Non-Recourse Loans: The Basics 

One of the biggest benefits of HUD 221(d)(4) loans for developers is the fact that they are non-recourse. This means the lender cannot seize a borrower's personal property if they default on the loan. Instead, HUD multifamily construction loans are secured by collateral. In this case, the collateral is the building and the property itself, which can be seized if the borrower defaults. In contrast, full-recourse loans require the borrower (or certain principals) to sign a personal guarantee (PG), making them legally and personally liable for the debt should they default. 

Non-Recourse Loans are Still Usually Subject to "Bad Boy" Carve-Outs 

While it's true that FHA multifamily construction loans are non-recourse, there can be some exceptions. In most cases, certain principals will still be required to sign "bad boy" carve-outs. These are documents that stipulate that they will be held personally liable for the loan in the case of egregious misbehavior (usually fraud or serious misrepresentation of their financial situation). Despite that, some lenders have a much lower standard than others when it comes to what constitutes being a "bad boy." Because of this, it is essential to read and analyze all the terms of a potential loan before signing anything. 

Benefits of Non-Recourse Loans

The primary benefit of non-recourse loans is that they provide a greater degree of protection for the borrower. Without a personal guarantee, the lender cannot seize the borrower's personal assets if they default on the loan. This can be especially beneficial for developers who are just starting out and don't have a lot of assets to protect.

To learn more about how a HUD 221(d)(4) loan can help finance your next development, fill out the form below for a free consultation.