Security deposits are one of the key ways that landlords protect themselves from unexpected issues with tenants.
When we think of security deposits, we generally think of residential property leases, but they’re just as common and important for commercial properties, whether that be office complexes, industrial warehouses, or retail centers.
With that being said, there are some differences between security deposits for commercial leases and residential leases. One difference between the two is how you come up with the amount to charge for the security deposit.
So, what do most landlords charge for commercial rental security deposits? This article will take a closer look at answering this question.
What Is the Purpose of a Security Deposit?
Security deposits accomplish a couple of things. Primarily, they provide landlords with a way to cover damage that a tenant inflicts on the property during their tenancy. Because the deposit is refundable, security deposits incentivize tenants to take care of the property. Security deposits also provide assurance that tenants intend to move into the property.
Landlords shouldn’t expect to keep security deposits. You’re only entitled to the security deposit if there’s excessive damage to the property when a tenant moves out. A security deposit doesn’t cover normal wear and tear. Depending on state laws, you may also be entitled to the security deposit to cover unpaid rent or bills.
How Are Commercial Rental Security Deposits Different?
Everything described above applies to both residential and commercial property security deposits. If your tenant leaves the property in reasonable condition and all the rent is paid on time, then you must refund the entire security deposit. Typically, you must refund the deposit within 30 days of the lease’s termination.
A commercial property security deposit differs from a residential property security deposit mainly in the amount of regulation. Commercial properties have fewer laws governing security deposits. This gives landlords more freedom in terms of the amount they can charge security deposits and what they can do with the security deposit (in terms of investing and gaining interest on the deposit).
How Do Landlords Decide What to Charge for a Commercial Rental Security Deposit?
The actual amount for a commercial security deposit can vary widely. Generally, the main factors landlords use to determine what to charge are the tenant’s gross rent payments, credit rating, and tenant improvement allowance.
Perhaps the most important of these factors to consider when determining what to charge for a security deposit is the tenant’s credit rating. An established company with solid financial ground and a history of consistently paying on time is usually charged a very low security deposit. Some landlords waive security deposits entirely for large, reliable corporations with great reputations. Small businesses and startups with little to no credit history, on the other hand, will typically have to pay larger security deposits.
The next factor that influences security deposit amounts is a tenant improvement (TI) allowance. Landlords provide a TI allowance, and they cover the costs of improvements to the rental property. These include hard costs, which are permanent or semi-permanent changes to the property, such as new flooring, new walls, fresh paint, and updated HVAC system, and soft costs, which are the costs necessary to make these changes, such as building inspection fees and construction management fees.
Landlords use TI allowances as an incentive to rent their space. By covering the costs of the improvements, a tenant wishes to make to your space (which are oftentimes mutually beneficial), they’re more likely to sign a lease with you. With that being said, you’ll want to collect a higher security deposit in the event that the business closes before you recoup the TI allowance. As a result, the higher the TI allowance, the higher the security deposit.
The best way to figure out exactly what to charge is to look at similar properties in your area, based on these factors, and ensure that it’s a fair price that isn’t deterring tenants from leasing your space.
Conclusion The precise amount that you should charge for a commercial property security deposit is more variable than the amount you’d charge for a residential property security deposit. By knowing what factors determine a tenant’s security deposit amount, you’ll be better situated to determine the amount you should charge for a particular lease.