$30K Security Deposit + 6 Months Rent Up Front? (Florida)
I'm a foreign national legally residing in the US, looking to open a business. I have the funds at hand and do not need a business loan. I want to lease a space to open a smoothie shop in a high foot traffic area. There are virtually no spaces available in the specific area, and the exact space I wanted recently came on the market (1200sqft). The property is being listed by the property management company who manages the building. They said they are only willing to work with me if I don't use a realtor because they are not going to split the commission. Their initial terms are $30K security deposit and six months rent up front.They said those terms were necessary because even though I provided proof of the funds, the money is not in the US. Apart from the high cost of rent, which is obviously negotiable, I think the initial terms are unfavorable.
**Any advice as to what fair terms would be given in my situation would be greatly appreciated.**
[{"id": "d63wyfc", "text": "That sounds super fishy.  However, if I was in your position and I really wanted the space, the only way I would agree to those terms is if the security deposit and up-front rent is kept in an interest bearing escrow account with an attorney we both agreed upon.  The lump sum up-front rent should remain in the escrow account, and taken out one month at a time as that month's rent comes up.  ", "replies": [{"id": "d6409ip", "text": "That is a good idea. Rent is about $7000 per month, so putting $42K in escrow and letting them take it out monthly could work. Couldn't that in itself be a security deposit. ", "replies": [{"id": "d640ymx", "text": "Technically no.  A security deposit is paid upfront and kept in escrow to be available to the landlord in case at the end of your lease there is damage to the space, if you return the space in accordance with your lease then you get the full amount back.  In most states the landlord is not allowed to touch the security deposit at all during the term of your lease.\n\nPutting prepaid rent in an escrow account is not the same as a security deposit and legally should be kept in a separate escrow account.  If the moneys are not kept separate it is called \"commingling of funds\" and is illegal in most cases.\n\nIn this case it seems the landlord wants upfront rent to make sure that you are able to pay, not to cover the cost of damages to the space.  I'm not really sure why he needs that much upfront rent.  Most landlords will actually give you 1-2 months of free rent to get your business up and running and cover the cost of buildout.\n\n*I am not a lawyer, you should seek legal advice and have an attorney read over your lease before you sign it.", "replies": [{"id": "d641qek", "text": "Thank you for clarifying that. There will be a rent-free grace period to get the business up and running.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "d6425np", "text": "Prepaid rent is not that common but if they view you as a risky tenant, it makes sense they would want the funds in order to justify the time and effort of leasing the space and tying up the space. \n\nAlong with an escrow account, you could work with a tenant rep broker and pay them a commission out of your pocket. It is important to note that the management company is not representing their client's interests by refusing to work with you if you have a broker. It's their fiduciary responsibility to show every offer to their client. ", "replies": [{"id": "d643c55", "text": "I get why they could consider me a risky tenant, but at the same time I have all of the funds at hand, and because they are aboard it is difficult to verify the funds and the process is much faster. At least this is what I was told when I purchased a house in FL recently... ", "replies": [{"id": "d643jsa", "text": "Why don't you bring the funds into the US and then provide a letter of credit or personal guaranty? \n\nAlso, you'll need to sell a lot of smoothies to cover operating costs and rent. It's your business and I know real estate, not food service. Your rent is effectively $70 PSF and I'm curious as to where that is in Florida. It feels high even for a lot of markets in South Florida. ", "replies": [{"id": "d643xrm", "text": "I thought about bringing the funds to the US, but I'm not sure what difference it would make because I can still move them after the contract is signed. I'm not sure how that provides them more security... It's in Miami, in an upper middle class + neighborhood. And the asking price per sqft is $6.", "replies": [{"id": "d668i8o", "text": "$6 a month, $72 per year. What do project your monthly revenues to be?", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "d642ifr", "text": "Their concerns sound valid to me.  You are a foreign national that can leave at any time and you have no domestic assets they can attach to.  They have an in demand space.  Why risk it on you?  \n\nYou need to alleviate their collection concerns some how.  A large deposit and prepaid rent is how you do that typically.  Maybe counter with a smaller deposit or less prepaid rent, but I absolutely understand why they are asking for it.", "replies": [{"id": "d643h8b", "text": "that's a risk with any new business. anyone can move money out of a domestic account and liquidate a business they just started. They are asking for $30K deposit and $42K in rent. $72K up front for a 1200sqft goes beyond collective concerns. Especially when Miami (where I'm located) is mostly financed by foreign funds.", "replies": [{"id": "d6447ka", "text": "No it is a risk FOR any new business.  They do not have to rent to a new business.  That is YOUR problem.  You are telling us its a high cost space with near 0 vacancy so why should they assume the risk that you might fail?  They shouldn't.  They will look either to alleviate that risk through you coming up with up front cash, or they will choose another tenant who has someone who offers a personal guarantee that is worthwhile, or is an established business with a track record.  You have neither.  All you can offer is deposits.\n\nIf you think they are asking too much, counter lower, like I said.  If they say no move on.  I am explaining WHY they are asking for this.  \n\nI don't deal in miami, but I have to imagine even most foreign investors are going to have some attachable assets in the US,  you seem to not even have a bank account here.  \n\nHave you given them a business plan or anything like that?  I'm not a smoothie expert but I tend to agree with /u/brew17 too.  \n\nIf you want to successfully negotiate this you should realize their objections are probably that they can't go after you personally, you have no assets they can go after, and you have a brand new business with no track record.  \n\nMany new business owners have this \"well every new business is risky\" attitude.  And its true.  Thats why landlords demand more as they do not want to assume your business risk.\n\n--edit-  I also see you are getting free rent.  This goes right along with them telling you they aren't paying your broker.  They think you are going to fail.  