I had a client ask me to compare two building leasing options and recommend the best one.
Option A had a monthly lease amount of $9,000 with a $4,500 refundable security deposit. Option B lease amount was $8,500 a month, with an $8,500 refundable security deposit. I recommended Option B. My client was shocked; they thought Option A was the best selection because it required less cash.
Option A appeared to be the best agreement, but it was not for two main reasons. First, it was not the best cash flow option. Upon first glance Option A appears to require less cash. The security deposit is half the amount of option B and the rent is only $500 extra a month. However, if you break down the numbers you see a different picture.
As you see Option A is actually $2,000 more expensive in the first year compared to Option B.
The other important thing to remember is that the security deposit is refundable and will be classified as an asset on the balance sheet. So Option B is $2,000 cheaper in the first year, and results in an $8,500 asset, compared to a $4,500 asset in Option A. Starting in year 2 Option B will save $6,000 a year.
So as you see Option B is definitely the way to go.