First, thanks for all the replies yesterday.
I contacted my lawyer, who happened to be on vacation until next Monday. So I told my PM that I would not be able to get back to the tenant regarding the deposit until next Monday because I needed to consult with my lawyer. Now, the tenant is afraid that he may not be able to get his deposit back and wants to continue the lease.
It seems that to have a lawyer helps - in this case, even the idea of having a lawyer worked.