting.
▸Deed in lieu of foreclosure: handing back the keys is often traded for release of Personal guarantees: full, limited and burn-offFact, law or data
The connection
An owner who guaranteed a loan has a strong reason to hand the property back cooperatively. A common deal: the borrower gives a deed in lieu, a smooth transition and sometimes cash; the lender releases the guaranty, fully or partly, and agrees not to sue for any deficiency.
When and why
Commercial workouts involving guaranteed bank loans and carve-out guaranties.
How we know
Release and covenant-not-to-sue clauses in deed-in-lieu agreements, described in lender and law-firm workout guides.
Debates and risks
How much lenders give up in these swaps depends on the guarantor's assets, and outcomes are rarely public.
▸Business loans: credit lines, C&I term loans, equipment and ABL usually require, for small firms, Personal guarantees: full, limited and burn-offFact, law or data
The connection
Small companies have thin balance sheets, so banks usually ask owners of 20% or more to sign personal guarantees, often unlimited and joint and several. If the business cannot pay, the bank can pursue the owner's savings, home equity and other assets. Larger firms with audited statements and strong cash flow can often negotiate limited guarantees or none.
When and why
Standard in US small-business lending; SBA rules require guarantees from every owner of 20% or more.
How we know
Standard bank loan forms and the Fed's Small Business Credit Survey show guarantees are routine for small firms.
Debates and risks
How much guarantees actually recover after defaults, since owners often lack liquid assets and settlements are private.
▸Personal guarantees: full, limited and burn-off are standard at Community banks and credit unionsFact, law or data
The connection
Community banks and credit unions lend mostly to local owners whose own finances matter as much as the building, so they ask principals, often anyone owning 20% or more, to guarantee. NCUA dropped its mandatory guarantee rule for credit unions in 2016, but most still require one in practice.
When and why
US community banks and credit unions; SBA loans they make require guarantees from every 20% owner.
How we know
Lender loan policies, NCUA's 2016 member business lending rule, and SBA's SOP 50 10.
Debates and risks
Whether stronger borrowers can win limited or burn-off guarantees from small lenders depends on local competition, which varies by market.