Commercial Real Estate ContractLetter of Credit in Commercial Real Estate

Here is a summary regarding a letter of credit. What is involved and why you as a tenant would utilize one. 

Letter of credit to cover exposure

Typically in a commercial real estate lease, the landlord asks for a security deposit. Security deposits are calculated based on the tenant’s creditworthiness and solvency.  In most commercial leases there are tenant improvements made to a space. Tenant improvements are also known as Leasehold improvements.  If your credit is good and you have a track record of paying rent on-time, then a security deposit will be a solution. However, if you are a start up with no history or there is substantial finish out the Landlord may require more coverage. 

Using a Financial Institution 

If a letter of credit is negotiated, the landlord and the tenant will agree on the specific obligation. Letters of Credit also can replace or be part of a personal guarantee. A personal guarantee basically states that if your business goes under, you are personally liable for the remaining rents and un-amortized improvements and leasing commissions paid. These terms are negotiated in a lease.  Your broker will help you  negotiate the following:

  • When the Landlord is entitled to draw from the letter of credit
  • LOCs have a maximum amount stated and an expiration 
  • It can have an automatic renewal 
  • The Landlord will have to provide a drafted lease to draw under the Letter of Credit

Lender and Tenant

The letter of credit between you and the lender will have the following attributes:

  1. A fee that is involved for the issuance of the LOC.
  2. There may be collateral that will be required by the lender for securitization
  3.  The bank will make payments to the Landlord if the tenant is in trouble or defaults. Payments have moved from tenant to the lender.
  4. Risk shifts from landlord to tenant and is now landlord to lender
  5. Repayment shall be paid from the tenant to the lender

Shire Commercial has helped clients negotiated commercial leases since 2004.  Contact Shire Commercial!