By Larry H. Haber, Esq., CPA and Commercial Real Estate Managing Partner of Abrams Garfinkel Margolis Bergson, LLP
When it comes to how much protection a landlord needs by way of a Security Deposit (S/D) and Good Guy Guarantee (GGG), landlords need to channel the one and only Zen Master, Coach Phil Jackson, and ask themselves the question ”
<How Much Is Enough?” Conversely, tenants should make it their mantra to channel rock legend Pete Townsend’s song “Just a Little is Enough”for some motivation when it comes to deciding upon (1) how much of an S/D they will provide and (2) how many or little “steroid-laced” legal and business points they can digest when it comes to the GGG their principals will sign.
By way of example, on a 10-year, $50 PSF, 12,000 RSF office lease with a $50 PSF landlord allowance and six months of free rent, depending on whose calculator you are using, a landlord will contribute approximately $1,200,000 to the deal within a year or less. Imagine a landlord’s mindset when a tenant only wants to provide three months (i.e., $150,000) of S/D given what the landlord is shelling out! The following is AGMB’s “Sweet 16” list of items that landlords throw into their analytical blender to determine the S/D required when being served a “tenant concession cocktail” by a tenant’s broker:
(1) is a GGG being signed?; (2) the strength of a tenant’s P & L and balance sheet; (3) the tenant’s historical track record; (4) is it an office or retail lease (think more outlay on an office deal); (5) lease term length; (6) amount of tenant concessions desired; (7) is tenant a non-profit or trade association?; (8) and (9) is tenant a shell or foreign entity?; (10) amount of “monetary skin” tenant will contribute; (11) payout schedule for commissions and free rent; (12) is the S/D based on the first or last year rent or the average rent?; (13) will the S/D “burn-down”?; (14) Is the S/D in the form of a letter of credit or cash? (generally stated, a cash S/D equates to greater landlord risk); (15) will the S/D amount increase as base rent increases?; and (16) can landlord co-mingle the S/D?
Ultimately, the greater the concessions, shorter the lease term, higher the risks, and worse the financials track record of the tenant, the larger the S/D will be and the higher the dose of legal and business steroids a landlord will inject into its GGG. Look for Part 2 of this discussion in the next edition of Highest and Best Use. For more information on negotiating security deposits and good guy guarantees, please watch Larry Haber’s videos, visit REBNY, or email email@example.com.