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Money Talks – But you need to know the language With Danni Toshack, Senior Property Consultant ACORPP Brisbane Money talks, but sometimes it talks in its own language and you need to be an accountant to understand what’s actually being asked for when it’s time to fund a new lease. Your tenant representative can provide advice and help negotiate these types of tenant costs to a minimum. Here are the most common forms of funds that are requested in the property market.
Security deposit: This is also referred to as a Cash Bond and vice versa. This type of security is an amount of money as agreed under lease terms that is usually (but not required to be) held in a trust account. It is provided by a tenant to a landlord and is kept as a separate fund for the landlord to call on should the tenant cause any damage, go into arrears or otherwise breach any lease terms causing a financial cost to the landlord. A security deposit may be held in an interest bearing account whereby all accrued interest should legally be returned to the tenant. Who Benefits?
Bank guarantee: This is essentially a “written promise” from a bank/finance institution to make a payment to the landlord up to and/or for the nominated amount of the guarantee. Under those conditions, the bank does not need to seek any referral or approval from the entity providing - and indeed requesting - the guarantee be established. No physical funds are necessarily transferred, but rather security is offered by way of cash in account or sometimes property can be used to secure the bank guarantee. Who Benefits?
Personal / Director Guarantee: This is often requested in addition to either a security deposit or a bank guarantee or sometimes in lieu of these. This is typically open ended meaning that any costs or losses incurred by the landlord are recoverable from the personal assets of the person / director providing this guarantee. It is possible to include a “cap” on this security type to say “x” months rent however this has to be negotiated to ensure all parties are aware of the limits. Who Benefits?
Way to go?
Personal guarantees are often easier for start-up / smaller businesses where capital is required for operational growth and having cash set aside is a hardship. Always try and limit this to a set amount to minimise the overall exposure – particularly if a business has multiple sites. Where possible however, it is far safer to not provide personal / director guarantees.
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