Commercial Security Deposit Basics

Commercial Security Deposit Basics

Posted by Tyler Walsh on April 8th, 2021

When a tenant signs a lease for a commercial property, they are required to pay a security deposit to the landlord before the start of the lease. What is a commercial real estate security deposit? It’s money that is given to a landlord, lender, or seller of a property as proof of intent to move in and care for the domicile. Security deposits serve as an intangible measure of security, or as a means of tangible security in the event of damages or lost property.

What Is the Security Deposit Used For?

In the majority of cases, the landlord uses the security deposit to fix or repair any damages to the space following the completion of the lease agreement to ensure everything is in good shape for the new tenants. For instance, if the tenant broke the window blinds or stained a portion of the carpet, the costs to repair these damages would be deducted from the security deposit that was provided at the start of the lease. When this happens, the landlord will provide the tenant with an itemized receipt of all the damages and the cost to repair them.

While security deposits are typically used to cover damages to a space after the tenant moves out, they can also be an added sense of security for the landlord in case the tenant defaults on a rent payment. If this were to happen, the landlord can pull funds from their existing commercial lease security deposit to cover the rent temporarily so as to not disrupt the regular income stream.

How Much Is the Average Commercial Security Deposit?

The short answer: it depends on the landlord and the commercial lease terms. Security deposits can be either refundable or nonrefundable, depending on the terms of the transaction.

You will typically see them measured in terms of the monthly rent. For instance, a landlord might require a security deposit equivalent to two month’s rent. While security deposits aren’t always required, most landlords opt to include them in the lease terms because of the added sense of security and protection.

While the landlord can use the deposit to cover any damages to the space, they aren’t able to use it to cover the standard wear and tear that may have accrued throughout the lease. Following the termination of the lease agreement, the tenant will receive the security deposit (minus any damage costs) back within 30 days of move-out.

What Variables Influence Commercial Security Deposits?

While you typically see a landlord require one or two month’s rent as the security deposit, there are a few other variables that can impact this number. Here are some additional variables that can influence a commercial security deposit:

  • Established companies – Similar to an individual with a high credit score and a history of making payments on time, landlords prefer a tenant that is an established company with good financials. With a successful track record, more established companies can expect to pay a lower security deposit — or might have it waived altogether.
  • Small or new businesses – Because starting any business is a gamble, landlords are more likely to require a higher security deposit for startups or smaller businesses due to the lack of credit history or uncertain future.
  • Tenant improvement (TI) allowance – If a tenant is provided with money from the landlord to improve the space, the security deposit is likely to be more expensive due to the landlord having more upfront costs on behalf of the tenant.

While no landlord determines the security deposit the same way, a knowledgeable property manager can provide recommendations based on similar properties in the area to ensure your security deposit isn’t deterring high-quality tenants from leasing your space.

How a Property Manager Helps with Collection

Working with a property management company provides countless benefits, including the handling of each tenant’s security deposit. This is a value-add for landlords before it ensures their protection.

The goal of a property manager is to help keep landlords in compliance with state laws and reduce their risk and liability. This relates to commercial lease security deposits as well. Your property management company will handle the collection of the security deposit from the new tenant, hold onto the deposit during the lease term, and issue the remaining funds to the tenant within the correct time frame required by law. Most importantly, your property manager will know to understand what constitutes wear and tear (and isn’t allowed to be repaired with the security deposit) versus what damages are covered by the security deposit.

Why Choose Price Commercial Management for Commercial Property Management

As a property investor, you need a team behind you that you can trust. That’s where Price Commercial Management can help. Our team’s goal is to work alongside you as an extension of your organization to ensure that your best interests are always top of mind. You can expect unparalleled property management services from a team that treats your properties as if we own them personally.

From rent collection and security deposit to preventative maintenance and tenant retention, your commercial properties will be in capable hands. At Price Commercial Management, our team offers a fully customizable suite of property management services so you can get assistance with what you need and continue managing what you want.

If you are looking for a commercial property manager who can handle everything from security deposits to preventative maintenance, contact Price Commercial Management today.

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