A major milestone for any small business is moving into a new office space. But along with the prospect of company growth and larger work spaces, there are additional responsibilities to consider when securing your new location. The initial responsibility may be a deposit payment.
Security deposits can be issued with a physical letter of credit from the tenant’s bank. This protects the landlord’s rights if the tenant goes bankrupt and allows the tenant to retain the actual deposit within its bank account. State laws also dictate how much landlords can deduct from a security deposit for property damages and unpaid rent. You should document and understand whether any portion of your upfront capital outlay is refundable. If this is the case, the refundable portion of your payment is reported on your balance sheet as a receivable when using accrual accounting.
The deposit on any property should not exceed six months of rent. When a tenant becomes unable to pay, any subsequent litigation is expected to be resolved within half a year, in which the landlord has recouped unpaid installments via the upfront deposit. The commercial real estate market, especially for retail spaces, drives the deposit amount; geographical locations with higher demand force buyers to make offers more enticing by giving more cash upfront. One tactic to reduce a deposit is to forgo any “free rent” periods. Additionally, you may experience less stringent deposit requirements if your company is larger and already well-established in the geographical area.
You should preserve documentation of the office conditions upon moving in. As you prepare to leave, you will be able to reference what damages were incurred during your stay and what was pre-existing. Retain documentation stipulating when your deposit will be returned. This timeframe may be specific, such as within 14 days of vacancy, or general, such as “within a reasonable amount of time.” In general, know your rights and hang onto paperwork to maximize the benefits of your security deposit.