Security Deposits Required in A Low Vacancy Market

Security deposits for a commercial or industrial real estate building are normally required upon the signing of a lease. There is no magic on the amount of the security deposit; however, it has to do with multiples of the rent generally. For instance, if the rent is $10,000 per month, the security deposit may also be a one-time fee of $10,000.

Historically, security deposits are required to satisfy the landlord if the tenant defaults on payment of the rent or damages the property. In some instances, security deposits can be anywhere from the equivalent of two month’s rent to six month’s rent. Also, the real estate commission for leasing the premises can be substantial. In the case of a sizeable commission, the landlord may insist that the security deposit be at least enough to cover the fee.

The security deposit is usually evaluated by the landlord depending upon the financial strength of the tenant combined with the amount of damage at the end of the lease that the landlord may incur. In negotiations of the lease, the security deposit may be a major objection by the tenant. Tenants have sometimes negotiated lower security deposits by offering a personal guarantee. A personal guarantee is an excellent way to reduce the security deposit, but the party offering the guarantee should limit its exposure. For instance, the guarantee may be for twelve months rent in the event of a breach and or default by the tenant. The party guarantying the money will be responsible as well as the company.

Publicly traded companies typically do not agree to any security deposits. This rejection of security deposits by substantial companies has been around for decades and still exists today. The larger the company on the lease the smaller or no security deposit. In some instances, the last month’s rent is paid by the company as an offset to the security deposit, and the company may expense that cost in the current year.

Today, the landlord may request any amount of security deposit that he or she feels they can get from any company. Any shrewd landlord knows that there is virtually very little vacancy, and he or she can wait until they get the right tenant to pay the security deposit. Of course in a slow market, the opposite is true.

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