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Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans


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.
JEL codes: G21, G22, G23, R33.


Suggested citation: Glancy, David, Robert Kurtzman, Lara Loewenstein, and Joseph Nichols. 2021. “Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans.” Federal Reserve Bank of Cleveland, Working Paper No. 21-20. https://doi.org/10.26509/frbc-wp-202120.

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