This can be one of the most contentious points in any lease negotiation… Just how much security deposit does the landlord want and what is the tenant willing to provide? This is an issue with almost any tenant I’ve worked with, from the small law firm all the way up to Fortune 100 companies.
It’s helpful to understand what the landlord wants to securitize. Because the landlord is amortizing a number of up-front costs into the lease term, he is most focused on those costs when he weights the amount of security deposit he requests. These initial costs include the tenant fit-out budget, any relocation allowances, rent concessions, and other deal expenses (like commissions and attorney fees.)
There are a few ways to handle the security deposit and I have helped tenants work through a number of them (and kept them away from others.)
Traditional Security in Escrow: This is probably the most common and simplest way to take care of a security deposit. A check for the agreed-upon amount is provided with the signed lease and placed in escrow for the term of the lease. Some tenants shy away from this because they don’t want to give up control of their cash or want it earning interest in their bank.
Letter of Credit: In this case, the tenant places the security deposit in a savings account with their bank and a legal document is provided that gives the landlord access to those funds if the tenant defaults. There is typically an annual fee from the bank for this service and some additional documents that must be attached to the lease.
Personal Guarantee: Essentially, the principal is personally guaranteeing the credit of his firm to avoid tying up cash like you would have to with one of the two above options. While it does avoid any up-front cash outlay, there is tremendous exposure. While I have seen these in leases I’ve reviewed, I’ve never had a client put forth a personal guarantee.
The next post will discuss how the security gets negotiated, creative ways to structure a security deposit, and ways to minimize the impact on available cash.
When considering a renewal, relocation, or other facility decision, too many people only look at their real estate costs simply from the perspective of rent per square foot multiplied by square feet leased. While this provides an accurate picture of your rent payment, it excludes other obligations and doesn’t come close to establishing your total cost of occupancy.
In addition to the base rent, keep in mind that there are utility costs, maintenance expenses, real estate taxes, amortized improvements and a whole host of other charges that the landlord may try to pass along to the tenant. It’s also important to consider the efficiency of the space layout and growth projections for the future. These costs will compound exponentially when you start looking at the total charges across the rented area and over the term of the lease.
On the opposite side of the spectrum, it’s important to consider the up-front costs of each individual option. How much will the physical move cost? What about setting up the phone and data? Will the new space require a large furniture purchase? How will it impact productivity? And what will it mean for business disruption?
Signing a lease without fully comprehending these costs may leave your head spinning from the move and a shock when that first invoice shows up in your mailbox. It’s important to evaluate each building and consider the rental rates, space efficiency, and all of the other charges that will be incurred during the evaluation process so you can make the an informed business decision.
Took a look at the unemployment rate in New Jersey versus the class A vacancy rate across the market. It looks like the market better get ready for lower vacancy rates! We’re already seeing submarkets where landlords are feeling more bullish and becoming less flexible with their rental rates and concessions.
I got back from a week at the shore with my family a few days ago. It was a fantastic trip and a great opportunity to get away from it all and reflect on the previous year. It took a little effort, but I stayed away from my phone, didn’t check email too frequently, and generally decompressed.
My younger daughter thought it would be a good idea to get up before dawn every morning, so I spent a good deal of time walking around the beach, enjoying the sunrise, and recharging my batteries.
It’s interesting to grab some perspective when you have the time to step back from the continuous barrage of emails, perceived crises, and various demands that seem to never end. I take a lot of pride in my responsiveness and general level of excellence that I deliver to my clients. Taking a step back allowed me to differentiate between “urgent” and “important.”