They are trying to set this up so when you do they still get paid.", "replies": [{"id": "d644xcv", "text": "I have given them a business plan, but even before they are willing to sit down with me to negotiate rent, they want a tentative agreement for the other two items. I have close to 800K in personal assets in the US (all paid in full). I've spoken to other foreign nationals in other parts of Miami, who have opened businesses and none of their terms have ever been this high, even the one that had no business experience whatsoever.", "replies": [{"id": "d65gdj1", "text": "If your assets are high and you are a reasonably good credit risk generally, speak to your bank. They may be willing to issue you a letter of credit (they are guaranteeing your security deposit). Depending on your relationship with the bank they may still want to hold on to a significant portion of those funds though... ", "replies": [], "depth": 5}, {"id": "d6l8trn", "text": "What you can do is hire a good local agent and pay him yourself. Tell him they're not willing to pay him out of their commission and that you require his assistance. If this management company doesn't have a signed contract for exclusivity then you can circumvent them. You'll need to be a shark if you want to swim in deep waters. ", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "d644960", "text": "To properly take a look at this there are several other items that would need to be know.\n\nWhat are the other terms of the lease proposal?  How long is the lease term?  When does the lease start?  Is there any build out that either they or you have to undertake to get the space ready?  Have you discussed any amount of free or reduced rent?  Are you signing personally or in the corporation?  If it is in the corporation are you personally guaranteeing the lease?", "replies": [{"id": "d644zcl", "text": "They stated that before they are willing to sit down with me to negotiate rent and other terms, they want a tentative agreement for the deposit and prepaid rent.\n\n", "replies": [{"id": "d645wk5", "text": "Hmm, I deal a fair amount with foreign entities on lease transactions.  It is not uncommon for a landlord to request an enhanced security deposit, letter of credit, or other security device to guarantee the lease.  It is also not unusual for the landlord to make clear their intention up front so that both parties do not waste time if a security device is a problem.\n\nWhat makes your case so hard to evaluate is that the lease terms themselves are unknown.  Assuming the details of the following statement is correct you could inform them that you are willing can capable of providing the deposit and prepaid rent but, you will still need to come to agreement on the general terms of a lease before you are able to fully commit to the space.\n\nAt that point you can address lease term, start date, lease rate, and other items.\n\nI will say that there are a few comments that you have referenced that seem to have been made by them that make me a bit suspicious.  The comment about not having an outside broker represent you is quite strange for an established project and considering agency laws in Florida does not instill a lot of confidence in the landlord's sophistication level or ethics.  The focus on security deposit and prepaid rent without first addressing lease terms also does not bode well.\n\nYou really need to draft up your own LOI/Proposal Letter that addresses the broader lease terms if you want to make any progress here.\n\nShoot me a PM if you want help.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "d65g7yp", "text": "Absolutely. I can't speak to the specific terms, but I've seen foreign nationals just disappear back to their country and leave the landlord hanging on the lease obligations. Once they are out of the country the odds of recovering lost money via the court system is basically zero.\n\nTherefore, you are a very high risk tenant and they are asking for a lot of security accordingly.\n\nPerhaps ask for the security deposit to burn down over the lease term. Ex: After X months of on-time rent payments, the security deposit is reduced by X amount.", "replies": [], "depth": 2}], "depth": 1}, {"id": "d64axhv", "text": "You're going to get screwed by these guys. I can't believe they won't even let you bring in yoir own broker.\n\nWhat you could do is call a real estate attorney. Explain your situation, then ask him to write a letter of intent for you to give to the broker. That will be a good opening proposal and it will show the guys that you are serious. \n\nI just signed a lease. I figured I could negotiate it myself, but I ended up hiring a broker.", "replies": [{"id": "d64czan", "text": "They will, but I have to pay him commission out of my pocket, they won't split it. I may just reach out to a real estate lawyer, thanks", "replies": [{"id": "d64gbnd", "text": "One time I asked on here about that option (no broker, hire a laywer to write a LOI). The general opinion on the board was that that was silly, a lawyer is not needed to write an LOI. However, I think it's a pretty good move. It will cost you $1000 or so (my real estate charges $455/hour and i think he billed me 2 hours for that LOI). I ended up hiring a broker and having the broker write the LOI, but I don't regret paying the lawyer. I established a relationship with the lawyer which is valuable. I also gained confidence going into the negotiations with the broker, which was quite valuable. For you, these guys sound like they smell blood in the water. It's normal for a new biz owner to feel a bit insecure; nobody here wants to see you get taken advantage. ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "d64zxcy", "text": "Is no one pointing out the obvious here!?? Go direct to the owner if the management company is going to threaten not working with you because they don't want to split commissions!!? That would make me WANT to work with a broker and have that person contact the owner direct and report the unethical manner in which they conduct business. Top real estate firms in your local market will have the tools and platform and capabilities necessary to find just about every property owner.", "replies": [{"id": "d659xkh", "text": "The owner owns several commercial properties and I doubt he'll care about someone reaching out regarding a 1,200 sqft space...", "replies": [], "depth": 2}], "depth": 1}, {"id": "d65ghg4", "text": "At the end of the day, this PM believes that they will have no problem leasing this space and can therefore dictate terms to potential lessors.  It's a question of how bad do you want it really.  I would say that if the rent is around market level, and you are confident in your business plan that you might as well move forward.  You might ask that they begin to burn off a portion of the security deposit once you have established yourself for a year or so.  \n\nThis kind of prepaid rent/large deposit type of structure is imposed on owners accessing CMBS financing all the time.  It isn't the same, but TI/LC deposits can be quite aggressive and are only repaid once the LL spends the money.  This is compounded by the lender restarting the deposit schedule over once those funds are expended so don't think the evil LL is necessarily skating himself.    ", "replies": [], "depth": 1}]