Are CMBS Loans Non-Recourse? | Sponsor Liability Limits

Yes, most conduit-backed commercial mortgages are non-recourse, with “bad-boy” carve-outs that can trigger personal liability.

Non-recourse is one reason many owners choose CMBS (commercial mortgage-backed securities) debt. The note is tied to the property. If things go sideways, the lender’s remedy is usually the building and its rent stream, not your outside assets.

Still, “non-recourse” is not “no strings.” CMBS papers are strict about cash handling, ownership changes, and honesty in reporting. Cross the wrong line and the loan can shift from collateral-only to a personal claim.

This article breaks down how CMBS non-recourse works, which carve-outs matter most, and what sponsors do day to day to keep liability contained.

What “Non-Recourse” Means In CMBS Lending

In a non-recourse CMBS loan, the borrower is an entity that owns the collateral property. If the loan defaults, the lender typically enforces against that collateral through foreclosure, receivership, and control of rents. A deficiency claim against the borrower’s owners is usually blocked.

CMBS deals are built to be sold into a securitization pool, so investors need predictable enforcement rights. That predictability shows up in long, detailed agreements that spell out cash management, transfers, reporting, and remedies.

For a public-market view of how these securities are described to investors, see the SEC investor bulletin on asset-backed securities.

Taking A CMBS Loan Non-Recourse With An SPE Borrower

Most CMBS borrowers are single-purpose entities (SPEs). The goal is simple: keep the borrower focused on one asset, with clean books, clean accounts, and limited outside activity. That “ring-fencing” makes the collateral easier to value and easier to enforce against.

SPE language is not just legal formality. It reaches daily operations: separate bank accounts, separate contracts, and clear documentation for any affiliate services. When separateness slips, servicers can treat it as a red flag in a default file.

CMBS servicing is also rule-driven. Performing loans sit with a master servicer. Defaults and big consents move to a special servicer. The servicer’s playbook is tied to the transaction documents, not a relationship manager’s discretion.

If you want to see what real CMBS deal documents look like, search a pooling and servicing agreement on SEC EDGAR and search within the PDF for “non-recourse” and “carve-out.”

Where “Non-Recourse” Ends: Bad-Boy Carve-Outs

CMBS non-recourse clauses almost always come with carve-outs. These clauses shift liability to the borrower and often to a guarantor when certain actions happen. You’ll hear them called “bad-boy” guaranties or springing recourse.

The logic is straightforward: bondholders are fine taking real estate risk, but they don’t want sponsor misconduct risk. So the documents draw bright lines around honesty, cash, and ownership.

Common Carve-Out Triggers

• Fraud or intentional misrepresentation. False rent rolls, hidden side letters, or fake invoices can trigger recourse.
• Misuse of rents or restricted funds. Taking cash that belongs in controlled accounts is a fast path to personal exposure.
• Unauthorized transfers. Selling the property or changing control without consent can spring recourse.
• Voluntary bankruptcy filings. Putting the borrower into bankruptcy in violation of covenants can trigger liability.
• Waste or willful damage. Acts that strip value from the collateral can create extra claims.
• Hazardous materials misconduct. Causing, hiding, or failing to report known contamination can raise liability under loan documents.

Loss-Limited Vs. Full Recourse

Many carve-outs are loss-limited, meaning the guarantor pays the lender’s actual loss tied to the bad act. A smaller set can be full recourse, meaning the entire debt may become collectible from the guarantor. Sponsors often press to keep full recourse limited to fraud and intentional theft-type acts, while keeping other items capped.

Standard Default Usually Stays Non-Recourse

A payment default by itself often stays non-recourse. The lender enforces against the collateral: foreclosure, a receiver, a cash sweep, and rent control. Recourse tends to appear when sponsor actions block those remedies or siphon value away from the collateral.

Cash Management Rules That Protect Non-Recourse Status

CMBS loans often use a lockbox or deposit account system. When performance drops or a covenant trips, cash can move into lender-controlled accounts, with disbursements released under set rules.

The cleanest way to avoid a carve-out fight is to treat restricted accounts as untouchable. Don’t “borrow” rent money to plug a different gap. Don’t pay affiliates from trapped cash unless the documents allow it. Servicers track these flows closely during a default file.

Also watch casualty and condemnation proceeds. Many CMBS documents require those funds to sit with the servicer and be released only for approved repairs or an approved payoff path.

