Non- Recourse Debt

Posted in Finance, Accounting and Economics Terms, Total Reads: 250
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Definition: Non- Recourse Debt

A non- recourse debt is a semi- secured loan that is secured using a collateral of the borrower, usually real property such as land etc. the borrower is not personally not liable in case of a non- recourse debt i.e. the debt cannot be recourse back to the borrower.


In case the borrower defaults, then the lender can sell the collateral and cash the amount. If in case the value of the collateral does not reach the full amount of loan, then the ender is at a loss and borrower has no personal liability.


Example:

In case the borrower defaults, consider the following examples to explain the tax implications and risk from the lender’s perspective.


Case 1:

Unpaid value of debt= $80,000

Market value of the collateral= $ 50,000

Loss to the lender= $ 30,000 ($ 80,000 - $50,000)

In the case of a recourse debt, the remaining amount is collected from the borrower by levying on his/ her salary or bank account.

But, in the non- recourse debt, the remaining amount would be a loss to the lender


Case 2:

Unpaid value of debt= $80,000

Market value of the collateral= $ 85,000

Profit for the lender= $ 5,000 ($ 85,000 - $80,000)

As there is a profit, this should be shown in the tax applicable on the $ 5,000.

The non- recourse debt is better than an unsecured loan but more risky than a recourse debt for the lender.


Situations where non- recourse debt is Profitable:

• Commercial real estate, shipping projects where the capital expenditures are high

• Long loan period where non- recourse debt is better has an unsecured debt

• Uncertain revenue streams of the borrower

• For stock or other security- loans where the result is not always profitable

 

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