Is There a New Alternative to the Security Deposit?

As NYC tenants know all too well, the security deposits demanded by landlords can be onerous.  In recent years, security deposits have ranged from two months to over one year’s rent. However, a fascinating new credit instrument has recently been introduced as an alternative to the much-maligned security deposit.  As many of our clients know, that longtime mainstay of commercial leases can be a significant obstacle for tenants that do not want to tie up large amounts of cash. The instrument is being offered by a company called The Guarantors (www.theguarantors.com) which has put out a new product called Securiti that can be used for commercial leases.

The product is fairly straightforward. The Guarantors will provide a surety bond backed by Chubb as a substitute for a tenant’s security deposit in return for an annual fee of 2 to 12% percent based on the creditworthiness of the tenant. This allows tenants to conserve their cash and avoid putting up collateral in the form of a letter of credit as currently required under most commercial leases. If the tenant defaults, it will be obligated to The Guarantors for the full amount that The Guarantors pays the landlord, plus interest and fees. Some NYC landlords are now accepting their Securiti and others are considering it.

Securiti may be of interest to companies or professional firms that are light on cash or prefer to deploy it for alternative uses. It certainly bears consideration for those tenants who are averse to a paying a high security deposit. Below is an example of the potential costs and benefits for a tenant required to post a $1,000,000 security deposit on a 10-year lease by comparing the Securiti product to a traditional letter of credit.

The trade-off is clear. The total cost of Securiti in our example would be $500,000, as compared to the $200,000 for the letter of credit.  However, the tenant would have to post the entire $1,000,000 security deposit with the letter of credit but could deploy those funds for other purposes with the bond.

This is an exciting idea that bears watching. I have seen many deals fail based upon the landlord’s request for a larger security deposit than the tenant can afford.  While the surety bond may not be for everybody given the higher out of pocket cost, it could provide a new way to provide security to landlords.

We will continue to keep our eyes out for new innovations such as the surety bond that may benefit our clients.  Accordingly, let us help craft a customized solution to your office space needs that works best for you and your company.  Please call me at 212.759.0408 or email ruth@whartonproperties.net.