CRE glossary
Letter of credit (LOC)
A letter of credit (LOC) is a bank-issued document guaranteeing that the bank will pay the landlord up to a defined amount if the tenant defaults on the lease. It's commonly used as security deposit alternative for credit-light or early-stage tenants, the landlord gets bank-grade certainty, and the tenant doesn't tie up cash in a deposit.
Tenants prefer LOCs over cash deposits because the cash stays on the tenant's balance sheet earning interest, available for working capital. The LOC is collateralized against the tenant's bank line, but it doesn't reduce cash. For an early-stage company that needs every dollar, replacing a $250k cash deposit with a $250k LOC is meaningful.
Landlords prefer cash. A cash deposit is theirs to use immediately on default; an LOC requires drawing from the bank, which can take days and faces bank scrutiny. Most leases require LOCs to be 'standby' (not 'documentary') so they're drawable on landlord demand without complex documentation. Confirm the standby language at LOI.
Sizing matters. Cash security deposits are typically 1-2 months of rent. LOCs replace at the same dollar amount. For higher-credit-risk tenants, landlords sometimes require LOCs of 6–12 months of rent, that's a big drag on the tenant's bank line and worth pushing back. Negotiate burn-down provisions: the LOC reduces by 25% per year if the tenant performs, eliminating in year 4–5.
Example
- Lease total rent
- $2.4M over 7 years
- Standard cash deposit
- $50k (2 months rent)
- LOC amount
- $50k face value
- Bank fee
- ~$1k–$1.25k per year
- Burn-down structure
- Reduces by $12.5k each year, eliminates year 4
Broker perspective
When you have an early-stage tenant facing a guaranty request, the LOC is your first counter. It gives the landlord protection without putting personal liability on the founder. Banks issue these routinely, typical fee is 1.5–2.5% of face value per year, covered by the tenant's bank line. For a tenant that can't avoid a guaranty, LOC + reduced GGG is a common middle ground.
Frequently asked
People also ask
LOC vs cash deposit, which is better for the tenant?
LOC. Cash stays on the tenant's balance sheet. Bank fee (~2% of face value annually) is much cheaper than the opportunity cost of locked cash.
How much does an LOC cost?
1.5–2.5% of face value per year. Bank-specific. Sometimes negotiable if tenant has a strong banking relationship.
Can LOCs replace personal guaranties?
Sometimes. LOC + reduced guaranty is a common middle ground. Pure replacement is harder; depends on landlord credit comfort.
What's a burn-down LOC?
An LOC that reduces in face value over time as the tenant performs. Typical structure: 25% reduction per year, eliminating in year 4–5. Negotiate this at LOI.
Related terms
Good guy guaranty
A limited personal guaranty that protects the landlord against unpaid rent only if the tenant doesn't surrender the space cleanly.
Letter of intent (LOI)
A non-binding outline of the major business terms, rent, term, TI, options, that becomes the basis for the binding lease.
Security deposit
Cash held by the landlord as collateral for the tenant's lease obligations — typically 1–3 months of base rent.
Default and cure period
When a tenant breaches the lease and the time the landlord must give them to fix it before pursuing remedies.
See letter of credit (loc) extracted from a real lease.
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