Ripple Effect of Recent Bank Insolvencies on Real Estate
The closure of Silicon Valley Bank (SVB) and Signature Bank, and the subsequent receivership by the Federal Deposit Insurance Corporation (FDIC), has far-reaching effects, including to commercial real estate transactions in which these banks are involved. Specifically, landlords holding letters of credit and borrowers with loans with SVB and Signature Bank were all immediately affected by the receiverships.
Leases and Letters of Credit
Letters of credit are utilized as security for commercial real estate leases and are guaranteed by lending institutions. Letters of credit are commonly used as a replacement for cash deposits in leasing. When SVB and Signature Bank became subject to receivership, landlords holding these letters of credit may have become immediately insecure. Generally, leases have specific requirements regarding letters of credit, including the requirement that they be issued by a creditworthy bank that is acceptable to the landlord. Landlords holding letters of credit from SVB and Signature Bank will likely require a replacement letter of credit from another bank.
Actions for Tenants With SVB and Signature Bank Letters of Credit: Tenants will need to be proactive with terminating letters of credit with these banks and entering into discussions with their landlords regarding replacement forms of lease deposits, including cash deposits, replacement letters of credit, or surety bonds.
Loan Transactions in Process on March 10
Loan transactions, including sales, refinances and construction loan draws, were in process when SVB and Signature were closed on March 10 and March 12, respectively. The following provides a brief summary of the impact of the closure on these loans.
Loans Funded Prior to Receivership: Title companies have taken the position that if a loan was funded prior to the receivership then the closing will be deemed to have occurred unless instructions have otherwise been given by the respective closed bank to return the funds.
Loans in Process at the Time of Bank Closure: However, with respect to any pending sales or refinance transactions that have not closed, any funding will be determined on a case-by-case basis in accordance with instructions from the title companies.
Construction Loans: With respect to construction loans, because these types of loans involve ongoing funding, verification with any new bank with which SVB and Signature Bank assets were assigned as to whether the new bank intends to continue funding the construction loan will be necessary.
These are just a few examples of the ripple effects resulting from the insolvency of SVB and Signature Bank. Navigating lease requirements and obligations relating to potential replacement security and possible loan restructuring can be complicated.