The security deposit in a commercial lease is very different than a residential lease.  It can range anywhere from 0-12 months and is often one of more contentious components of a deal to negotiate.   

From the Landlord’s perspective the amount of security deposit is extremely important and is a major item in a lease negotiation. 

In NYC if a tenant stops paying rent and continues to occupy their space, it can take the Landlord 4-6 months to evict them.  Additionally, the landlord’s upfront costs in a leasing transaction are significant.  Between construction, free rent, and additional transaction expenses including brokerage fee, architects, engineers, and filing, it can cost the Landlord anywhere from 1 to 4 years’ rent upfront to make a deal.  If a Tenant goes bad, the Landlord can only look to the security deposit to recoup some of their investment. 

From the Tenant’s perspective, the security deposit is capital that they will be unable to access and put towards their business. 

So, what is the correct amount of security?  The landlord will make this determination based on their perceived risk.  The main factors being the creditworthiness of the tenant and the amount of upfront capital the landlord must invest into the deal.  The landlord’s first point of evaluation is a review of the tenant’s latest financial statements.  This is where it can often get personal.  The owners or partners of a service business such as a law firm, a financial advisory firm, or advertising/marketing agency may earn a substantial income and have excellent personal credit. But there is a saying: All the firm’s assets leave in the elevator at the end of the day.  Therefore, a landlord will typically demand a higher security deposit from a service firm.  On the other hand, a nonprofit organization may own real estate and have a substantial amount of money in the bank. To a landlord, the nonprofit is the better credit tenant.

Getting back to the question of what is the correct amount?  I have seen zero from the Government or a bank with substantial assets.  I have seen 2 months for either very strong companies with assets or on smaller deals where a tenant was leasing a built space that required the Landlord to perform very little work.  More typically a security deposit is in the 3–6-month range.  Or in the case of a startup 6-12 months.

Other things to know.  The Landlord of a commercial building is not required to put the security deposit in an interest-bearing account.  A Tenant will often provide a landlord with a letter of credit from their bank in lieu of a cash security deposit.  In fact, many Landlords prefer this.  Lastly, a Tenant is often able to negotiate a security deposit burndown.  Meaning, the Landlord will return a portion of the security deposit at certain points over the life of the lease so long as the Tenant has maintained a track record of prompt payments. 

It always best to enlist the services of an experienced broker to help with the negotiation.