Last Updated on March 14, 2023 by Morgan Beard
The collapse of Silicon Valley Bank has immediate implications on early-stage tech startups, especially those looking to make payroll and access operational funds. The long term reverberating effects of SVBs collapse are still to be seen. This blog will explore the SVB collapse: implications for commercial tenants.
The commercial real estate space is the backbone of numerous business operations. Daily operating costs like: utilities, rent, payroll, CAM expense, construction costs etc., all are necessary bills that keep the doors open for restaurateurs, retailers, and office occupiers alike. Lines of credit for your security deposit, construction loans for site build out, and commercial real estate loans for operations are examples of types of financing that commercial tenants deploy.
Ultimately, banks are involved in financing commercial real estate transactions and providing other financial services that businesses rely on. In this blog post we will dive into some of the potential effects that could impact commercial tenants.
What caused the Silicon Valley Bank collapse?
The collapse of Silicon Valley Bank marks the second-largest bank failure in US history, since the 2008 financial crisis in which Lehman Brothers declared bankruptcy. This time around, Silicon Valley Bank focused their assets too heavily on crypto, tech startups and bond investments that are highly sensitive to interest rate increases. Ultimately, this investment strategy left Silicon Valley Bank exposed and depleted of liquid funds and of banking customers.
Their hail mary attempt after months of warning signs was a sale of their liquid securities portfolio which was recognized at a $1.8 billion dollar loss. Ultimately Silicon Valley Bank was looking to sell securities in an effort to raise $2 bIllion in capital. With that news, investors began to advise technology founders to withdraw their funds from SVB. One day later, the Federal Deposit Insurance Corporation took over management of Silicon Valley Bank.
Occupier is financially sound, and here to support our customers and commercial real estate tenants as they navigate this scenario. So, how does a bank collapse like this one impact commercial real estate tenants?
How does this impact commercial real estate tenants?
Confidence in your banking provider is a non-negotiable. This is especially true for commercial real estate tenants, navigating expansion goals into new spaces, managing recurring operating expenses, and pulling construction loans for build out projects. The collapse of Silicon Valley Bank is a reminder that diversification of your financial institutional partnerships is paramount. Here are some potential scenarios to prepare for in cases like the collapse of Silicon Valley Bank.
Letter of credit (LOC) –
A letter of credit (LOC) is a financial instrument used in leasing transactions to provide assurance to the landlord that the tenant has the necessary funds to complete the transaction, like a security deposit. When your bank defaults, like Silicon Valley Bank did, that puts the tenant at risk of defaulting as well.
A personal guarantee –
A personal guarantee clause is often included in a lease agreement especially when the tenant is a new business without a track record of financial stability, or has a weak financial standing. The personal guarantee provides the landlord with an assurance that holds the individual liable for the obligations of the business. This is an unsavory scenario, especially when your bank collapses and leave you accountable.
Frozen construction loans –
When an organization is growing quickly construction loans are an option for site build out. If your banking institution collapses then your loan can be frozen resulting in project delays, issues in fund disbursement, and loan default.
Ultimately, any combination of these failures caused by your bank create time delays which result in revenue delays. Our ask for commercial real estate tenants is to empower yourself with your lease data at your fingertips.
How can commercial tenants mitigate real estate risk?
Pending your lease portfolio size, your organization’s real estate data is the second largest expense on your balance sheet after payroll So, a default from your bank can have catastrophic impacts on your business. Mitigation of commercial real estate risk starts with adopting software that empower you to make smarter decisions. Here is our list of top notch commercial real estate software providers mitigating risk for commercial tenants:
Otso – Commercial lease security
Otso empowers commercial tenants to show their financial strength, negotiate better deal terms, and replace onerous cash collateral requirements. What Otso does is remove the loan or obligations for the tenant. Their multi-year policy covers every instance of default per your lease terms for approved tenants. Otso instills confidence for commercial tenants with a policy backed by A-rated credit through Accelerant specialty insurance company and administered by Assurely.
Occupier – Tenant lease management & accounting
We couldn’t create this list without including ourselves. Occupier is the only lease management software for commercial tenants that powers the entire lease lifecycle. From site selection to critical date management and lease accounting compliance. We keep commercial tenants on the real estate team, construction team, facilities department, finance & accounting staff and c-suite all aligned on the happenings within your lease portfolio. Commercial tenants need to answer questions like:
- When is that lease expiration?
- Did Real Estate communicate that lease amendment to Accounting?
- Did Barbara from Accounting recognize the lease modification in our journal entries?
- Do we have a favorable termination clause for that one space no one uses?
Protect your lease data
It typically takes a financial error, loss in data, or system failure for commercial tenants to proactively protect their lease details. If your second largest business expense is still living in legacy software, excel spreadsheets or printed pdf files, then you are exposing your organization to unnecessary risk. Commercial tenants are comfortable with the status quo.
But, smarter solutions are here to aid commercial real estate tenants in the management of their lease portfolio and lease accounting processes.
The silver lining in the collapse of Silicon Valley Bank is that it is a reminder to digitize your lease data, as well as to diversify your financial investments and loans.