Renters’ Interest Law Gains : Housing: Deposits would earn 5% annually under the measure tentatively approved by the City Council.

An ordinance that would require landlords to pay 5% annual interest on security deposits won tentative approval from the Los Angeles City Council on Tuesday, but the measure will not apply to 40% of the city’s rental units.

At the same time, the council rescinded an earlier plan to bar landlords from increasing security deposits to match rent hikes. The action was a compromise in a tug-of-war between landlord and tenant groups that has stalled the measure for years.

The ordinance would apply only to the 480,000 housing units that fall under the city’s rent control law. About 40% of the city’s apartment units were built after 1978 and are not covered by the law. Several months ago, the council turned down a proposal to cover all rental units in the long-debated deposit-interest measure.

“We did try to include all units,” said Councilwoman Gloria Molina, who sponsored the measure. “If you believe in the concept that a security deposit belongs to the tenant, then why does it only belong to the tenant in a rent-controlled unit? But I lost.”

The council voted 10 to 2 to approve the compromise measure, but must take a final vote next week. Councilmen Ernani Bernardi and Nate Holden voted against the proposal, with Holden arguing that it would mean “a real hardship” on landlords.

Council members Richard Alatorre, Joan Milke Flores and Gilbert Lindsay were absent.

Mayor Tom Bradley is expected to sign the measure when it wins final approval. It could take effect as early as the end of November.

“This is long in coming,” said Councilman Zev Yaroslavsky. “This should have been done long ago.”

The ordinance is similar to measures in effect in Chicago and New York for a number of years. However, both cities require the payment of annual interest on virtually all rental units.

The Los Angeles ordinance requires that landlords credit tenants with 5% interest on their deposits each year, but the interest must be paid to the tenant only after five years or when the tenant moves after a minimum of one year.

Los Angeles landlord groups have complained that the paper work involved in paying interest each year would be excessively burdensome.

Barbara Zeidman, director of the city’s rent stabilization division, said Tuesday that landlord and tenant groups have agreed to the compromise.