BPOA Article Library
Only in Berkeley • April 4, 2006
A Tale Of Two Interest Rates
A Tale Of Two Interest Rates
The hands-down number one question we receive in the office is this: “Why do I have to pay 4.1% interest on my tenants’ security deposits when I can only raise the rent seven-tenths of one percent?”
That question is often accompanied by something like this: “What are you going to do about this unfairness? If you do something, don’t use my name.”
Here are some answers.
Why? The Simple Answer
The reason we have to pay two different rates is because that’s the law. The methods for calculating both rates were approved by voters at exactly the same election: Measure O (the AGA) and Measure P (security deposits, among other things) were adopted in November 2005.
Why? The Policy Answer
The policy answer goes something like this: you can’t compare apples and oranges. Security deposit interest just doesn’t have much to do with annual rent increases.
To understand this, we must recall that a security deposit belongs to the tenant. The tenant could have spent that money on a TV, or bought shares of Google, or put it under his mattress. Instead, he’s given it to the landlord to hold, and to keep if he damages the unit. In the meantime, it’s the tenant’s money; any investment return belongs to the tenant. The new Berkeley interest rate is pegged to a published federal 6-month CD rate. That rate is higher than what many banks pay, but it is obtainable.
By comparison, the AGA is supposed to reflect increases in your costs of being a landlord. That’s why it is keyed to increases in the Consumer Price Index, not interest rates. Due to some fairly unusual factors explained in the January 2006 Newsletter, the CPI increase for fiscal 2006 was minimal, and so was the AGA. Note also that the AGA is a measure of cost increases, and not of total return, which depends on the magic rent control formula established back in 1982, plus all the underlying appreciation in the value of your property, plus all of those Costa-Hawkins rent increases.
If you really wanted to compare apples to apples, then, you would compare your total, annual return on investment, annualized, to whatever the tenant receives on his/her security deposit.
Why? The Political Answer
One reason the security deposit interest law changed in November was because of who got involved, and who didn’t.
Until last year, Berkeley law required you to keep each security deposit in a separate bank account and then return the actual interest earned. Santa Monica, by contrast, required landlords to pay 3% interest no matter what. That law was struck down because it forced landlords guarantee a minimum rate of return.
But a single individual landlord complained loudly about this system to the Executive Director of the Rent Board. Voila! When the Board sat down to draft the rent law changes that became Measure P, they included something to standardize interest payments and eliminate the “separate account” requirement. That’s right: the rent board actually thought they were doing landlords a favor! In a sense this was true since they eliminated the time and expense required to deposit and account for each tenant’s money separately. They also left housing providers free to manage their cash flow in more businesslike ways. That may be why we aren’t getting any complaints from the larger landlords who are now able to co-mingle security deposits with other revenues and potentially get a higher return than 4.1%
That brings us to who didn’t get involved. You see, all the elements of Measure P were announced on several occasions, both by the City and in the BPOA newsletter. BPOA members knew when and where the Board’s and Council’s meetings were being held. However, only two landlords ever showed up…and they were far more concerned with other parts of Measure P than with the security deposits.
Ninety percent of life is showing up, and politics isn’t much different. A person who “doesn’t want his name used” is a person who doesn’t show up. While it is really hard, and sometimes risky, to get involved in Berkeley politics, we have no choice when our vital interests are at stake. “Thanks for the lecture, but it’s still unfair and I’m still pissed off.”
Hey, you’ll get no argument from me. It’s preposterous that you should have to hunt around for bank rates, just to make sure you don’t lose money on the whole thing. It’s doubly preposterous that you can’t deduct the costs (if any) of bank charges you may incur.
It’s also probably illegal. Remember Santa Monica? That case (ACTION Apt. Assoc. vs. Santa Monica Rent Board) stands for the simple proposition that you can’t force landlords to pay an interest rate they’re not actually earning. Berkeley’s law seems to do just that. All it takes is one landlord to stand up and make the challenge.
At the end of the day, I prefer to view the four-percent-versus-one-percent issue as little more than an irritating grain of sand. Rather than spend energy getting upset about a relative trifle, we should put the energy into solving the real problem—the rent board—once and for all.