No on Security Deposit Interest Bill

No on security-deposit interest bill; for landlords and tenants alike: Not worth the pain for pocket change The California Apartment Association is opposing legislation that would require property owners to pay interest on tenants' security deposits. Senate Bill 603 by Sen. Mark Leno also significantly changes the penalties under current security deposit law. "SB 603 has numerous problems," CAA says in a letter to Leno. "Ultimately, the potential costs far exceed any benefit for tenants and property owners." SB 603 would require owners to pay tenants interest on security deposits at the Federal Reserve Discount rate, now set at 0.75 percent. Most banks, such as Chase or Bank of America, now offer rates for savings accounts between 0.01 and 0.05 percent.  For a $1,000 security deposit, SB 603 would require the owner to pay the tenant $7.50 in interest, even though the account may only earn 10 cents of interest per year. "Tenants in California would get better interest rates under this legislation than almost any other Californian who invests their money in a financial institution," the letter says. Moreover, the costs that owners would incur administering payments would dwarf any interest earned. On average, a $1,000 security deposit would earn 10 cents per year. But once costs including postage, paper, envelopes, forms, checks, employee time and bank fees are factored in, the property owner's cost per tenant would range from $10 to $15. In many parts of the state, though, security deposits are as low as $250-$500. As such, the potential interest earned would be almost nothing. The bill also neglects to take into consideration that many tenancies are formed between April and September, especially in college communities. As a result, rental property owners would have to "pro-rate" the calculation for the first year in February, since the tenants will not yet have a full year's interest earned. Owners could be issuing checks for 5 cents or less. With most tenancies lasting about 12 to 24 months, rental property owners would have to repeat the calculation when the resident moves out. The city of Santa Cruz offers a strong example of why SB 603 doesn't make sense. In this city, landlords are required to pay interest on security deposits to tenants, yet a recent survey of rental property owners there revealed that tenants rarely cash their checks. Perhaps it wasn't worth their trouble. With the average deposits in Santa Cruz between $500 and $750, the interest yielded for tenants only reached about 30 cents for a full year. In one case, a property manager spent $500 in processing costs to issue a total of less than $30 in security deposit interest earnings to several hundred residents. Many of these checks were uncashed, creating additional issues for the landlord in tracking checks and balancing the records. If owners and management companies follow general accounting principles, they will file IRS forms, creating a paper trail for any later audits. A bank issues a Form 1099-INT to account holders each year when interest is earned. An owner who then redistributes that interest would provide a 1099-INT to the tenant, removing the portion of interest income from the owner's books and income tax return. Otherwise, the owner would be liable to pay the tax on the interest income. For example, if an owner has six occupied units and earns 8 cents in interest from the bank for the six tenants' security deposits held, the owner would have to mail out six Form 1099-INTs, showing that $45 was paid from the landlord's own pocket to cover the higher rate required by SB 603. SB 603 also creates the potential for a negative tax consequence for tenants. Under IRS regulations, tenants must report any interest earned on their tax returns, whether they are issued an IRS Form 1099-INT or not. Given that the amount of interest is so low, it is likely that tenants will simply forget to report the income and subject themselves to IRS audits and penalties. Under SB 603, a property owner who simply forgets or does not know that he or she needs  to provide 10 cents in interest to a tenant would be considered to have done so in "bad faith," resulting in violation of the law and possibly subjecting the owner to paying twice the amount of the security deposit, plus actual damages. In addition to requiring interest payments, SB 603 removes the bad-faith requirement for penalties on the security deposit law. SB 603 would entitle every tenant whose landlord makes a mistake -- even in good faith -- to return of any portion of the deposit wrongfully withheld and a mandatory penalty that is at least the amount of the entire deposit. There is no cap on the penalty amount other than the $10,000 small claims limit. By requiring judges to award mandatory minimum penalties for a minor error, SB 603 creates a very strong incentive for every tenant to sue property owners.Any degree of victory would mean the tenant gets at least the entire deposit back, plus actual damages. Instead of increasing penalties, California landlords and tenants would be best served with legislation that clarifies Civil Code Section 1950.5. "While the author implies that landlords keep tenant's security deposits as a money-making venture, the fact is this is just not true, CAA's letter says. "The subjective nature of Civil Code 1950.5 creates unrealistic expectations on the part of tenants and continual disputes between the parties. "By now adding penalties that could be as high as $10,000 in small claims court, with absolutely no focus or acknowledgement of the problems associated with the current statute, SB 603 is unrealistic and unfair."