Security Deposits

Landlords require security deposits to protect themselves from losing upfront costs and renovation expenses in the event of default by a tenant. They frequently spend heavily to entice new tenants, often by assuming alteration and improvement costs and providing free rent at the start of the lease term. In addition, landlord’s incur legal, accounting, brokerage and permitting fees. Many of these “costs” apply specifically to one tenant with little enduring value in case of default.

Companies with very good credit who lease a reasonable amount of space can expect to avoid paying a large security deposit. Typical security deposits start at two-to-three months’ rent and rise from there. Tenants with poor credit may be required to pay six-to-twelve months, assuming the landlord is still willing to move forward.

If landlords are unsatisfied with a tenant’s financials and credit-worthiness, they may ask the tenant to fund all or a portion of the alterations in addition to a security deposit, or may even require a personal guaranty. We never recommend signing a guaranty; however, if it’s unavoidable, you should insist upon a “good guy” guaranty.

Tenants providing a large security deposit can often negotiate a “burn down.” In a burn down, landlords agree to return portions of the deposit during the course of the lease term, provided their tenants have paid the rent on time and are not in default.