There’s a good chance you’re already familiar with the concept of a non-recourse loan, but to help illustrate it, let’s define its exact opposite—a recourse loan. Let’s say you take out a loan to buy a car. As a provision of the loan, the lender can require you to sign a personal guarantee upfront—also known as a recourse term. This allows the lender to take possession of the car if you fail to make payments.

The same is true with a mortgage, when a bank forecloses on a house. No doubt this scenario is still cemented in the minds of many, even though the 2008 financial crisis—which severely impacted the real estate market—was several years ago.

When a lender takes possession of an item or property, per the terms of the recourse loan, it will typically sell the asset at auction or at wholesale amounts to recoup an outstanding balance. But if a balance still remains, the lender can retrieve the outstanding amount in other ways, like a property line or through the confiscation of other assets. A recourse loan can lead to some scary consequences if you fall behind on payments.

But for those involved in commercial real estate, recourse loans are not the only option—a non-recourse loan can be an alternative.

Under the terms of a non-recourse loan, a lender can only take possession of an asset directly tied to it. In other words, if a lender had to sell an asset at a loss, it cannot continue to pursue your personal assets or other real estate holdings in order to be made whole. This can be especially problematic in an economic downturn when real estate values are depressed. You may be forced to sell your other properties when their values are at lows in order to satisfy the recourse loan. It could potentially wreak havoc on your real estate portfolio.

Non-recourse loans are common in non-bank financed commercial real estate deals, particularly in cases where the cash flow from a building has a stable track record over many years, and a building owner has a lot of experience managing commercial properties.

Banks and credit unions collectively provide over half of all the financing for commercial real estate and recourse loans are certainly their norm.  Especially on loans for new construction, recourse loans are a way to make sure that the project is completed. Recourse loans are also standard when an investor group lacks experience in commercial real estate.

This is why non-recourse loans make it a lot easier for investors to feel more secure about their commercial real estate investments. Not only do you get to work toward owning stable cash flowing assets, you can do so without putting any of your other real estate equity at risk. The only caveat I offer here is that you, as the investor, must ensure that you operate your properties within the boundaries of the law.

If you’re investing in commercial real estate, and you’ve financed your properties through a recourse bank loan, you can reduce your own personal risk by switching to non-recourse financing. While risk and investment go hand-in-hand, a non-recourse loan can go a long way in minimizing your risk, especially in market downturns and times of hardship. You don’t want one property going sideways to wipe out your entire portfolio.

In commercial multifamily, non-recourse is a common feature of most non-bank loans. Loan products from FHA, Fannie Mae, Freddie Mac, Insurance companies, and even some private money are non-recourse. It isn’t easy to acquire multifamily properties so it makes sense to give yourself every advantage to reduce your own personal and portfolio risk whenever you can by financing the property with a non-recourse loan.