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Working Paper

Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans

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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.
Topics
Lending and access to credit
09.27.2021ISSN 2573-7953 WP 21-20DOI 10.26509/frbc-wp-202120
Keywords commercial real estate, recourse, LTV
JEL Classification Codes G21, G22, G23, R33

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Loewenstein, Lara, David Glancy, Robert Kurtzman, 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