One of our favorite things to do here at Otso is to meet with stakeholders in the commercial real estate industry. We do it religiously, multiple times per month (often per week) to ensure what we’re building, modeling or offering aligns with how the industry operates (or would like to.) It’s amazing what people will tell you when you simply ask for their opinion. When initially modeling our product we of course spent a ton of time learning from Tenants (we learned a thing or two every day at Tenavox as well) but we knew we needed to really understand the Landlord and Ownership side of the equation to be successful. So we started asking….and then we just shut up and listened.
For Tenants, Otso is a slam dunk. I mean, who wants to put up cash in a security deposit account? No one! However, for Landlords it’s not that simple. We spent an enormous of time (and still do) learning about how financials, deposits and leasing are all inter-related in a commercial lease.
We were blown away and fascinated by the pain points uncovered as we modeled out Otso, in this case on the Landlord side. We heard some consistent refrains from Landlords and Property Managers. Like these…
“Well, I like cash…BUT it really doesn’t adequately cover me in the event of a default.”
OK, what about financials to assess business health, how do you set deposits?
“I have received the gamut. From self-signed sources and uses to tax returns, maybe P/L’s if they’ve got them but honestly even audited financials don’t give us what we’re looking for…which is comfort they can occupy a space successfully”
We pressed further on this issue and got more….now it was getting into the pain points.
“We’re taking most of the risk here as Landlords. I get it, it’s my building but on every new lease I’m writing a big check for improvements since construction costs are high and a big commission. If I see a default in the first couple of years it kills me.”
“We’re going with my gut on these deals. We just don’t have great ways to project lease performance. So larger cash deposits, letters of credit and personal guarantees are where we end up usually. The tenants hate them, but we end up finding a middle ground hopefully”
“The tenant reps hammer us when we ask for more than a month or two of rent…but we’re writing a check for 10X that to get the deal done. It’s a tough spot for us.
What happens if they do experience a default?
“I keep the deposit or call the letter of credit in…then I get ready to pay a small fortune to re-lease the same space. Frankly, it’s a huge loss for us when it does occur.”
“It’s simply not practical to go around suing tenants who default, it’s expensive and often not worth the legal fees or hassle…..”
“I don’t think a personal guarantee is worth the paper it’s printed on…”
What we were listening to were consistent pain points, across multiple property owners and managers of commercial real estate in all classes (office, retail and industrial assets)
To sum it up:
- Projecting future lease performance is hard. Often resulting in bad solutions like larger than normal cash deposits, costly letters of credit or weak personal guarantees.
- Landlords feel they take on almost all the risk. It’s not the rent performance they are most worried about at step one, it’s the costs of the deal. Namely TI and Commissions that scare them.
- Deposit amounts vary widely, mostly because Landlords don’t have comfort on the deal costs. Tenants bear the brunt of this in most cases.
- Cash doesn’t make a Landlord whole, or come close to it.
- It’s incredibly impractical to collect or sue from a business in a default of a commercial lease. The numbers have to be pretty big to motivate a Landlord.
- Personal guarantees don’t hold a lot of value, mostly because they’re difficult to enforce and costly for a Landlord.
Some pretty big feedback to chew on! This was like finding gold for us (yes, we’re obsessed with commercial real estate.) This feedback directly impacted how we model our Guarantees, we knew we had to solve this for Landlords if we wanted to offer the program to Tenants. Here’s what we learned:
- We needed a way to give Landlords a better way to assess financials on a tenant, they wanted cash on hand and historical balance information
- We also needed to cover the Landlord for every instance of default they could think of (or is in their lease docs) if we wanted them to consider us
- Lastly, paying a Landlord in a default situation needed to be fast and painless.
With this in mind, the Otso Guarantee was born.
- Our application process allows for collection of tenant information on credit, banking and entity history for Landlords in a matter of minutes. They can make a clearer decision with our reports.
- Guarantees needed to be backed by strength, we have a AA-rated insurer who backs every policy we write.
- In a default situation, we make payments in thirty (30) days or less when verified.
That’s the crux of our product, a faster, better way to collect financials and a stronger, more enhanced guarantee in the hands of the Landlord when a deal is done. Enhanced?
Here’s a great example of how one of our customers uses Otso today.
Let’s say you have a small building with $20,000 in security deposits from 10 tenants and each one is worth $1,500 essentially (1 months rent on average). If a default occurs the only coverage you have is the cash on hand ($1,500)…and as we learned it’s usually too costly and impractical to sue for these amounts.
With Otso, let’s say that same building sets a “minimum viability” standard before quoting any deal…let’s say you want every Tenant to be able to AT LEAST qualify for $5,000 from Otso.
Essentially this means Otso projects at a minimum that business is good for several months of rent. You go negotiate the deal knowing you have to work $30-50 a month into the rate (not much right?) If a default occurs with Otso in place, you know get a $5,000 check, over 3X on what you would normally have. This math works as you scale up to $10,000+ cash deposits too!
Otso provides enhanced coverage in cases of default with minimal impact on a lease. Beyond the clear benefits of getting a deal done faster by not requiring the deposit, Landlords are reducing and replacing risk with the use of our AA-rated guarantees. Otso is better than cash.
Learning from our industry is how we build real solutions. See how Otso can accelerate leasing velocity while reducing risk in your building today.
Visit us at https://legacy.otso.io
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