Should you post a letter of credit or a cash security deposit on a Denver office lease?
If landlord credit is your concern, the letter of credit is usually the safer instrument for the tenant, which is the opposite of what most occupiers assume. A cash deposit held without an effective trust or escrow arrangement can be swept by the landlord's secured lender, leaving you a general unsecured creditor for your own money. A properly structured LC is the issuing bank's obligation and generally is not estate property at all. It is not free: an LC carries fees and, depending on how it is issued, ties up either borrowing capacity or cash.
The security instrument is a financing decision, not a lease formality
The landlord's form lease names one. Usually cash, because cash is simple for the property manager and it sits in the landlord's account rather than yours. Most occupiers sign that line without a look.
Price it. As an illustration on asking rent rather than a quoted deal: 25,000 square feet at the metro average of $34.07 per square foot full service gross (CBRE, Q2 2026) puts six months of security at roughly $426,000. As cash, that is $426,000 of working capital out of your hands for as long as the lease requires it. As an LC, it is a fee plus, in most structures, a quiet cut in what your bank will lend you.
Two costs. Two very different outcomes if the landlord's loan goes sideways. One line nobody redlined.
In a landlord bankruptcy, cash is the riskier instrument
Flatly: the cash deposit is usually the weaker position, the LC the stronger one.
Cash you hand a landlord is the landlord's cash unless the lease says otherwise. Under Section 541(d) of the Bankruptcy Code, your deposit escapes the landlord's estate only if the lease or state law required the landlord to hold it in trust for you. No trust language, and your money is another line on the landlord's balance sheet.
In 10FN, Inc. v. Cerberus Business Finance, LLC (S.D.N.Y., October 18, 2022), a tenant's deposit of roughly $271,000 under a Chicago sublease governed by Illinois law carried no trust language. The landlord's secured lenders swept the deposit account before the bankruptcy, and the court treated that deposit as an unsecured loan to the landlord. The tenant ended up behind the lender as a general unsecured creditor, for its own money. (Herbert Smith Freehills Kramer, "Tenants Beware: When Your Deposit Lacks Security," November 21, 2022; Mayer Brown, "Look Before You Lend," October 19, 2023.) It is an Illinois-law illustration of the mechanism, not a Colorado holding, and Colorado law on deposits held by a commercial landlord is a question for your counsel. The mechanism itself does not depend on the state.
An LC is structurally different, not safer by degree. It is the issuing bank's independent obligation to the landlord. Your money never enters the landlord's account, so when the landlord files, the LC is generally not estate property.
One exception, and it catches people. If the landlord has already drawn the LC and is holding the proceeds, that is landlord cash now, with the same exposure as a deposit.
Security structures and bankruptcy outcomes turn on the words in your lease and the facts of the case, so have your own counsel read the actual clause before you sign it.
Denver landlord credit is a live question, not a hypothetical
Republic Plaza, downtown's tallest tower, carried a CMBS loan of about $230.1 million that transferred to special servicing after the borrower did not pay it at its March 2026 maturity (Trepp, reported by BusinessDen and Hoodline, March 25, 2026). A Denver District Court judge appointed a receiver, Trigild, in September (BusinessDen, September 4, 2026), and the property was appraised at $136.0 million after the transfer, against a 2012 appraisal of $535 million (Connect CRE). In the southeast suburbs, the owner of Panorama Corporate Center in Centennial defaulted on a $133 million loan that had matured in June 2025 (BizWest, citing the Denver Post, April 1, 2026). And on CRED iQ's August 2026 read, Denver's CMBS distress rate across all property types jumped from 22.4% to 35.9%, the largest move of any major metro, on two large office defaults (CRED iQ, August 7, 2026). That is an aggregate figure, not office alone, which is exactly the point: the office loans are big enough to move the whole market's number.
Those are landlords. Metro office vacancy sits at 26.6% on Cushman & Wakefield's count and 28.7% on CBRE's (Q2 2026, different building universes). At Republic Plaza the appraisal against the loan says the equity is gone, and it is not the only building in the metro where that arithmetic holds. Underwriting the ownership behind your building is part of the deal now, the same way landlord default risk belongs in your renewal analysis and the same way you read an SNDA before signing an estoppel.
In a tenant bankruptcy the analysis flips, and that is where your leverage lives
If the tenant files and the lease is terminated, Section 502(b)(6) caps the landlord's claim for the rent lost from termination at the greater of one year's rent or 15% of the rent for the remaining term, not to exceed three years, measured from the earlier of the filing date or the date the landlord got the space back, plus any unpaid rent already due at that point. The cap governs termination damages; other claims a landlord may hold are a separate question. A cash deposit the landlord is holding gets applied against that capped claim. Whether LC proceeds count against it is unsettled.
The Third Circuit in In re PPI Enterprises (2003) held that where the lease calls the LC security for the tenant's performance, the proceeds count against the capped claim. The Fifth Circuit in In re Stonebridge Technologies (2005) held the cap applies only if the landlord files a proof of claim, so a landlord who draws in full and never files could keep the excess.
That route may be getting narrower. In the Tupperware Brands Chapter 11 (Party Products v. Spirit Realty, Adv. Pro. No. 25-50062, Bankr. D. Del.), landlord Spirit Realty drew a $10 million LC in full and never filed a claim. The tenant's reimbursement-obligated successor filed one on the landlord's behalf under Section 501(b), and in an April 1, 2026 ruling denying a motion to dismiss, the court held that was enough at the pleading stage to potentially trigger the cap (Stark & Stark, National Law Review, July 30, 2026). That is a ruling that the claim survives, not a final determination of what the landlord keeps, and it does not resolve the circuit split.
