When CBRE's Tom Burns talks about rescuing office business plans midstream, he does not start with fresh equity or full guarantees. He begins with a letter of credit.
In a recent "Weekly Take" podcast episode, the vice chairman of CBRE's Debt & Structured Finance group described how institutional borrowers and their lenders are leaning on letters of credit as a form of synthetic equity in office refinance negotiations, especially when rollover risk threatens debt service coverage.
The move reflects a shift in how credit risk is being shared as banks return to commercial real estate and rates remain higher for longer. Rather than forcing sponsors to write new checks into assets whose values are still in flux, lenders are accepting contingent instruments that can be drawn only if a business plan slips.
Springing collateral for rollover risk
In the discussion, Burns outlined a structure that has become more common in office deals with heavy near-term rollover. A bank issues, for example, a $5 million letter of credit on behalf of the fund or sponsor, which is then assigned as collateral to the mortgage lender. The LOC lies dormant until a defined event—such as the loss of a major tenant or a breach of a coverage test—triggers the lender's right to draw.
Burns cited situations where 50% of a building is at risk of rolling in year three. If the space does not release on schedule and coverage falls below agreed thresholds, the LOC "springs," providing cash that can be used for tenant improvements, to cover shortfalls or, in some structures, to pay down the loan.
"It's really just buying additional time," he said, describing a recapitalization of an industrial project that had lagged its original leasing plan but could be refinanced and cashed out mid-business plan.
For institutional borrowers, the attraction is clear. The letter of credit can be supported at the fund or corporate level, avoiding personal guarantees and delaying actual funding of capital unless and until the risk materializes. For lenders, it delivers a specific, enforceable backstop tied to the very events that keep credit committees up at night.
Coverage, not value, drives underwriting
What makes these structures viable in 2025–26, CBRE's team argued, is a broader pivot toward coverage-based underwriting. Banks that spent 2022 and 2023 on the sidelines are now "back on offense," as another participant on the podcast, Ty Gerschick, head of debt capital markets for CBRE Investment Management, put it, but they are far more focused on debt service coverage than on appraised value.
Legacy office loans originated near the top of the last cycle are a particular problem. Index rates have risen sharply, but net operating income in many assets has not kept pace, especially where leasing has been slow. Absent a "miraculous move" in NOI, as Gerschick noted, the math on some refis no longer works at prior leverage levels. A springing LOC gives lenders a reason to stay in the deal even when today's income does not comfortably cover tomorrow's interest.
The CBRE conversation made clear that lenders see these instruments as a way to hard-wire coverage support into the loan agreement. Covenants can require that the LOC remain in place with a specified issuing bank and rating. Triggers can be tied to DSCR, rollover thresholds or leasing milestones. If the sponsor misses, the lender's draw right is automatic.
Repricing contingent support
This contingent support is not free. LOC-backed refis are being priced to reflect the additional complexity and residual risk that the lender bears. Borrowers may see a modest spread premium compared with deals where new equity is injected up front, and lenders often carve out specific fees for issuance and maintenance of the LOC.
That repricing sits within a broader reordering of the capital stack that CBRE has been tracking across its platform. Regional banks have ramped up originations, debt funds are stretching to higher loan-to-cost levels and preferred equity providers are targeting a basis closer to 80% rather than 100%. In that environment, a letter of credit is one more lever for lenders who want downside protection but still need to put money out.
Not a wholesale substitute for guarantees
Even as their use grows, letters of credit are not replacing guarantees across the board. On construction loans, Burns and Gerschick said, completion and carry guarantees remain standard, often with recourse caps around 25%. In joint ventures, operating partners are still expected to stand behind those obligations, even if fund-level structures are used higher up.
Where LOCs are most powerful today is in refinancing and recapitalizing office assets that are fundamentally viable but temporarily exposed. They give banks and debt funds a way to defend coverage without insisting on full recourse and provide institutional sponsors a way to keep capital flexible while they work through leasing risk.
The CBRE podcast framed it as one element of a broader "toolkit" that has emerged as lenders return to the market with a more cautious eye.
In a cycle defined by higher rates, uneven office demand and a crowded capital stack, the letter of credit has moved from the margins of documentation to the center of negotiation, functioning less like a mere banking form and more like equity that only shows up when it is truly needed.
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