Anyone in commercial real estate?

There are many ways to show you have "means," and thats all they care about.

You can show credit references, a Profit/Loss statement, Income Tax returns, etc. Usually, if you have a good relationship with your banker, he just writes you up a note stating you are in good standing. Its a very fuzzy-logic type verification that you have "means."

As an aside, RE is still slow, and I think most landlords wouldn't require much paperwork. I just do a credit check, and get 3-6 months security deposit. My leases allow eviction after 2 months nonpayment - so I feel pretty comfortable with the above security deposit.

Are they asking for the letter of credit INSTEAD of a security deposit?

 

Twelve months is not too long, but in reality the security (letter of credit) should tie back to the landlord's cost of putting you into the space (improvements, if any and commissions, if any) - that's his/her exposure. By asking for an LoC instead of a 3-6 month cash security deposit, this landlord is doing you a favor while protecting his/her downside.

Ask the landlord for a burn-off clause on the letter of credit - i.e. after twelve months of timely rent payments, your LoC goes away.

LoCs are not free - 1) your bank will most likely want some kind of collateral - e.g. all your deposits in their bank or some type of minimum balance in your operating account - so you may have to tie up cash or other assets; and 2) there will be a carry cost for the LoC - usually 1%-2%.

Hope this helps.

 

It's typical for a landlord to ask for an LOC from a tenant. Bo, I doubt this is in place of a security deposit. What it does is ensures the LL will get his first year's rent should Darkalley go tits up. As Tesseract noted, sometimes the LL may wish an LOC to cover broker commissions or build-out costs. FWIW, I've never seen anyone ask for a 6 month security deposit. I've seen LL's ask for 3 months' rent + and LOC + a personal guaranty before - those are not unheard of. I seriously doubt this LL is suggesting an LOC **in place** of a year's rent.

RMX

 

In our area LOC are rarely used, from what little info I have. But again, they are used instead of security deposits.

REMIX, congrats on your success by the way!!!

 

Who pays the buildout cost? If its you, 5 and 5 seems in line. If they are paying, I can see asking for a 10 year lease. Even if they are paying, there are ways around this.

Stipulate in the contract you want a 5 year with 1-2 renewals, and you will pay back 50% of the buildout if you don't renew...

I never offer buildout money - I am not that trusting. If the tenant fails in 6 months, I would be out some big bucks. I do give a token amount for flooring/paint, but stipulate if the tenant is late on rent orfails the contract in any way, they owe me that money back. Keeps folks motivated to pay on time...

 

Thanks, Bo. I'm putting back what I spent over the past 15 months...I still have a ways to go, too.

Darkalley,

How much space do you need anyway?

People do things differently in different parts of the country. Here, landlords shy away from 10 year office leases. Too many things can happen. You see lots of 3+ 3+ 3 or 5 + 5 or 7 year terms.

I just closed a 10 year industrial lease yesterday. Really good for me btw.

RMX

 

That's what the LOC is for.

RMX