Finance and Economics Discussion Series (FEDS)
December 2021
Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans
David Glancy, Robert Kurtzman, Lara Loewenstein, and Joseph Nichols
Abstract:
We study the role that recourse plays in the commercial real estate loan contracts of the largest U.S. banks. We find that recourse is valued by lenders and is treated as a substitute for conventional equity. At origination, recourse loans have rate spreads that are at least 20 basis points lower and loan-to-value ratios that are around 3 percentage points higher than non-recourse loans. Dynamically, recourse affects loan modification negotiations by providing additional bargaining power to the lender. Recourse loans were half as likely to receive accommodation during the COVID-19 pandemic, and the modifications that did occur entailed a relatively smaller reduction in payments.
Keywords: commercial real estate, recourse, LTV
DOI: https://doi.org/10.17016/FEDS.2021.079
PDF: Full Paper
Related Materials: Accessible materials (.zip)
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