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Requiring tenants to give you a security deposit before moving into the office building or retail space you own can help protect you if you later can't collect rent from them or need to pay the cost of repairing damage they may have caused. But depending on a security deposit to give you protection if a tenant doesn't meet its lease obligations can be dangerous if you don't have the right to increase the amount when certain costly events occur.
If one of your tenants has defaulted on its lease or damaged its space, you know the importance of having both a security deposit amount large enough to cover expensive problems and a clause in the lease that will protect you from having to spend your own money rectifying them. But be prepared for a tough negotiation—especially in this economy, when many tenants have a hard time coming up with the cash for a deposit and fear that they will lose it if they have to go dark.
A tenant that moves out before the lease expires may create costly problems for you—namely, finding a replacement tenant. Despite the breach—and the aggravation and cost it has caused for you—the tenant may try to recover its security deposit. That is what happened to a New York owner who, fortunately, had protected himself from such a situation by including a security deposit clause in the lease.
Given the precarious credit situation of many tenants today, it is more important than ever that a tenant's security deposit be as secure as possible and immunized from the consequences of a tenant bankruptcy. There are several techniques owners can use to accomplish this, but a novel method—using the security deposit to secure the guaranty of the lease—reduces many risks and administrative burdens.
To entice a desirable tenant to sign your lease, you may be forced to give it a security deposit concession. The concession may be to forgo a deposit altogether or to have the tenant put up less money than you'd typically require in a stronger leasing market. Either way, a security deposit concession is a special perk that you wouldn't want to give to just any tenant—especially not to one that becomes undeserving or a deadbeat.
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