How Sponsors Still Lose Money On A Non-Recourse CMBS Loan

Non-recourse is a legal shield, not a profit shield. Equity can be wiped out in foreclosure. Reserves can be trapped. Consent delays can stall leasing plans. Special servicing can rack up fees that come out of property cash flow.

There is also “soft pressure” on owners when an asset turns cash-flow negative. You may choose to fund operating shortfalls just to keep the building stable and avoid a deeper spiral. That is optional in most documents, yet it can feel like the only sensible choice for a strategic asset.

How To Read The Non-Recourse Carve-Out Package

Start with the non-recourse carve-out guaranty, then check the transfer and cash management language in the loan agreement. Your goal is to spot the tripwires and match them to how the asset is run.

1. Definitions first. Look for “Transfer,” “Control,” “Trigger Event,” “Restricted Payment,” and “Recourse Event.” Small definition tweaks change real outcomes.
2. Mark each carve-out. Label it loss-limited or full recourse and note any cure rights.
3. Map cash flows. Write down which accounts exist, who controls them, and what needs approval.
4. List consent items. Track leasing thresholds, manager changes, major capex, and ownership steps that need a servicer “yes.”
5. Check separateness promises. Make sure the borrower’s actual operations match the paper promises.

For a quick, transaction-language definition of guarantor and “bad-boy” carve-outs in CMBS, see the CREFC glossary entry on guarantors.

CMBS Non-Recourse Triggers And Risk Controls

The table below pairs common recourse triggers with sponsor habits that reduce the chance of a recourse claim. Use it as an operating checklist, not just a closing checklist.

Trigger Area	What Can Trip Recourse	Control That Helps
Representations	False statements in financials, leases, rent rolls	Third-party checks with sign-off trail
Rents And Accounts	Payments outside the cash waterfall or lockbox	Two-person approval for disbursements
Restricted Funds	Using reserve, insurance, or escrow funds off-plan	Written release requests with invoices
Transfers	Change of control or sale without consent	Consent calendar for corporate actions
Bankruptcy Actions	Voluntary filing or prohibited steps	Governance steps reviewed before filing
Liens	Mechanics liens not cured on time	Waivers tied to pay applications
Collateral Value	Willful waste, removal of fixtures, unapproved deals	Capex log, vendor controls, photo files
Taxes	Tax delinquency that primes the lender	Escrow tracking with proof of payment
Leasing	Lease terms outside approval limits	Lease abstract review before signature

REMIC Limits That Affect Modifications

Many CMBS transactions use a REMIC (Real Estate Mortgage Investment Conduit) tax structure. That structure can limit how much a servicer can change a loan without risking tax issues for the trust. This is one reason CMBS modifications can feel strict and slow.

For the statutory basis, see 26 U.S.C. § 860D (REMIC defined).

Negotiation Points That Can Cut Personal Exposure

CMBS documents are standardized, yet sponsors still have room to push on the edges. The aim is to narrow full-recourse triggers and make loss-limited claims measurable.

• Keep full recourse narrow. Press to limit it to fraud and intentional misrepresentation.
• Define “actual loss.” Tie damages to lender out-of-pocket loss, net of collateral proceeds.
• Narrow “Transfer.” Carve out internal restructures that do not change control, subject to notice.
• Spell out permitted payments. Define what operating expenses can be paid during a sweep.
• Align cure windows. Match lien and tax cure periods to real payment cycles.

Checklist For Borrowers Before Signing A CMBS Term Sheet

This checklist helps you spot the clauses that most often drive recourse disputes and servicing friction.

Item To Verify	What To Look For	Why It Matters
Recourse triggers	Which events are full recourse vs. loss-limited	Sets the real liability profile
Transfer tests	Control change thresholds and permitted transfers	Avoids surprise consent defaults
Cash controls	Lockbox terms, sweep triggers, release rules	Prevents “misuse of rents” claims
Reporting	Deadlines, formats, tenant sales reports	Late reports trigger fees and scrutiny
Insurance terms	Minimum limits, notice rules, proceeds control	Protects value after a casualty
Reserves	Capex, TI/LC, tax and insurance escrows	Cash traps can strain operations
Lease approvals	Limits on term, options, major tenants	Side letters can breach consents
Property manager	Manager approval and replacement steps	Manager change can be restricted

Final Takeaways For Borrowers And Sponsors

Yes, CMBS loans are often non-recourse, and that can fit owners who want long-term fixed-rate debt tied to one asset.

The catch is the carve-out list. Treat cash handling, reporting, and transfers like hard rules, keep records tidy, and you keep the loan in the collateral-only lane.