As soon as a darling within the tech business, Silicon Valley Financial institution was utilized by many up-and-coming tech corporations to supply assurance to workplace landlords that these corporations may make their month-to-month lease.
That assurance — supplied within the type of letters of credit score — is now up within the air, in line with attorneys and landlords with publicity to tenants who had ensures from SVB. Letters of credit score are sometimes utilized by business tenants as safety deposits, and permit landlords to attract cash from the financial institution if a tenant can’t pay lease.
After California regulators shut down SVB’s operations final Friday and appointed the Federal Deposit Insurance coverage Corp. to dump its property, attorneys rushed to advise shoppers to switch any letters of credit score issued by SVB.
Within the case of a financial institution’s failure, the FDIC can select to void the letters of credit score. If that occurs, landlords could have no recourse to withdraw funds if a tenant doesn’t pay lease.
“They’ll completely reject it,” lawyer Tony Natsis with the agency Allen Matkins mentioned. “If it’s void, landlords can’t draw on something.”
The FDIC, Treasury Division and Federal Reserve on Sunday mentioned “sure unsecured debtholders” of SVB wouldn’t be protected like depositors, who regained entry to funds held in SVB this week.
SVB had $3.6 billion in standby letters of credit score — commitments to pay within the occasion of a default — on the finish of 2022, in line with the financial institution’s annual report, although it’s unclear how a lot of that was for actual property.
Whereas the FDIC has not but determined if it’s going to honor letters of credit score, it has rejected them earlier than. After the 2008 monetary disaster, the FDIC mentioned it will “not honor letters of credit score issued by banks which have been positioned in receivership,” Natsis wrote in a analysis observe in 2009.
For now, attorneys are exercising warning, advising landlords to contemplate themselves unprotected.
“If you’re holding a letter of credit score issued by SVB, you might be an unsecured creditor of the financial institution,” Buchalter lawyer Handbook Fishman wrote in a observe on Monday.
Hudson Pacific Properties, an workplace and studio landlord primarily based in Los Angeles, mentioned 11 of its tenants have letters of credit score issued by SVB, in line with a Tuesday submitting with the Securities & Trade Fee. Collectively, these 11 tenants occupy about 2 % of the agency’s workplace footprint, popping out to about 318,000 sq. ft.
The agency mentioned it was working to assist tenants acquire new letters of credit score.
Pasadena-based Alexandria Actual Property Equities additionally disclosed it has various tenants who supplied SVB-issued ensures, which Alexandria accepts rather than safety deposits. Collectively, the letters of credit score are price about $108 million, the agency mentioned in an SEC submitting, including it was additionally working to switch these ensures with “one other acceptable safety deposit.”
Over the previous couple of days, various publicly listed startups have disclosed letters of credit score they held with SVB.
Sonder, a short-term leases start-up primarily based in San Francisco, disclosed in a Friday SEC submitting that it held letters of credit score with SVB, price a complete of $13 million.
Attorneys are telling landlords with tenants holding letters of credit score from Signature Financial institution — which was shuttered on Sunday by New York regulators — the identical factor.
“We’re going to them and saying in the event you’ve obtained a letter of credit score with Signature, it’s good to change that,” lawyer Eric Orenstein with the agency Rosenberg & Estis informed TRD earlier this week.