Finding the right office space is merely the first phase of a longer journey when you’re looking for commercial space for lease in New York City. The next phase requires strong negotiation skills and plenty of know-how, both on the market’s specifics and on the local legislation. Part of this second phase is understanding what are security deposits, how much they cost, how they vary based on your company’s size and history, and so on. While we strongly advise you have a broker by your side along this journey, below are the key features of security deposits in NYC.
What is the security deposit?
Just like for residential properties, the security deposit is money that is given to the landlord as proof of intent to occupy the space. This amount is intended as a measure of security for the recipient and can also be used to pay for damages on the property or whatever unknown issues that may come up during the lease term. However, unlike residential landlords, commercial real estate landlords have greater freedom in the amount that they can demand.
What is the security deposit used for?
Typically, the security deposit is a way for landlords to hedge the risk of a tenant not paying rent on time. If the tenant fails to make the rent payment on time, the landlord can pull funds from the security deposit to maintain an income stream, even if for a short period of time. It can also be used after you move out of the space to pay to repair damages that may have occurred during your stay. In the event that the landlord uses the deposit to repair damages at your lease expiration, they will provide a receipt.
How much is the security deposit in NYC?
New York City commercial security deposits typically range from 2 to 12 months, depending on the landlord’s perceived financial risk. Companies with strong financial statements will pay less than a start-up, as the latter is just establishing their profitability, thus poses a higher risk. However, security deposits are negotiable and a broker can make a real difference in the amount you end up paying, or they can at least help you recoup a portion of that deposit on a regular basis, provided that you’re in good standing with your rent payments and other lease obligations.
How is the security deposit amount determined?
To determine a tenant’s creditworthiness and their financial risk, commercial real estate landlords will typically look at two factors: they will first look at how much money they will need to spend on your occupancy (construction cost and free rent) and at your business and credit history. For the latter, they will analyze the last two years of your corporate tax returns and/or financial statements prepared by a CPA.
Other ways to secure a lease
Depending on your budget and the landlord’s expectations, in addition to the security deposit there are two other ways to go about securing your lease–through a letter of credit or a personal guarantee.
- The letter of credit is a suitable method for those companies that have a strong relationship with their bank and have built an availability of credit. This way, the entity can put up a letter of credit in lieu of a large security deposit. The upside of this method is that it exonerates the company (tenant) from paying cash up front, however it can still impact its access to capital. This is something that can also be negotiated, so a good tip is to try and agree on having the amount held in a letter of credit be reduced over time, while also earning the landlord’s trust.
- The personal guarantee is rarely used, but it is still an option if cash is tight and available credit is limited. In this arrangement, the owner of the company leasing the space puts up their personal assets as collateral if something happens to the lease.
If you want to learn more about security deposits in NYC and how they work, check out some insight from Alan Rosinsky, principal broker at Metro Manhattan, in the video below:
Are you thinking of setting up your business in a convenient location in Manhattan, and are looking to lease space in a modern building offering state-of-the-art amenities? Then reach out to us and we will show you worthwhile space situated right in the heart of New York City. To learn about available office space, call Metro Manhattan Office Space at (212) 444-2241 or email us at [email protected]