Will Your Letters of Credit Be Honored? The FDIC Warns It Will Not Honor Letters of Credit Issued by Banks in Receivership

In the early 1990s, many commercial landlords experienced a significant increase in the number of defaults by their office and retail tenants. This situation prompted many landlords to require credit enhancement in connection with leases to noncredit tenants. Because of tenant bankruptcy concerns, the preferred source of credit enhancement became letters of credit. As the late 1990s and early part of this decade brought an influx of dot-com companies with no financial track records, commercial landlords were forced to rely heavily on letters of credit for security against tenant defaults and bankruptcies. Given the current market conditions and the ongoing rise in office and retail tenant defaults, commercial landlords are again relying heavily on credit enhancement instruments as a source of financial security. Accordingly, the use of letters of credit as the preferred credit enhancement instrument is more in focus now than ever before.

For a list of failed banks, go to: http://www.fdic.gov/bank/individual/failed/banklist.html

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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