Non-Recourse CMBS Loans Limit Borrower Liability
Fortunately for borrowers, the vast majority of CMBS loans are non-recourse. This means that if a borrower defaults on their loan, the lender cannot attempt to repossess their property in order to get compensation for their loss. However, just like most other types of non-recourse commercial real estate financing, CMBS loans are typically subject to standard bad boy carve outs.
What are Bad Boy Carve Outs?
A bad boy carve out is a clause in the loan agreement that provides specific conditions, such as fraud, under which a loan may actually become full-recourse. For example, if a CMBS borrower misrepresented their financial strength during the loan application process, and later defaulted on the loan, the lender/investors might be able to go after the borrower’s personal property in order to compensate themselves for their financial loss.