Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans

RePEc Short ID: plo411
ORCID iD: 0000-0002-7203-6470

Glancy, David P.; Kurtzman, Robert J.; Loewenstein, Lara; Nichols, Joseph B.

doi:10.26509/frbc-wp-202120

Working Paper

Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans

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;

https://doi.org/10.26509/frbc-wp-202120