CRE glossary
Security deposit
A security deposit is cash collateral the tenant pays the landlord at lease signing, held throughout the lease term and returned (less any deductions) when the tenant surrenders the premises. Typical amounts: 1–3 months of base rent for established tenants, 6–12 months for weaker credit. Sits in a landlord-controlled account, often without interest accruing to the tenant.
Security deposits give the landlord rapid access to recovery funds if the tenant defaults or causes damage. Unlike personal guaranties (which require legal pursuit) or letters of credit (which require a draw on a bank instrument), the deposit is already in the landlord's account.
Tenants should focus on three negotiation points: amount (push for 1–2 months), burn-down (reduce 25% per year of performance), and interest (some jurisdictions require it).
Letters of credit are increasingly used as alternatives. The bank fee (~2%/year of face value) is far less than the opportunity cost of cash sitting idle for 10 years.
Example
- Established tenant
- 1–2 months base rent
- Startup / new entity
- 6–12 months base rent
- Burn-down
- 25% reduction per year
- LOC alternative
- ~2%/yr of face value
Broker perspective
Security deposit negotiation is about minimizing locked-up capital. For credit tenants, a letter of credit almost always wins on PV. For smaller tenants, focus on burn-downs and capping the deposit at 1–2 months. Don't accept open-ended deposits that scale with rent escalations.
Frequently asked
People also ask
How much is typical?
1–3 months for established tenants. 6–12 months for startups.
Can I burn it down?
Yes — 25% reduction per year, eliminating by year 4 or 5 is common.
Does it earn interest?
Depends on state. NY requires it for commercial deposits over certain thresholds; most states don't.
When do I get it back?
After surrender in good condition, typically 30–60 days post-surrender.
Related terms
Letter of credit (LOC)
Bank-issued guarantee of rent payment, used in lieu of cash security deposit, especially for credit-light tenants.
Personal guaranty
An individual personally guarantees the tenant's lease obligations — putting their personal assets at risk if the entity defaults.
Good guy guaranty
A limited personal guaranty that protects the landlord against unpaid rent only if the tenant doesn't surrender the space cleanly.
Default and cure period
When a tenant breaches the lease and the time the landlord must give them to fix it before pursuing remedies.
See security deposit extracted from a real lease.
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