How Letters of Credit Are Used in Commercial Real Estate

A Letter of Credit is a bank document that guarantees payment of a loan amount as a result of some specific condition being met. Letters of credit are frequently used in the world of commercial real estate to guarantee leases, for security deposits, for commercial real estate loans and more.

There are benefits for both landlords and tenants to rely on letters of credit when negotiating commercial real estate deals — with the assistance of a South Florida commercial real estate lawyer or on their own.

A letter of credit can ensure that a deal moves forward, even if a tenant doesn’t have capital on hand for a large security deposit or other upfront expense. Tenants may also be unwilling to put up personal assets as collateral when negotiating leases.

Letters of credit can be used in exchange for personal guarantees

There are many circumstances in which a letter of credit can become handy. In modern times, landlords often request a personal guarantee from a business tenant in order to ensure that they are paid even if the business goes bankrupt.

Personal guarantees put the assets of one or more individuals at risk if there is a lease default. However, a letter of credit can be obtained from a bank and offered in lieu of a personal guarantee in many cases, and the letter would be tapped as a source of funds if the entity defaults.

Letters of credit can be used in exchange for a security deposit

Another common use for a letter of credit is in lieu of a security deposit for a commercial lease. The letter of credit provides the landlord an opportunity to draw upon the letter when certain conditions are met, such as damage to the property, or a late rent payment.

Typically, landlords will want the conditions to be as simple as possible so that they would have an easier time drawing upon a letter if they felt it to be necessary. On the other hand, the tenant will usually want to have more complex conditions.

Tenants may seek a letter of credit rather than putting up cash for a security deposit, because many deposits for commercial real estate leases can be a significant amount, and that capital can be otherwise spent on equipment, marketing, or other early state business needs.

Mark Schecter at Schecter Law is a leading commercial real estate attorney based in South Florida who can answer any questions that you may have about utilizing letters of credit for commercial real estate agreements in Florida, so that you can effectively use this instrument to your advantage. Call Schecter Law at (954)-779-7009 for a consultation today.