In today’s post-COVID world, putting down a cash security deposit on a commercial real estate property could mean tens or hundreds of thousands of dollars. With the cost of nearly everything on the rise, this capital could be better used by the business for hiring expenses, equipment purchases, and so on. Since putting this money down can be the differentiating factor between signing the lease and not, it appears that security deposits could be a thing of the past. And, with newer options, like Otso, ideal for both landlord and tenant, the world of commercial real estate could change– and we’re here for it.
Let’s look at some options for tenants and landlords when applying for commercial property.
In simple terms, a security deposit is a tenant’s payment to a landlord before the lease begins and the keys are handed over. This payment doesn’t get applied towards rent, but is held by the landlord as security against unknowns that may occur during the lease term.
Most often, security deposits are held until the tenant moves out, and it is used to cover the cost of damages incurred during the tenancy. They’ve been considered “normal” in business for as long as we can remember- but do they still apply to modern leases? Unlikely.
Letters of Credit
Letters of credit are letters from the tenant’s bank that says two things: that the deposit amount funds are reserved and available, and if the tenant defaults on the lease, the landlord is able to collect the money. While these are loved by landlords, they’re not great for the tenant because of additional fees. Tenants typically have to pay the bank a fee to keep that money in reserve and not lend it to others, which ends up resulting in letters of credit being a costly alternative to a security deposit.
Surety bonds are legally binding contracts that ensure obligations are met, or in the case of failure, that the entity requiring the bond will be paid. They exist between the principal, surety and the obligee- and are great for residential and multi-family real estate– but not commercial. In commercial real estate, they’re too expensive and are not flexible enough to meet the requirements of the lease terms. So what are we left with? What else is there to do that benefits both the landlord and the tenant? Enter, Otso.
Otso is the solution that provides an option for landlords to replace cash deposits in their commercial leases so that the businesses can put the hard-earned capital to better use. With Otso, landlords get the security of AA-rated coverage and up to $50,000 in lease performance guaranteed for a small fee beginning at $250/mo. Though the landlord covers the cost, because the monthly fees for Otso are so small, they’re typically negotiated into the rent itself. Tenants love it because there is no longer a cash deposit required and they keep the capital, and landlords love it because they get 3-5 times the coverage of a security deposit. Everybody wins.
STRATAFOLIO Co-Founder and CEO Jeri Frank sat down with Otso Co-Founder and President Marissa Limsiaco in a LinkedIn Live event, Creative Ways to Manage WIth Less Risk and Happier Tenants. You can watch the YouTube video here to learn even more about Otso.
In the modern world of commercial real estate, there are old ways of doing things and there are more modern solutions. Contact Otso today to learn more about their turnkey solutions to securing a lease.