Bank construction loans typically come with 25% to 100% recourse during construction, with negotiated burn-off provisions tied to objective milestones, completion (TCO/CO), stabilization ( DSCR / debt yield achievement for 2 to 3 consecutive months), and permanent take-out. Negotiate the burn-off triggers in the term sheet , not in the loan documents.
Why recourse exists on construction
During construction, the property is not yet generating cash flow. The lender's underwriting depends on (a) the construction completing per plans and (b) the project leasing up to projected stabilization. Both involve execution risk that the lender mitigates through partial or full recourse to the sponsor.
Once the property is built, leased, and stabilized, the original execution risk is gone. The recourse should burn off accordingly. Lenders that don't offer burn-off provisions are pricing the loan as a permanent recourse facility, not a true construction loan.
Standard burn-off structure
Phase 1 (during construction): typically 25% to 100% recourse, depending on bank and sponsor.
Trigger 1, completion: TCO/CO + lender's construction consultant sign-off. Reduces recourse by typically 25 to 50 percentage points (e.g., from 50% to 25%).
Trigger 2, initial lease-up: achievement of physical occupancy threshold (typically 80% to 90% leased) for a defined period. Reduces recourse by another 25 percentage points.
Trigger 3, stabilization: achievement of stabilized DSCR (typically 1.20x or 1.25x) and/or debt yield (typically 8.0% or 8.5%) for 2 to 3 consecutive months. Reduces recourse to zero.
Trigger 4, permanent take-out: refinance to permanent removes the loan entirely; recourse exposure ends with the construction loan.
What's negotiable
The percentages at each trigger. Lender opens at higher numbers; sponsor pushes for lower numbers and earlier triggers.
The trigger thresholds. Lender prefers stricter thresholds (1.30x DSCR for full burn-off, 90% physical occupancy for lease-up trigger); sponsor prefers achievable thresholds (1.20x DSCR, 80% occupancy).
The trailing-period requirements (2 months vs. 3 months vs. 6 months at the threshold).
Whether the burn-off requires lender approval or is automatic. Sponsor wants automatic on objective metrics; lender wants approval to verify operating quality.
What's not negotiable (usually)
Bad-boy carve-outs, the bank construction recourse burn-off applies to the principal repayment recourse, not the carve-out recourse. The carve-out recourse persists for the life of the loan, regardless of completion or stabilization milestones.
Completion guaranty. On construction loans, the sponsor guaranties that the building will be completed per plans and specifications, even if costs exceed budget. Distinct from repayment recourse and typically not subject to burn-off until TCO/CO.
Worked example, burn-off schedule
$30M ground-up multifamily construction loan. Initial recourse: 50% ($15M). Trigger 1 (TCO/CO): drops to 30% ($9M). Trigger 2 (80% leased for 60 days): drops to 15% ($4.5M). Trigger 3 (1.25x DSCR + 8.0% debt yield for 90 days): drops to 0%. Trigger 4 (refinance to permanent): loan paid off, recourse ends.
Sponsor's pre-closing math: under the worst-realistic scenario (project completes but lease-up takes 18 months instead of 12), the sponsor's recourse exposure peaks at ~$9M for ~6 months, dropping to $4.5M and then 0% as lease-up completes. Sponsor's personal balance sheet can absorb that peak, deal proceeds.
Frequently asked questions
Do all banks offer recourse burn-off?
Most institutional banks doing construction lending will negotiate burn-off provisions, especially for repeat sponsors. Banks that won't negotiate burn-off are pricing the construction loan as a permanent recourse facility, that pricing should be wider than burn-off pricing.
Are debt fund construction loans non-recourse from day one?
Most institutional debt fund construction is non-recourse with completion guarantee. The completion guarantee is the sponsor's commitment to see the building built; it's not a repayment recourse and it ends at completion.
What is a completion guarantee vs. payment guarantee?
Completion guaranty: sponsor guarantees the project will be completed per plans, even if costs exceed budget. Payment guaranty: sponsor guarantees repayment of the loan. Construction loans often have completion guaranty without (or with limited) payment guaranty after burn-off.
Sources
- Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) · Board of Governors of the Federal Reserve System · 2026-Q1
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1