Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans

32 Pages Posted: 28 Sep 2021 Last revised: 21 Dec 2021

See all articles by Lara Loewenstein

Lara Loewenstein

Federal Reserve Bank of Cleveland

David Glancy

Board of Governors of the Federal Reserve System

Robert J. Kurtzman

Board of Governors of the Federal Reserve System

Joseph Nichols

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: September 27, 2021

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

JEL Classification: G21, G22, G23, R33

Suggested Citation

Loewenstein, Lara and Glancy, David and Kurtzman, Robert J. and Nichols, Joseph, Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans (September 27, 2021). FRB of Cleveland Working Paper No. 21-20, Available at SSRN: https://ssrn.com/abstract=3931589 or http://dx.doi.org/10.2139/ssrn.3931589

Lara Loewenstein (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

David Glancy

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/view/davidglancy

Robert J. Kurtzman

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Joseph Nichols

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2983 (Phone)

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