Why you care: unsettled law is what makes an LC worth more to a landlord than the same dollars in cash. A cash deposit gets applied against a capped claim. An LC might reach past the cap, or might not, depending on the court and the lease language. That uncertainty is a premium the landlord is paying for, and it is yours to sell... in months of security, in burn-down terms, or in who pays the fee.
Six terms decide what your security actually costs you
- Size. Deposits historically ran one to two months of rent. Multi-year direct leases now often require security equivalent to several months of rent and as much as a year, especially where the landlord is funding a large improvement allowance. That range is broker commentary (Advocate Commercial Real Estate Advisors, May 2022), not survey data, and there is no published Denver norm. The right number is whatever you can negotiate against the landlord's actual exposure.
- Burn-down. A burn-down reduces your security over the term, either on a clock (a cut at year 2 or year 5 contingent on no default) or on milestones tied to revenue or profitability. Tie the release to objective triggers, timely rent payment and no continuing material default, never to landlord satisfaction, or the clause is decorative. (Hollander Real Estate Law, 2025; Occupier.)
- The LC fee and collateral. Ask who pays it, and ask the bank for the complete fee and collateral schedule before you agree to anything. An issuance fee and an annual fee are usually separate components, not alternatives, and a bank may require cash collateral behind the LC on top of the fees. Over a ten-year term, that schedule is the conversation.
- The evergreen clause. Most LCs auto-renew annually unless the bank gives notice. Read the notice period, and make sure a failure to renew gives you a cure window, not an immediate right to draw the full face amount.
- Draw conditions, written into the LC itself. A bank honors a draw that matches the documents the LC calls for. It does not read your lease, and it will not referee a dispute about whether you actually defaulted (that independence is the whole point of the instrument, and it is codified in UCC Article 5). So the protections you negotiate in the lease only help if the LC's own documentary conditions mirror them: what the landlord must certify, on what notice, and with what cure period. A sight draft with no conditions is a blank check, and lease language alone will not stop the bank from honoring it.
- Segregation, if you post cash. Require that the deposit be held in a trust or escrow arrangement for your benefit, structured by your counsel so that it actually works under the governing law, and require the landlord to maintain it. A bare contractual promise to segregate is only as good as the arrangement behind it. Done properly, that is what separates a 10FN outcome from a recoverable one. It is the highest-value ask on the cash side and almost nobody makes it... so ask while it is still free.
The cost your CFO will not see on the lease
An LC issued under your revolver typically reduces available borrowing capacity for as long as it is outstanding, even if it is never drawn, through an LC sublimit or reduced availability. A cash-collateralized LC does something different: it ties up cash instead, and still carries fees. On the illustration above, a $426,000 LC under the revolver is $426,000 of borrowing capacity your company does not have while it is outstanding, until a burn-down or replacement releases it. Compare the bank's actual collateral requirements, fees, and release terms before you treat an LC as a working-capital solution. That is a financing cost, not a lease cost.
Decide on the landlord's credit and your cost of capital, not on what the form lease names
Two questions settle this, and neither is in the lease. How solvent is the ownership behind your building? And what is a dollar of your working capital worth against a dollar of your revolver?
Weak landlord credit and cheap borrowing capacity argue for the LC. Strong landlord credit and a tight facility argue for cash, with a segregation clause attached. What should not decide it is which instrument the landlord's attorney typed first.
Frequently asked questions
What is a letter of credit in a commercial lease?
A standby letter of credit is a bank's independent promise to pay your landlord up to a stated amount on a conforming presentation. You post collateral or use capacity under your facility, the bank issues the LC, and the landlord draws by presenting whatever documents the LC itself requires. The bank checks the presentation, not the lease, so the draw conditions have to be written into the LC. The landlord never holds your cash.
How much is a typical commercial lease security deposit?
Deposits historically ran one to two months of rent. Multi-year direct leases now often require security equivalent to several months of rent and up to a year, especially where the landlord is funding a large improvement allowance. That range is broker commentary (Advocate Commercial Real Estate Advisors, May 2022) rather than survey data, and there is no published Denver norm, so treat it as directional.
Is a letter of credit better than a cash security deposit?
For the tenant, usually yes when landlord credit is the concern. A properly structured LC is the issuing bank's obligation and generally is not property of the landlord's bankruptcy estate, while a cash deposit held without an effective trust or escrow arrangement can be swept by the landlord's lender. It costs fees and, depending on structure, either revolver capacity or cash collateral, so it is a trade.
What is a security deposit burn down clause?
A burn down, or step down, reduces your security over the lease term. Time-based versions cut it at year 2 or year 5 absent a default. Performance-based versions tie the reduction to revenue or profitability milestones. Tie the release to objective triggers, never to landlord satisfaction.
Does a letter of credit affect my line of credit?
Usually. An LC issued under your revolver is treated as usage against the facility even when it is never drawn, typically through an LC sublimit or reduced availability, and that capacity stays tied up until the LC is reduced, replaced, or released. A cash-collateralized LC ties up cash instead. Ask the bank for its collateral and release terms before you assume either.
If you're working through a lease decision in Denver, whether that's a renewal, a relocation, or a footprint question your CFO is pushing on, I'm happy to run the numbers with you. Schedule a conversation.
About Brian McCririe
Brian McCririe is Executive Managing Director of SVN | Denver Commercial and National Council Chair for Occupier Services across the SVN network. After 25 years representing tenants and investors across global markets, he now focuses on the Denver Metro area helping companies navigate leases, acquisitions, and the gap between what landlords offer and what occupiers deserve. He leads one of the metro's top tenant rep practices and writes about the deals, decisions, and market shifts that matter to corporate real estate leaders.
