Two years ago, Firm OP bought a tract of land for $600,000, paying $50,000 down and borrowing the balance of the purchase price from a commercial lender. The land is the collateral for OP’s debt. To date, OP has not repaid any of the loans.
a. If the debt is recourse, to what extent do OP and the commercial lender bear the risk of loss if the FMV of the land decreases to $475,000?
b. How does your answer change if the debt is nonrecourse?