The ripples from the banking and liquidity crises keep hitting distant shores, giving everyone pause to consider how the “new rules” will affect each respective business model going forward, at least until things “return to normal.”

The newest twist affecting the commercial market in general and the Tenantin-Common (TIC) market specifically is the emergence (or re-emergence) of the dreaded “Recourse Loan.” After ten years of easy money and low interest rates, the recourse loan, or personal guarantee, is re-appearing to the consternation of many an investor.

In a recourse loan, investors are required to personally guarantee all or a portion of the loan, in addition to putting the property up as collateral. Non-recourse loans have been the order of the day for many commercial projects over the past decade, as lenders packaged the loans into commercial-mortgage-backed securities (CMBS) and sold them as bonds, reducing their own risk if the borrowers could not pay. But now, with the near shut-down of the CMBS markets and lack of liquidity overall, it is becoming more prevalent in the TIC industry and elsewhere as lenders seek to limit their exposure to losses.

It is likely that many lenders going forward will keep the loans on their books. The added measure of protection offered by a partial recourse loan back by the personal guarantee of the borrower would afford them a level of protection lacking over the last decade.

To be sure, many developers and investors will balk at the prospect of putting up their personal bank account as collateral for a loan. But for many, that may be the only way they will be able to put a deal together. With regard to the TIC market overall, the recourse loan is just now making an appearance, and how prevalent they may become in anybody’s guess.

It would be a mistake to say that all of the characteristics of a recourse loan are negative. For one thing, they are generally less expensive, by about 1% less than a non-recourse loan. A lender may also be inclined to offer more favorable leverage on a deal, further lowering costs and /or raising the potential yield.  A recourse loan can also offer more flexibility than a nonrecourse loan if structured properly. One could conceivably get more favorable repayment terms than would be available with a traditional CMBS loan. It also may be without prepayment penalties, yield maintenance provisions or defeasance costs associated with an early payoff. With this added dimension and if the properties perform as projected, investors may have the flexibility to refinance with potentially greater leverage and at more favorable terms once the capital markets become more liquid.

When it comes to the Tenant-in-Common market, the recourse loan could be more problematic. With up to 35 investors in each TIC, each investor could have partial responsibility for any losses incurred by the lender. And while TIC investors share “pro-rata” throughout the activity of a property, losses could be substantial (and beyond their pro-rata portion) if the investors are held to be liable both jointly and severally, conceivably exposing them to substantial losses. This risk must be weighed carefully when considering a recourse loan for a TIC property.

As investors are confronted with recourse loans, at least in the near future, careful consideration must be paid to how much exposure one is willing to assume to craft a commercial real estate deal using leverage, and whether the risks and potential rewards are worth it.