Security Deposit
Money held by the landlord as financial protection against tenant default, unpaid rent, or property damage.
Definition
A security deposit is collected at lease signing and held throughout the tenancy as protection for the landlord. In small bay industrial, deposits typically equal one to two months of gross rent (base rent plus NNN estimates). The deposit covers potential losses from unpaid rent, damage beyond normal wear, or costs to restore the unit at lease end. Unlike residential leases, commercial security deposits are generally not regulated by state laws regarding interest or return timelines—terms are negotiated in the lease. Strong tenants may negotiate reduced deposits; weaker credits may be asked for larger deposits or letters of credit. Deposits are returned (minus deductions) after lease termination and move-out inspection.
Example
A tenant leasing a 2,000 SF unit at $14/SF NNN (approximately $2,800/month gross) provides a $5,600 security deposit equal to two months' rent. At lease end, the landlord deducts $800 for patching holes and repainting where the tenant mounted shelving, returning $4,800.