Do Landlords Still Require Letters of Credit Instead of Cash Security Deposits?
The Security Deposit Dilemma
Every Manhattan office lease requires some form of security to protect the landlord if a tenant defaults. Traditionally, this has meant a cash security deposit held in escrow. But since 2020, more landlords—especially institutional owners—have turned to letters of credit (LOCs) as their preferred form of security.
For tenants, the difference between the two can have real implications for cost, liquidity, and flexibility.
How Cash Security Deposits Work
- Tenant delivers a cash deposit (often 3–12 months of rent) when signing the lease.
- Landlord holds the funds—sometimes accruing minimal interest—until the lease ends.
- If the tenant defaults, the landlord can draw directly from the deposit.
- Downsides: Cash is tied up, reducing a company’s working capital.
How Letters of Credit Work
A letter of credit is a commitment from a bank to pay the landlord if the tenant defaults. Key points:
- Tenant arranges an LOC through a bank, usually secured by a line of credit or pledged collateral.
- The bank charges annual fees—typically 0.5%–1% of the LOC amount.
- Landlord can draw on the LOC if the tenant defaults, similar to pulling from cash.
- Tenant retains liquidity (cash isn’t frozen with the landlord), but their borrowing capacity at the bank shrinks.
Example: Comparing Costs
- Cash Security Deposit: A 10,000 SF tenant at $70/SF = $700,000 annual rent. If landlord requires 6 months’ deposit: $350,000 cash tied up for 5–10 years.
- Letter of Credit: Same $350,000 secured by an LOC. Tenant pays bank fees of 0.75% annually = $2,625/year. Liquidity preserved, but $350,000 of credit capacity is encumbered.
Why Landlords Prefer LOCs Post-2020
- Financial Security: LOCs reduce the risk that a tenant’s cash deposit is lost in bankruptcy.
- Institutional Norms: Lenders and REITs like LOCs because they’re cleaner on the balance sheet.
- Flexibility for Enforcement: LOCs can often be drawn without landlord needing a court order.
What Tenants Should Watch For
- Bank Requirements – Not every tenant can secure an LOC; smaller firms may lack credit capacity.
- Annual Fees – LOCs add recurring costs tenants must budget for.
- Burn-Down Provisions – Tenants should negotiate reductions over time (e.g., deposit drops from 6 months to 3 after 3 years of timely rent).
- Draw Procedures – Clarify in the lease when and how landlords can draw on the LOC to avoid abuse.
Manhattan Market Reality
- Class A landlords in Midtown and Downtown often demand LOCs, especially for startups, foreign entities, or nonprofits.
- Smaller private owners in Class B/C buildings are more likely to accept simple cash deposits.
- Negotiation leverage matters: in today’s tenant-favorable market, some landlords will give tenants a choice between LOCs and cash.
Tenant Takeaway
Yes—many Manhattan landlords still prefer letters of credit over cash security deposits, especially in higher-end buildings. For tenants, LOCs preserve cash but tie up credit and create ongoing fees. Cash deposits tie up liquidity but avoid banking costs.
The best strategy is to:
- Ask early whether a landlord requires an LOC,
- Compare the true costs of cash vs. LOC fees over the lease term, and
- Negotiate burn-downs to reduce the amount as your tenancy matures.
Where We Fit In
We help tenants evaluate deposit structures that won’t choke their growth. We’ll:
- Benchmark security requirements across Class A, B, and C landlords
- Negotiate reduced amounts and burn-down provisions
- Ensure your lease doesn’t leave your capital locked up unnecessarily
Contact us to structure a lease that protects your business’s cash and credit.
Fill out our 📋 online form or give us a call today 📞 212-967-2061 — let’s find the right office for your business.
