Unlocking hidden income in your building with Otso.
At Otso, we’re obsessed with making commercial real estate leasing a better process for both Landlord and Tenant. We’ve learned so much about the pain points of both parties in a lease transaction it allowed us to model our program in a way that we believe unlocks a ton of previously “dead” value in a commercial lease. How do we do it…and more importantly, how can you leverage Otso?
We’re revolutionizing the concept of a security deposit. Read on….Most folks who familiar with commercial real estate leasing will know this but here is a quick primer on the “status quo” or current options that exist as it relates to leasing a space as a business.
Tenants (businesses occupying space) are typically responsible for a cash deposit of 1-6 months of rent (negotiable depending on credit/terms) when they execute a lease document.
Landlords (Owners of the spaces) are usually required to hold this cash deposit as security for good payment and accordance with the lease in an account. At the conclusion of the lease, the deposit is returned to the Tenant.
This is incredibly inefficient. Most commercial leases are multi-year commitments. So, we’re looking at keeping a significant portion of a businesses cash just sitting on the sidelines. Landlords, on the other hand, are not supposed to use this cash for anything. They cannot monetize/capitalize the cash in a meaningful way when selling or financing the building either. It’s truly dead money. Worse yet, that cash actually loses value over the period of a lease due to inflation. Here’s an example.
Inflation is currently pegged around 2% annually (a goal the FED shoots for) meaning that every year that your dollar isn’t “working” for you, yes, it’s actually losing 2% in value due to the nominal increase in costs for goods and services. $10,000 becomes less than $9,000 in a five year lease!
Put simply, that security deposit has less buying power and usage than it did than when you signed your lease. How much worse, up to 10% in value lost. This doesn’t even take into account the value lost to not being able to invest that capital as a business. Most businesses shoot for 15-25% ROCE (Return on Capital Employed). So when you factor THAT in, your business is “losing” the ability to invest that cash deposit into our normal operations, further diluting it’s value annually.
Now let’s consider the Landlord side. They’re holding cash they legally are not supposed to “use” (although some skirt this and deploy any funds they have) and as noted they cannot value or capitalize the security deposits in a building. In a sale situation, deposits are simply transferred into the new owners accounts via escrow…the opposite of net income/rent which is capitalized based upon a buildings market value. This is a big deal. An extra 2% in annual rents to a building could mean six-figures plus in value to a refinance or sale. Here’s a real world example.
Net Income of $1,000,000
Building CAP Rate (rate of return expected by market): 10%
Building Value: $10,000,000
With 2% Increase in Net Income:
Net Income: $1,020,000
Building CAP Rate (rate of return expected by market): 10%
Building ValueL $10,200,000
Yes, that’s a gain of $200,000 in real-world value just by capturing 2% ($20,000) more in annual rents.
Ok. So we’ve established that cash deposits make little to no sense for Tenant or Landlord. We haven’t even gotten into how Landlords are typically bad at making credit decisions and assessing a business’s value yet either…it’s a broken system. So what are some existing alternatives.
A popular one is called a “Letter of Credit”. This is when a Tenant gets a letter from their banking institution that essentially says they are “good” for the value of the rents being considered in this lease based upon historical banking data. These give Tenants flexibility by not putting up valuable cash (which is great!) BUT they are costly and require the Tenant to keep a certain level of deposits in the bank in order to keep the letter active. However, it also gives the Landlord direct access to a bank to “draw” upon that account in default scenarios. You then are responsible for “interest” on the amount that is drawn as well ( in addition to default penalties that can be imposed by the LL).
Pros are that a Tenant gets flexibility in cash up front and the Landlord gets reduced complexity by not having to hold dead cash. Sounds good, but that’s not the whole deal…what are the cons?
LOC’s are not free. Tenants are likely to pay significant annual fees for the amount of the credit letter annually PLUS they have to keep the capital on hand.
Tenants are usually required to have ample deposits as collateral to keep the letter up, so yes, the bank may even “freeze” your funds to keep the letter in good standing once all parties have executed and to ensure ample collateral is on hand….So yea, a business may end putting up MORE collateral than a cash deposit would normally require just to do the letter.
