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Univ. of Arkansas, Fayetteville

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Thursday, September 15, 2011

Gold as a Security Deposit?

The Wall Street Journal reports today that the Trump Organization has accepted a security deposit in the form of 99.9% pure gold bullion, rather than cash or a letter of credit.  Landlords probably don't need to buy safes just yet -- this appears to be a publicity stunt by the tenant (precious-metals dealer Apmex) and the landlord (who told the Journal that he saw the move as a "repudiation of the Obama administration's economic policies").  Now, if the lease called for all the rent to be paid in gold, that would really be interesting...

Trump told the Journal that depositing gold was the tenant's idea.  I'm not surprised.  From the landlord's perspective, it makes for a fairly problematic security deposit.  Most commercial leases provide that if the tenant fails to pay rent or is otherwise in default, the landlord can dip into the security deposit to cure the default.  That's a little tougher when your security deposit consists of three gold bars.  Bigger problem is that the price of gold fluctuates, which impacts the value of the security deposit.  If gold goes up in value, the tenant has an increasing incentive to meet its leasehold obligations, because it will get the bars back at the end of the lease.  If the security deposit had been in cash, the landlord could have invested the money in an interest-bearing account (which is, admittedly, pretty much worthless right now), but it can't capture any appreciation in the value of the gold.  But if gold plummets, then the landlord is left with a security deposit worth less than he originally bargained for.  In short, the landlord can't capture the upside on changing gold prices, and is stuck with the downside. 

But hey, at least Apmex and Trump bought themselves a little publicity!

Tanya Marsh

http://lawprofessors.typepad.com/property/2011/09/gold-as-a-security-deposit-.html

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