Covid-19 uncertainty has created a dual challenge in the commercial real estate sector.
Landlords remain concerned about their tenants’ ability to make good on new and existing leases, while companies worry about how leasing space will affect cash flow, with keeping costs in check paramount because of the pandemic.
Enter Otso Corp.
The Texas startup co-founded in 2019 by Marissa Limsiaco, Josh Feinberg and Frank Rogers offers a solution for both parties.
“We eliminate cash deposits for commercial real estate leases and replace them with double-A credit guarantees,” said Limsiaco, the company’s president. That frees up capital for tenant companies to use in their businesses, she said.
Paris-headquartered credit insurance company, Euler Hermes, backs the startup's guarantees, according to a July announcement.
Commercial real estate landlords pay a fee to Otso for the service, which, Limsiaco said, the landlords passes down to tenants in the rental price. That formula enables landlords to increase their net operating incomes, she said.
Otso’s security-deposit guarantee is particularly significant during a time when commercial delinquency rates are rising at a record pace. Delinquency rates for commercial mortgage-backed securities shot up to 10.3% in June, the Visual Capitalist reported July 16, reaching levels last since in 2012.
Limsiaco said the coronavirus has made cash king, “even more than before. Businesses need cash on hand.” Simultaneously, she said, “landlords want more coverage.”
She said the company finished building its product at the end of March and “started selling in May and June.”
Otso remains just the three co-founders for now, with its headquarters split between Austin, where Limsiaco is based, and The Woodlands, outside Houston. The company president said Otso would run “as lean as possible” during the coming 12 months — it could add a sales and marketing position in that time, if it hires anyone.
Limsiaco said she and the team understand the pitfall some startups stumble into when they hire at the executive level, “and run out of money doing so.”
The business will partner with a technology company to do any upgrades to its product, she said.
Limsiaco declined to say how many customers Otso has, but shared that those customers cover “over 500,000 square feet.” The company is “in talks with customers to add at least another million [square feet] before the end of the year.”
For 2020, Limsiaco said the startup will generate about $200,000 in revenue, “and in the millions [of dollars], the following year.” And that’s a conservative estimate, she said. “We’re taking into account Covid numbers, projecting a 20% default rate.”
The president said Otso is “expanding nationally based on a successful pilot, and will achieve profitability by end of 2021. As part of this rollout, our goal is to bring on multiple national ownership groups, increase referral relationships with brokerage firms and grow our guarantees issued.”
The company has raised a total of $250,000 to date. It is currently putting together a $450,000 funding round and Limsiaco said Otso has obtained more than half of that goal. “We won’t raise another round until the end of next year,” she said.
The prior startup
Otso is a subsidiary of Austin-based Tenavox Corp., co-founded by Limsiaco and Feinberg in 2017. Limsiaco is a West Point graduate and Army veteran. Feinberg is a former broker with J. Beard Real Estate Co. in The Woodlands, Texas.
Tenavox is similar to Glassdoor, but for office space. Business owners can read reviews from building tenants and glean details about commercial space — such as how much a tenant is really paying, how easy it is to get in touch with the landlord or how the buildings' parking accommodations fare in peak hours.
Tenavox continues to operate, with Feinberg, who is based in the Houston area, as principal co-founder, while Limsiaco is leading the charge at Otso.
Bearish origins
The idea for Otso — the Finnish word for bear — emerged from conversations Limsiaco had with commercial real estate landlords in Houston, where Tenavox launched.
They lacked appropriate risk coverage, Limsiaco said.
“When the lease defaults, it cost them five to six times, minimum, what the deposit was,” she said. “They risked more than the tenant.”
Limsiaco had observed what California-based LeaseLock Inc. was doing, eliminating security deposits with guarantees in multifamily, where the company had been “killing it,” she said.
Though companies exist that provide similar products to Otso — The Guarantors Agency and Assurant Inc., both based in New York, are examples — “no one is covering the majority of the market," Limsiaco said.
“The ones out there, they’re mostly for class A office space,” she said, referring to the newest and highest-quality buildings. "The number one competitor we have is really the status quo and our biggest differentiator is our algorithm."
Otso, on the other hand, offers its guarantee for security deposits ranging as low as $500 and as high as more than $100,000, she said. “We cover all asset classes, and our proprietary algorithm allows us to make fast decisions like a lender. Our current competitors aren’t even addressing 1% of the total market. We’re going after the majority of it.”
A key aspect of the startup’s business model is the fact that, as it provides its guarantees, Otso “is collecting lease information,” the president said, something “even the big brokers” aren’t doing.
Such data are a valuable asset to potential acquiring companies, Limsiaco said.
“We call it our moon rock because no one’s collecting data like we are,” she said, adding that Otso ultimately could be acquired for that alone.
Pandemic challenges
The coronavirus “just paralyzed our industry for three or four months,” Limsiaco said. “Nobody could think about anything beyond what was right in front of them during that time.”
During May, June and July, “it was impossible to get a hold of anyone to talk to,” she said. “It was certainly a challenge. But, in a way, it was a blessing in disguise because we had no exposure. If we had launched last year, who knows how many defaults we’d be up against?”
By presenting Otso’s solution as a “new way of doing things,” Limsiaco said she and her colleagues were able to catch the attention of potential customers.
Since August, “conversions have increased over 100%,” she said. "We have met over 50 landlords and brokerage firms since the end of the summer."
And, she added, Otso has "approved over $150,000 in applications in the last few weeks alone."
Otso moved into an office in October 2019 at 105 West Riverside Dr. but amid the pandemic it has let the lease run out, Limsiaco said. The company had found that space through the connections of one of its investors, Jason Fernandez of Austin, managing partner of venture capital firm Quake Capital.
