We’ve written a lot on why Otso Guarantees make sense for Landlords, you can find a ton of resources on replacing cash deposits makes sense for the ownership, management and leasing of a property. However, today we wanted to spend some time outlining the power of capital when it’s put to work by a business and NOT tied up in some zombie deposit account.
First and foremost, for many businesses initial operating capital is the most important factor that determines their success. Even successful and growing businesses use operational cashflow as an important metric. Landlords harp on this too when making assessments of potential tenants, often saying “I want to see 6-8 months of liquidity (rent) before moving forward.” Unfortunately, in that same breath, we often see Landlords collecting onerous cash deposits because they don’t have a good way of assessing the future lease performance.
No bueno.
What ends up happening is a large deposit up-front, taking valuable capital away from a new or expanding business. That capital is FAR more useful being spent on making the business stronger. Let’s see an example:
Let’s say Tenant “A’” is being asked to put up $10,000 as a security deposit in their new lease. The low end of a good return for a business is 9-10% per year on capital invested, the high end might be 30%+ (especially for smaller businesses). Let’s just take the low end as an example:
Over a five-year period, that $10,000 should be worth $15K+ to that Tenant. Frankly just parking it in a mutual fund might get you close. Either way, that $10K gets put to work. Hiring, investment, equipment or whatever that business needs…
Money matters to a businessLook at the same money deposited with a Landlord in a deposit… it loses value. That’s inflation folks. If we just take an average of 2% per annum, that $10,000 loses about 10% of its purchasing power over a five-year term.
Yes, not only does a business lose the ability to invest the money it needs in their business…that same money holds less purchasing power when they get it back (Landlords do not pay interest on deposits, they are only obligated to return the exact amount).
It’s an incredibly inefficient system that puts the Tenant behind the 8-ball from day one. Now you may say, “well, that’s not a lot of money it shouldn’t matter etc…” but that’s just the point. It may not be a ton of money to a Landlord, but it matters to a business.
Even more frustrating is the renewal scenario of most leases. Let’s say Tenant “A” completes a five-year term without any defaults. Yes, that means they have proven they are a good bet financially. Yet, in 99% of leases the deposit on-file stays.
We understand this! Landlords need some collateral to cover defaults and past history doesn’t guarantee future performance. However, wouldn’t it be nice to return that deposit to a good-paying tenant? Retention is incredibly valuable to Landlords, on average saving them 70%+ on typical deal costs like TI and commissions…with Otso they can do this.
One more scenario to chew on. Occasionally for better credit tenants they are able to negotiate (usually with the help of a great tenant rep) a “burn-off” when the deposit required by the Landlord is considered to be onerous. Let’s say a Landlord is requiring 6 months of security deposit in the first year, it may “burn off” each year until the end of the term with good payment and only one month is remaining of deposit.
While this is a good situation for the Tenant in most cases (although we would argue 6 months deposit is a big number to tuck away, so is 5, or 4). The Landlord feels under-covered by the end of the primary term. In the event of a default in the “renewal” term with only one month of deposit up, any default situation could leave the Landlord exposed.
Otso precludes this. Our guarantees never decline in coverage value and because the Tenant is not putting up the cash in the first place (along with the nominal costs already being included in the rent) this friction/negotiation over deposits and term and burning-off never even happens.
Whether you’re considering a new lease or a renewal (or even if you have deposits up currently) Otso Guarantees create a win-win scenario for both Tenant and Landlord. Learn more about how we create better leasing experiences in commercial real estate today.
Ready to start using Otso Guarantees as a Tenant? Here are some helpful links below and remember, Otso is 100% for Landlords to Join!
