Who Should Get Interest on Rent Deposits?
Once a year, New York renters get a check from their landlords for interest on their security deposits. It’s usually not much money--”about 4% a year now, or $35 to $40 for me,” says one East Side resident. “For so little, you’d hardly choose another city if New York didn’t have the law, but it’s a welcome change that it earns interest for me now instead of the landlord.”
In California, there is an estimated $1.3 billion in security deposits in landlords’ hands--money that state Assemblyman Rusty Areias (D-Los Banos) wants in interest-bearing accounts for the benefit of renters. “It’s an equity issue,” he says. “It’s only logical that if landlords have the use of the tenants’ money, in some cases for years and years, they ought to be paying some interest.”
At least 15 other states have security deposit interest laws, some a decade old, as do eight cities (not including Los Angeles) in Areias’ own state. Typically, they require that the money be put in interest-bearing accounts at passbook rates and allow the landlord to keep one percentage point for administrative costs, or they specify an interest rate and allow the landlord to keep anything over that.
Some laws exempt buildings with few units. Some require payout annually, some only--in the words of Areias’ assembly bill--on “termination of the tenancy.”
Principle Stressed
Supporters of such laws concede the insignificance of the amounts involved, stressing “the principle of the thing.”
A security deposit is money--usually a month’s rent--deposited with a landlord as guarantee against damage to the premises or against rent lost if the tenant skips out without adequate notice. It’s also clearly the tenant’s money, proved, says one California renter, “by the fact that it’s refundable.”
“To the landlord, it’s nothing more than an assurance,” says Connecticut state Sen. James McLaughlin. “And when you put up collateral,” says a New Jerseyite, “you stay the owner of it, and the beneficiary if it appreciates.” (This is how many utilities treat deposits they receive when service is started: In California, for example, both Pacific Gas & Electric and Southern California Gas now pay more than 6% on such deposits, returned after a year of service.)
In the view of supporters, the landlord is not entitled to any benefit beyond that assurance. “The money would be doing what it’s supposed to for him even if it earns no interest,” says a Boston high-rise dweller.
Not everyone agrees, of course: “Our landlords screamed and yelled” when the law passed, says a Connecticut official.
Landlords Disagree
To landlords, the money is clearly “no longer the tenant’s money, but the owner’s,” says Jon Smock, general counsel and lobbyist for the California Apartment Assn. in Sacramento. “It’s a money transfer. The tenant no longer has possession or control of the money, which is typical of the transfer of title.”
Furthermore, such laws cause “a substantial increase in the cost of doing business,” indeed, “an administrative nightmare,” says Ron Kingston, lobbyist for the California Assn. of Realtors.
Going by the experience in California’s eight cities, property owners estimate that a similar state law would cost landlords $25 to $40 a year per tenant to “collect the money, keep it on the books, track it, calculate the amount of interest earned by each tenant, fill out a 1099 (tax) form, and file it with the IRS and the tenant.”
This is much more than the $15 that California’s average security deposit of $300 could earn a tenant at 5%, and much more than the 1% the landlord is allowed in Areias’ bill. (Areias’ bill, however, requires not an annual but a one-time payout.)
The tenant, naturally, is the likely loser. “If the owner is de prived of what he can now have,” warns Smock, “that’s a loss that’s going to have to be made up in the form of increased rent.” If this hasn’t happened in places that already have security deposit interest, it’s probably because they’re also under rent control, being what the realty industry calls “tenant activist” communities such as Santa Monica.
For those who see security deposit interest as a threat just short of a communist plot, there’s more radical stuff to come. There are already several state proposals that all those security deposits be pooled and banked as one fund, and that any “excess interest” (the Massachusetts word) beyond the tenants’ share go to subsidize “affordable,” or low-income, housing.
Those proposals have even more opponents. Some point to the prohibitive administrative costs that might be drained by banks appointed to handle the funds, or the government departments created to oversee them.
Others simply think it unfair to “select one small segment of the economy to pay for a societal problem,” Kingston says. He means landlords.
Areias says much the same thing but on behalf of renters, usually less affluent than homeowners: “It would be wrong and bad public policy,” he says, “to make home renters pay for public housing on their own.”
But why not? They could just think of their security deposit as the government’s money rather than their landlord’s.
