The Security Deposit part II

I wrote last week about different ways to structure a security deposit when negotiating a lease. While there are a few options when it comes to posting the deposit, there are also options when it comes to the structure.

One of the things that any landlord wants to ensure is that his up-front investment will be protected. He has come out of pocket for construction and transaction fees (including brokerage commissions, legal fees, etc) and if he provided free rent he may not recognize any revenue for months after the tenant occupies. The landlord has amortized those costs into the lease and will recap them eventually, but his fear is that the tenant will go bankrupt or is otherwise unable to pay the rent before he recoups his investment.

There are a number of ways to provide the landlord with some comfort while also not crippling the tenant by locking up a large portion of their operating capital in a security deposit. The first step is to get the landlord comfortable with the tenant’s financial position. that may include providing bank statements, audited financials, or recent tax returns. Anything that can demonstrate fiscal stability should be offered to the landlord before any security deposit amount is discussed. If the financial condition is strong enough, this may mitigate the need for a security deposit altogether.

There are also a number of other options when it comes to posting a security deposit. You can request a “burn-down” which means that the landlord reduces the security deposit when certain benchmarks are hit. Whether that’s simply paying rent for a period of time without any late payments, the tenant achieving certain revenue targets, or closing an additional round of funding, this is the time to try and get the landlord to view the tenant/landlord arrangement as a partnership.

The more comfortable you can make the landlord with the relationship, the better your chances for achieving a lower security deposit. This is why it’s important to have an adviser that not only helps you negotiate a good financial deal in terms of rental rate, but is also willing to be your advocate in selling your tenancy to the landlord.

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