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Letter of Credit Calculator
Letters of credit (LOCs) are bank-issued unconditional payment guarantees that commercial landlords can draw on if tenants default. They're common in office, retail, and industrial leases for early-stage or credit-light tenants. This calculator sizes the LOC amount based on rent coverage and totals the annual and lifetime cost — issuance plus standby fees.
Often 6-18 months
Annual
Letter of credit amount
$144,000
Annual cost to tenant
$2,880
Total cost over LOC term
$14,400
Issuance fee / yr
$2,160
Credit-use fee / yr
$720
How the math works
Letters of credit (LOCs) are bank-issued unconditional payment guarantees that landlords can draw on if tenants default. Common in commercial leases for large-format or credit-light tenants — typically sized at 6-18 months of rent.
LOCs are off-balance-sheet for the tenant but cost ~1.5-3% per year (issuance + standby fees) and tie up borrowing capacity at their bank.
How to Use
- Enter monthly base rent and the number of months the LOC covers.
- Enter the bank's issuance fee % (typically 1-2% annually).
- Enter the standby credit use fee % (often 0.25-0.75% annually).
- Enter LOC term in years.
- Read total LOC amount, annual cost, and lifetime cost.
Frequently Asked Questions
LOC vs cash security deposit?
LOC is off-balance-sheet for tenant; cash deposits aren't. LOCs cost 1-3%/year — cheaper than tying up cash if tenant earns higher returns. But LOC ties up borrowing capacity at the issuing bank.
Burn-down LOC?
Many leases let LOC step down each year as tenant proves payment history (e.g., 12 months → 9 → 6 → 3 over years 1-4). Negotiate this hard.
Draw mechanics?
Landlord submits a sight draft to the issuing bank with statement of breach. Bank pays within 5-10 business days regardless of tenant dispute — that's the unconditional aspect.
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