After taking the time to search for a perfect office it comes as a surprise to many startups that landlords are looking for big (6 months and up) security deposits from young businesses. In the final installment of “Obstacles and Solutions for Startups Renting in NYC” we will be discussing the challenges and solutions available to startups when they face a “Security Deposit” larger than expected.
Landlords request large security deposits from startups, due to the fact that without several years of tax returns, landlords view young businesses as a risk. In addition, if a tenant cannot pay rent and refuses to surrender the space, the eviction process in NYC is long and costly. Even startups that are heavy in cash funding are viewed the same as those that aren’t since cash is very liquid. “What cash is here today, may not be tomorrow”. So without tax returns (showing a profit of course), landlords will ask for security deposits ranging from 6-12 months from startups.
Solutions:
“Good Guy” Guarantee
This is a limited personal guarantee that basically ensures the landlord that in event the company cannot pay rent, they will surrender the space so that it could be rented to another business. This is done by having someone from the company personally guarantee rent so long as the business occupies the space. By having an employee of the company sign the “good guy” guarantee, landlords tend to lower the security deposit to a more reasonable number.
Burn Down
The burn down is basically a timed decrease in the security deposit if the tenant is in good standing until that point. For example, a tenant could obtain a six-month security deposit with a burn down to 4-months after the 2nd year if they are in good standing. This is a way of decreasing the large security deposit by having it returned as a reward for being a good tenant. Generally companies that don’t want cash tied up in a security deposit for too long look for burn downs. It is important to note, that burn down terms are negotiable as well.
Limited Investment into the Space
Finally, a good method to lower the security deposit is to lower the landlord’s investment into the space. If you can locate a space that works “as-is” or requires a limited investment on the landlord’s part, like just refinishing the floors and painting, the security could be lower. The thought being, that landlord’s like to amortize they investments into spaces and protect those investments with the security deposit. For example, a space that needs a complete build out could result in a 12-month security deposit for a startup but a paint, carpet, and move-in space could result in a 5-month security deposit for the same company.
I hope that this final installment of “Obstacles and Solutions for Startups Renting in NYC” has provided aspiring startups with some options for how to deal with security deposits. Stay tuned for more useful information about commercial office leasing in NYC!
David Goldberg, Social Media Manager