Interest rates are high when drawn on a LOC if not immediately paid back, sometimes in excess of 20%!
Drawing a LOC is not simple, banks require significant proof of default and actually accessing the cash can be a huge hassle.
Letters of Credit are most appropriate for business sitting on a big pile of cash…which isn’t the average Tenant. MOST Tenants need that cash when they start a lease, or at minimum would rather have it.
When you factor all this in…Letter’s of Credit aren’t so great either. So what’s the solution? Well, we came up with the best option available: The Otso Guarantee program. Here’s how it works.
Like in a letter of credit, with Otso, any approved Tenant (prospective Tenant) is not required to put up a cash deposit. We actually write a “same as cash” guarantee to Landlords in a commercial that they can call upon if a monetary (non payment) default occurs in accordance with the approved and executed lease.
Tenants get flexibility up front and no letter or collateral is required from their bank. Tjey keep their cash for what matters most, their business.
Landlords get a guarantee backed by a $2.5B bank. Yes, they actually reduce risk in the transaction by having Otso guarantee the value of the deposit and gain comfort knowing that a portion of the deal risk is now being shared by a massive, 130+ years-old banking and credit institution.
More importantly, here’s how we “unlock” the capital in a commercial lease. In exchange for keeping Otso’s guarantee active, Landlords pay a small monthly fee on behalf of their approved Tenants (usually .5-1% of the deposit value, subject to credit and approvals). This fee is passed through to the Tenant as a nominal increase in rent.
A typical Otso Guarantee fee is $100-200/month on a $12,000 security deposit, so on a 4,100 S.F. with a $35 PSF/YR Gross Rate lease a Tenant would see an increase of less than $.03 PSF per month ($.30 PSF/YR). For $100 a month, most Tenants jump at the opportunity at capital flexibility for the same reasons we often see other lease costs (like improvement allowances and construction) amortized into a lease over the term. When you factor in the value in putting that money to work as a Tenant, there is a gain to using the program in most cases.
Landlords get the benefit of credit decisioning on the front-end (if a business cannot qualify for a $12,000 deposit guarantee that is great information to know prior to executing a lease), additionally a Landlord gets the value of sharing monetary risk and replacing a portion of the credit in the lease with a historically strong organization. Most importantly though, the Landlord turns what used to be a “dead money” deposit into valuable increase in rent. How valuable?
Here’s what a building looks like with Otso.
Existing 25,000 S.F. Office Building
Deposits Held from Tenants: $83,000 (One month average)
Value at 8% CAP: $12,500,000
25,000 S.F. Building
NOI: $1,010,000 ($10,000 in Fees Generated as additional rent)
Value at 8% CAP: $12,625,000.
Otso unlocks $125,000 in value with just a minimum level of deposit (one-month rent scenario).
Otso is a better experience for everyone in a commercial lease.
Tenants get capital flexibility with no collateral required at a nominal cost to them in the rent.
Landlords get enhanced credit decisioning, shared risk on a lease and unlock thousands and thousands of dollars in previously dead-money in their buildings.
Otso is 100% free for Landlords to join and every lease is looked at individually when a Tenant applies. It’s a choice for Landlords to use, not a requirement and ultimately both Tenant and Landlord share the benefits when our guarantees are leveraged.
Get Started Today with Otso.
Here’s a comparison chart of the options for security deposits.
|Deposit Style||Up Front Capital Required?||Costs?||Loss of Value Over Term?||Additional Collateral Required?|
|Letter of Credit||No||1-2% of Deposit Annually||Yes (sits as cash)||Yes|
|Otso Guarantee||No||.5-1% Paid Monthly as Rent||No||No|
Otso Highlights for Tenants
- Keep your capital, no security deposit required in exchange for a small increase in monthly rent.
- Streamlined application and leasing process by acceleration of credit assessment and reduced complexity in negotiations.
- Marketing advantage (deposit free on Tenavox and everywhere else)
- Less Risk (we cover the value of the deposit same as cash)
- Transparency/Decision making (Programmatic assessments/approvals with credit of Tenants)
- Less Accounting (Guarantee instead of dead cash)
- Monetization/Capitalization of Previously dead money. Leverage Otso for more rents!