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 free or reduced rent at the start of the lease term. In addition, landlords incur legal, accounting, brokerage and permitting fees. Many of these “costs” apply specifically to one tenant with little enduring value in case of default.
Depending on the financial strength of the tenant, in the event of a default, the landlord will want to recover a portion or most of the above costs via a security deposit. Companies with very good credit and leasing a reasonable amount of space can expect to avoid paying a large security deposit.
Typical security deposits can start at two-to-three months’ rent and rise from there. Tenants with bad credit may be required to pay anywhere from six-to-twelve months, assuming the landlord is still willing to move forward.
If landlords are unsatisfied with the financials or security, they may even require a personal guaranty or ask the tenant to fund the alterations. We never recommend signing a personal guaranty; however, if it’s unavoidable, you should insist upon a “good guy” guaranty (please see our 12/9/19 blog entry).
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 lease term, provided the tenant has paid their rent on time and is not in default.