Navigating Transfer Restrictions in Non-Recourse CRE Loans
non-recourse loans, common in commercial real estate finance, often include provisions governing property transfers. A recent trend poses a significant risk to borrowers: failure to provide required notice to the lender regarding a permitted transfer can, in some cases, fully eliminate the lender’s recourse options. This means even if the transfer itself would have been allowed with proper notification, the lender loses the ability to pursue any claims against the borrower or guarantor if notice isn’t given.
Many lenders are understandably hesitant to relinquish all recourse, even in situations where a transfer technically complies with loan terms but lacks proper notification.Maintaining visibility into property ownership and operation is crucial for risk management. To address this, a common negotiation tactic is to bifurcate the non-recourse carveout.
This involves creating two distinct categories of transfer-related recourse:
“Above-the-Line” Carveout: This applies specifically to transfers permitted under the loan documents except for those where the borrower failed to provide required notice. Recourse here is typically limited to covering losses.
“Below-the-Line” Carveout: This remains a full-recourse provision, reserved for transfers that directly violate the loan agreement.
Another approach focuses on refining the scope of the “below-the-line” carveout. Lenders might limit full recourse to voluntary transfers of the property itself, including situations where a new mortgage or deed of trust is granted. It also frequently enough includes transfers of controlling interest in the borrower that diminish the guarantor’s ownership stake or control. Any other transfer violations would then trigger a less severe, losses-based recourse carveout.
The benefit of these bifurcated approaches is twofold: lenders retain some ability to pursue recourse for all transfer violations, and borrowers are strongly incentivized to meticulously adhere to the notification requirements.
Key Considerations for Negotiation:
Ultimately, the specifics of transfer restrictions and carveouts are heavily influenced by the individual deal structure and the negotiating leverage of each party.Borrowers should anticipate lenders will strongly defend their standard language. Prosperous negotiation requires a clear understanding of customary practices and a well-articulated explanation of any specific business concerns driving the request for modification.
For further insights on this topic and other developments in commercial real estate finance, contact the Commercial Real Estate Finance (CREF) Team at Frost Brown Todd. https://frostbrowntodd.com/industry-areas/finance/commercial-real-estate-finance-cref/
You can also explore more in-depth analysis on The Carveout blog: https://frostbrowntodd.com/the-carveout-blog/
This post is part of The Carveout, a blog dedicated to providing insights into current trends and developments in commercial real estate finance, with a focus on non-recourse carveouts and complex capital sources.
