Ask the Advisor – Is it safe to accept a letter of credit as a security deposit?
Abstract: Commercial landlords have historically preferred that their tenants provide letters of credit, rather than cash, for security deposits. A letter of credit won’t become subject to claims by the tenant’s creditors and isn’t covered by automatic stays imposed by bankruptcy courts. But enforcing letters of credit can be tricky and time-consuming, and come with an annual fee payable by the tenant. Furthermore, the FDIC isn’t required to honor bank-issued letters of credit if the bank fails. This article offers ways to reduce the risk of lost security deposits.