Startups salivate as pols target security deposits

A movement to supplant upfront payments gains momentum

TRD New York /
Feb.February 12, 2020 01:30 PM
From left: Obligo COO Omri Dor, Jetty CEO Michael Rudoy, Rhino CEO Paraag Sarva and The Guarantor CEO Julien Bonneville (Credit: The French Studio via YouTube, Twitter, LinkedIn)

From left: Obligo COO Omri Dor, Jetty CEO Michael Rudoy, Rhino CEO Paraag Sarva and TheGuarantors CEO Julien Bonneville (Credit: The French Studio via YouTube, Twitter, LinkedIn)

Last fall, a Cincinnati council member pitched housing legislation to a room full of elected officials. Dubbed “Renter Choice,” it would require landlords and property managers to offer alternatives to cash security deposits. Cincinnati has since passed a version of the bill, and at least five other states got started on their own. New York City is now considering joining their ranks.

“To me, this is a seismic leap forward, to have New York embrace it,” the Cincinnati lawmaker, P.G. Sittenfeld, told The Real Deal. “New York embracing this is a mighty domino in a chain reaction.”

The New York domino began teetering last week, when Mayor Bill de Blasio said in his State of the City speech that he will pursue requiring owners of city-financed apartment buildings to allow tenants to pay for insurance in lieu of forking over a security deposit.

The Department of Housing Preservation and Development can enact such a rule on its own for the approximately 60,000 units it finances, and agency officials are working on it. Covering all rental buildings would require a law — an idea de Blasio floated.

Security deposits are typically one month’s rent and are held by landlords to cover unpaid rent or damage left by tenants who move out. But they are a burden to tenants because they add to move-in costs and can be hard to recover.

“The cost of a security deposit can be a barrier for too many renters who are already feeling the squeeze of the housing crisis,” HPD spokesperson Matthew Creegan said in a statement. “By giving New Yorkers the option to rent without an upfront deposit, we’re removing a roadblock to housing and putting cash back in people’s pockets.”

Offering an alternative, while relatively rare, is not a new concept. For decades, landlords and tenants have had the option of surety bonds, a form of insurance that allows renters to pay a fraction of the typical deposit amount. Over the last few years, venture-backed startups including TheGuarantors, Jetty and Rhino have offered versions of such insurance or other options.

Rhino chairman Ankur Jain, who joined Sittenfeld in pitching a deposit-alternative mandate at the November NewDeal Leaders Conference, said in the week following the event he heard from nearly a dozen mayors looking to learn more.

“It’s going to open up a little bit more of the market,” Jain said of requiring that options other than a deposit be offered. “It also increases the competition, the more this becomes mainstream.”

Of course, not all companies operating in the space agree on how best to displace security deposits. Omri Dor, co-founder of Obligo, which provides landlords a direct connection to a tenant’s bank account so they may be paid immediately for damages or unpaid rent, said the insurance option doesn’t ensure landlords are attracting a “higher quality renter.” One of Obligo’s services is to ensure that prospective tenants can afford the rent.

“I don’t know that the government necessarily is the answer,” Dor said, though he noted that New York’s interest will ultimately play in Obligo’s favor. “As a company and a business, we see that this will benefit us and other companies in our space.”

Large landlords in New York including Related Companies, the Brodsky Organization, L+M Development Partners, Adam America and Rudin Management are already working with some of these startups. A representative for the Rent Stabilization Association indicated last week that the landlord group is open to security-deposit alternatives if they protect owners.

Sittenfeld acknowledged that he faced some pushback from landlords when he rolled out his proposal. The final version of the bill forced them to offer an alternative to a security deposit but gave them three options, including insurance. North Carolina Rep. Ashton Clemmons plans to propose similar legislation next year. In the meantime, she’s meeting with stakeholders to field concerns.

“We’ve done this security deposit structure for so long,” she said, “any change is going to have some nervousness.”

Write to Kathryn Brenzel at [email protected].com


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