Key Considerations For Determining The Appropriate Security Deposit And GGG
Two standard lease components and risk mitigation tools found in New York City commercial lease agreements are the security deposit and "Good Guy Guarantee."
In a basic GGG, one or more principals of a corporate entity guarantee to the landlord the payment of all rent due under the lease until the tenant vacates the leased space, even if the occupant leaves prior to the expiration of the lease term. After the landlord receives timely written notice of a tenant’s intention to surrender the space, and contingent on the return of the clean, vacant space with rent paid through the date of surrender, the GGG is nullified.
Although the basic GGG has historically been considered a common requirement in New York City commercial leases, over the past decade, landlords’ attorneys have injected GGGs with what AGMB CRE Managing Partner and Leasing REality CEO Larry Haber call the equivalent of human growth hormones, which tenant advocates may question. We caught up with Haber to learn about key GGG and security deposit considerations on both sides of the negotiating table.
For landlords to protect themselves, determining the appropriate scope and strength of a GGG and the amount and type of the security deposit requires them to conduct thorough tenant due diligence.
“Landlords need to channel the one and only Zen Master, Phil Jackson, and ask themselves 'how much is enough?' when it comes to the level of protection they may need,” Haber said. “Conversely, on the tenant’s side of the table, one should channel rock legend Pete Townsend from The Who and his hit song, 'A Little is Enough,' when it comes to deciding just how much security deposit the tenant is willing to give a landlord and how many steroid-laced legal and business points they can agree on in the GGG.”
Why Landlords And Tenants Should Consider Including A GGG In Their Leases
The basic GGG serves two purposes: to incentivize the corporate tenant to pay rent during occupancy and to help a landlord expeditiously regain control of the space if the tenant becomes nonpaying. Landlords should take a principal’s hesitation to give a GGG as a serious red flag.
“They are merely agreeing to the most basic of covenants that a tenant makes, namely agreeing to pay rent while it occupies a landlord’s space,” Haber said.
By consenting to a GGG, especially a strong one, the tenant helps to incentivize the landlord to grant more in the way of free rent, a tenant improvement allowance, a lower security deposit and other concessions.
How Landlords Inject Business And Legal Steroids Into The Modern Day GGG
“Over the past 20 years or so, landlords and attorneys have strengthened the GGG in a number of ways by injecting large doses of legal and business steroids into the once basic GGG that would make A-Rod ... blush,” Haber said.
A few common pro-landlord “steroids” include:
- a guarantee of the performance of all non-monetary lease covenants;
- a construction completion guaranty;
- 90 to 180 days’ advance written notice of the space surrender date;
- requiring the tenant to return the premises in a condition stipulated by the lease; and
- reimbursement to the landlord of its unamortized costs (like free rent, tenant improvement allowances, a landlord's work cost and brokerage commissions); and
- having the GGG remain in effect after a lease assignment
Factors To Determine The Amount Of The Security Deposit
A few common factors influencing the security deposit amount requested by a landlord include:
- the balance sheet and income statement of the prospective tenant;
- the tenant’s historical track record;
- the asset class of the tenant;
- the length of the lease term;
- the amount of money a tenant is investing in the space and whether it is for cosmetic or infrastructure improvement purposes;
- the amount of tenant concessions, improvement allowances and landlord’s work the landlord is providing;
- whether or not there will be a straight personal or good guy guaranty; and
- whether the security deposit is in the form of cash or a letter of credit.
“Bottom line — the greater the concessions granted by a landlord, the shorter the lease term and the worse the financial statements are of the tenant and guarantor, the greater the need for a larger security deposit and 'steroid-laced' GGG,” Haber said.
Watch Haber’s full, condensed walkthrough of these topics below; to learn more about this Bisnow content sponsor, click here.