Photo | Courtesy of Bowditch & Dewey
George Tetler, partner at Bowditch & Dewey
March 17, 2023
Know How
Advice: Silicon Valley Bank closure impact on lease security
By George W. Tetler
The federal government may have taken the extraordinary step of protecting all consumer deposits at the now shuttered California-based financial Silicon Valley Bank, which was the 16th largest bank in the country. But it’s still unclear whether real estate companies will get stuck with millions of dollars of worthless leases from startups.
Silicon Valley Bank, which specialized in lending money to tech startups, helped these fledging companies with their commercial leases. Since these firms had no cash flow, they couldn’t put down security deposits to rent properties, like most individuals and businesses do. Instead, these startups got letters of credit for their security deposits from Silicon Valley Bank, which ranged from small five figures to millions of dollars. If the tenant defaulted on its lease obligations, the bank would have to pay the landlord these hefty security deposits.
With Silicon Valley Bank now in receivership, what does this mean? At this point in time, a landlord holding a letter of credit issued by the bank will not be able to get any money from it. It is possible that another entity will acquire most of the bank’s assets or that the Federal Deposit Insurance Corp. will opt to sell portfolios of the bank’s loans. Under these scenarios, existing letters of credit would presumably continue to secure leases.
While we wait to see what happens in the next couple of days, landlords and tenants on leases secured by SVB letters of credit should take preliminary actions. Landlords should review their leases. In most instances, the landlord can demand replacement of the current letter of credit with a new letter or cash. If it does not appear likely that the tenant can provide a substitute letter of credit or other satisfactory credit enhancement for the lease due to its financial condition, the landlord should review with counsel whether a receivership claim is worthwhile, as this is not a clear path to recovery of funds.
In most instances, tenants that used SVB for letters of credit have their accounts with the bank and are currently laser focused on what the receivership means to them. Tenants should determine whether there are any letters of credit supporting their leases needing to be addressed. They should contact their landlords to confirm whether there is security for their lease.
The impact of the SVB receivership could have a big impact on the commercial real estate world. We need to wait and see whether the FDIC can broker an acquisition that protects a lot of companies and an even broader range of stakeholders.
Attorney George W. Tetler III is a business and finance partner at Worcester law firm Bowditch & Dewey.
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Ronald Fraser
March 20, 2023
Very thoughtful and timely insight George. Thanks.
Anonymous
March 18, 2023
The bank may be getting relief, but the real estate holders who rented to the startups look like they're on uncertain footing. On one hand, this crisis may provide a 'correction' to inflated real estate costs where the startups do business, but on the other hand, it may have a domino effect far further out than we know at the time.
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