What Makes Leasing a Space So Hard?

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Posted: May 19, 2022

Home » What Makes Leasing a Space So Hard?
Marissa Limsiaco is the co-founder and president of Otso.
[email protected]

In 2016, my co-founder Josh Feinberg and I came together to solve a problem we felt was pervasive in the commercial real estate industry. Leasing a space was just too hard. Two years later, we launched Tenavox to allow for easier search and connection. Our goal was (and still is) to make the leasing process faster and easier for both tenants and landlords. Since then, we have helped over 20,000 businesses get connected to the right space or professional. 

Along our journey, we spent an enormous amount of time learning about how financials, deposits, and leasing are all interrelated in a commercial lease. Surveying our tenant users revealed that over 70% of them would gladly replace their security deposit in exchange for a nominal increase in rent. We learned tenants often felt underestimated by the financial review process and, at times, intimidated by the large cash deposits required to lease space. Even worse, letters of credit not only lock up their cash but also require paying a fee to do so. 

The landlord’s pain points were even more fascinating to us:

  • Projecting future lease performance is hard and often results in larger than normal cash deposits, costly letters of credit, or weak personal guarantees.
  • Landlords feel they take on almost all the risk. The costs of the deal are massive, which mainly included tenant improvement allowance and broker commissions.
  • Deposit amounts vary widely because most landlords don’t have comfort on the deal costs. 
  • The cash on file is often not enough to cover these costs.
  • It’s incredibly impractical to collect or sue from a business in default of a commercial lease. 
  • Personal guarantees are difficult to enforce and costly for a landlord.

We knew the industry deserved a better solution to these pain points, so we created Otso in 2019. Otso provides an option for landlords to replace cash deposits in their commercial leases so businesses can put essential capital to work. Our program provides landlords with the strength of collateral they need with AA-rated guarantees from our partner, Euler Hermes.

Here’s how Otso works in three easy steps:

  • Landlords enroll properties in the Otso program to attract new tenants or incentivize renewals. There isno fee to enroll or obligation to use Otso on every lease.
  • The tenant completes an online application that takes 3-5 minutes.
  • When approved, we can issue a guarantee electronically in minutes. Landlords pay a monthly fee for every guarantee issued. This fee is passed through to the tenant in the base rent. 

Our fees are dependent on the business’ credit and financials, but on average, the landlord fees are between $50-$150 per month for every $10,000 in coverage.  Our fees never increase, and our coverage never decreases for the life of the lease.

Josh and I realized if landlords were to adopt Otso we needed to do the following:

  1. Landlords need a better way to assess financials on a tenant. Our application process collects tenant information on credit, banking, and entity history for landlords in a matter of minutes.
  2. We knew we needed to cover the landlord for every instance of default in their leases. If they were replacing the cash, the guarantee needs to operate “same as cash” if a default occurs.
  3. Our guarantees needed to be backed by strength. Otso is backed by our AA-rated financial partner, Euler Hermes, with over 130 years of history and billions in paid claims to clients.
  4. Finally, paying a landlord in a default situation needed to be fast and painless. With Otso in a default situation, we make payments in thirty days or less when verified.

Here’s a great example of how one of our customers uses Otso today: 

Let’s say your building has $20,000 in security deposits, and each one is worth $1,500. If a default occurs, the only coverage you have is the $1,500 on file. It often will cost a landlord 4-5X this amount (in commissions and TI) to strike a new deal.

With Otso, landlords are setting a “minimum viability” standard before working on any deal. In our scenario, every tenant needs to at least qualify for $5,000 from Otso (a few months’ rent).

You negotiate the deal knowing you have to work only $30-$50 a month into the contract to cover the guarantee’s monthly fee. If a default occurs with Otso in place, you get $5,000 more than 3X on that “normal” cash deposit.

Otso is better than cash. We provide 3-5X in coverage in cases of default with minimal impact on a lease’s economics. Beyond the clear benefits of less risk, landlords get the major advantage of getting a deal done faster by not requiring a deposit or returning deposits to existing tenants. Ultimately, Otso takes the friction out of a critical step of the leasing process and is designed to be a valuable solution to all stakeholders in a commercial lease deal.

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