After a decade of easy lending, the dreaded personal guarantee is making a comeback in the real-estate industry, bringing back the kind of tough terms that borrowers hoped not to see again.

As loans for commercial projects have become difficult to come by in this credit crunch, borrowers are being forced to consider loans that would give the lenders "recourse" to the borrowers' personal fortunes -- terms that led many a developer, including Donald Trump and William Zeckendorf Jr., to near ruin in the real-estate crash of the early '90s. More recently, New York developer Harry Macklowe found himself in a bind after he signed a personal guarantee on a $1.2 billion loan.

Rob Shepperson

Despite Mr. Macklowe's experience, these recourse loans -- once a staple of commercial lending -- had largely fallen by the wayside during the past decade as banks found ways to minimize their risk.

Now, with the securities market for commercial loans still anemic, recourse loans are popping up again -- and striking fear in the hearts of developers.

Dale Anne Reiss, global director of real estate for Ernst & Young, recalls the efforts involved in restructuring recourse loans, with some people losing numerous properties including their own homes: "Some of the workouts were extremely painful," she said. "You were tearing apart people's lives."

Yet commercial investors who can't wait out the credit crisis may have little choice but take a deep breath and sign a recourse loan. "Oftentimes, it's either sign personally or you don't get the loan," said Donald Isken, a real-estate attorney at Morris, Nichols, Arsht & Tunnell LLP. "The tide has changed."

Take, for example, Judah Hertz, chief executive of Hertz Investment Group in Santa Monica, Calif. About 3½ years ago, Mr. Hertz took out a $50 million mortgage from LaSalle Bank to buy an office building in New Orleans. That loan required no personal guarantee. As the loan is due next month, he is left with little choice but to accept a new $50 million loan from Wells Fargo that requires him to personally guarantee 25% of that amount.

"If you're going to banks today, they all require recourse," said Mr. Hertz, while adding that he isn't worried about his ability to pay off the loan.

During the recent sales frenzy for commercial properties, nonrecourse loans were the norm. Typically, this meant that the developers put up as collateral only the buildings they were purchasing. If they couldn't pay off the loans, they simply handed the building's keys to the lender and walked away. The borrowers' other holdings -- including personal assets such as homes and boats -- remained intact. The investment banks that originated many of these loans felt comfortable with the arrangement because they typically packaged those loans into commercial-mortgage-backed securities, or CMBS, and sold them as bonds, reducing their own risk if the borrowers couldn't pay.

Now, with a 90% drop in CMBS sales, banks have all but stopped originating loans aimed at the bond markets. Instead, they are returning to the traditional model of holding on to -- as opposed to selling -- the loans. "We're not closing loans for securitization. We're closing loans for balance sheet," said Brett Smith, managing director in Wachovia Corp.'s real-estate group. And with the return of balance-sheeting lending comes the return of recourse loans.

Even for banks, recourse lending can cause headaches. Borrowers are more likely to fight the banks if they face losing much of their net worth over one bad gamble. Plus, the banks make less money; the interest rates they can charge on recourse loans are about 1% lower than on nonrecourse loans.

Banks that have already suffered losses related to residential mortgages are increasingly viewing recourse loans as a necessary layer of protection. When prices were rising, the bank could take control of a building and sell it to pay off the loan. Now, with falling valuations, the building could be worth less than the debt on it. In that scenario, banks want a way to make up the difference.

Investors who buy debt welcome the return of discipline that recourse loans represent. "With more discipline, you're going to develop and derive a better product," said Jack Foster, managing director for Franklin Templeton Real Estate Advisors.

Borrowing recourse debt is one of the few options available to Dallas developer John Sughrue, who is leading a group that is trying for financing to build a $180 million condominium project in the city's thriving new arts district. He and his partners can contribute about $40 million in equity and get an additional $100 million in conventional financing. "We're missing about $40 million," he said.

One possibility would be to take out a "mezzanine" loan, which fills the gap between the equity and the first mortgage, but the rates would be so high that it would make it unfeasible given the amount of risk involved. The other major option would be to guarantee the additional $40 million. Mr. Sughrue said he won't personally sign for the loan and is still pondering his options.

With such onerous terms, some developers may opt not to do deals at all. "It is definitely slowing down the pace of real-estate transactions," said Douglas Buck, a partner with Foley & Lardner who recently represented several developers who decided to put off doing deals because of their reluctance to sign a personal guarantee.

Mr. Macklowe's travails in buying $7 billion of Manhattan property in February 2007 provide a reminder of the high stakes. Even though Mr. Macklowe didn't have to tap into his personal fortune to pay off a loan from the private-equity firm that helped finance the transaction, Fortress Investment Group, the knowledge that $1 billion of his fortune was at stake likely made him work hard to pay off the creditor, industry observers said. He ended up selling five of his Manhattan properties including his trophy General Motors building at 767 Fifth Ave.

Many borrowers may have no choice but to swallow the tightened lending terms. According to a March study by the Mortgage Bankers Association, $16 billion in loans that were packaged into CMBS -- which are nonrecourse -- are expected to come due this year, followed by about $19 billion next year.

Jerry Wolkoff, a developer in Long Island, N.Y., is among those who will do anything to avoid recourse. Mr. Wolkoff is planning to build a $1 billion mixed-used property in Suffolk County. He said he plans to put down equity that represents as much as 40% of the value of the project, in hopes of qualifying for a nonrecourse loan.

--Peter Grant and Jennifer S. Forsyth contributed to the article.

Write to Lingling Wei at lingling.wei@dowjones.com

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