Open AccessRecourse as Shadow Equity: Evidence from Commercial Real Estate Loans
Author(s) -
David Glancy,
Robert J. Kurtzman,
Lara Loewenstein,
Joseph Nichols
Publication year - 2021
Publication title -
finance and economics discussion series
Language(s) - English
Resource type - Journals
eISSN - 2767-3898
pISSN - 1936-2854
DOI - 10.17016/feds.2021.079
Subject(s) - loan , equity (law) , payment , business , real estate , negotiation , term loan , monetary economics , basis point , economics , interest rate , finance , financial system , non performing loan , non conforming loan , political science , law
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.