Feature
by Jeffery Woo and Stephen Sherman
Effective August 4, 2002, Chapter 49 of the San Francisco Administrative Code was amended to change the method for calculating the interest on security deposits that a landlord is required to pay a tenant. This was considered a victory for San Francisco landlords who were formerly required to pay interest on security deposits at a rate of return that they themselves could not earn on money deposited in a bank.
Section 49.2(a) used to require yearly payments of at least 5 percent simple interest on security deposits. Section 49.2(g) now states that the Rent Board, effective March 1 of each year, will determine the required interest payments. The Rent Board will calculate this rate by using the preceding December 31 Federal Reserve Discount Rate, which is based on the average of the 12 most recent monthly rates (rounded to the nearest tenth).
With every victory, however, comes a cost. In this case, the annually changing interest rate requires more administrative work on the part of the landlord, especially this year.
2003 Interest Payments
For interest payments due in 2003, the calculation of interest owed to the tenant is a two-part calculation. The Rent Board has calculated the required interest paid on security deposits to be 1.2 percent for the period from March 1, 2003, through February 29, 2004. The Rent Board has calculated the required interest paid on deposits to be 3.4 percent for the period from August 4, 2002 — the effective date of the amendment — through February 28, 2003. Note that these new rates are not retroactive prior to the effective date of the amendment.
The Rent Board has taken the position that for annual interest calculations with an anniversary date that occurs prior to August 4, 2002, the amount paid must include a calculation for those months while the rate was 5 percent (any period prior to August 4, 2002) and another calculation at 3.4 percent or 1.2 percent, depending on whether the anniversary date is before or after March 1.
After 2003
For interest payments due in 2004 and after, the method for calculating interest should be a single, simple interest calculation based on the announced rate. Just as with annual rent increases, you will need to look up the current interest rate on security deposits from the Rent Board. Information can be found online or by calling 415.252.4600.
Other Things To Remember
A security deposit can be more than what a lease calls a "security deposit." Section 49.1 provides that "A security deposit is any payment, fee, deposit or charge including, but not limited to, any of the following: (1) The compensation of a landlord for a tenant’s default in the payment of rent; (2) the repair of damages to the premises caused by the tenant; (3) the cleaning of the premises upon termination of the tenancy." This includes last month’s rent and cleaning deposits.
Civil Code Section 1950.5 limits the amount of security deposit that can be collected to an amount equal to two month’s rent on an unfurnished apartment and three month's rent on a furnished apartment. This law does not preclude a landlord from receiving "an advance payment of no less than six month's rent if the term of the lease is six months or longer." To collect a non-refundable deposit, however, is unlawful.
The landlord is required to pay interest on security deposits at least once a year. Such interest can be paid in the form of a direct payment or a credit against the tenant's rent.
When the tenant vacates the property, the landlord is required to furnish the tenant with an itemized statement indicating the amount of deductions, if any, and the basis for such deductions, and then return the balance of the deposit, if any. Failure to comply with this provision within the time allowed will waive the landlord's right to deduct any amounts from the deposit and require him/her to return the entire deposit, even if such deductions are otherwise proper. Bad faith retention of any or all of a deposit may subject the landlord to statutory damages up to twice the amount of the security.
This recent change
to San Francisco's Administrative Code brings a dose
of financial reality to the landlord’s obligation to
pay interest on security deposits. Security deposits
and interest on security deposits require the attention
of careful landlords who seek to protect their rights
and avoid costly mistakes.
| For Interest Paid Before March 1,
2003: For example, if a tenant had a security deposit of $1,000 and the last interest payment was made on February 1, 2002, the 3.4% rate would be used. The calculation for the 2003 interest payment would be as follows: |
||
| 2/1/02 - 7/31/02 | $1,000x5%x6/12 mo | $25.00 |
| 8/1/02 - 8/3/02 | $1,000x5%x1/12 mo x4/30 days | $0.06 |
| 8/4/02 - 8/31/02 | $1,000x3.4%x1/12 mo x26/30 days | $2.46 |
| 9/1/02 - 1/31/03 | $1,000 x 3.4% x 5/12 mo | $14.17 |
| Total | $41.69 | |
| For Interest Paid On or After March
1, 2003: If the last interest payment was made on May 1. 2002, the 1.2% rate would be used. The calculation for the 2003 interest payment would be as follows: |
||
| 5/1/02 - 7/31/02 | $1,000x5%x6/12 mo | $12.50 |
| 8/1/02 - 8/3/02 | $1,000x5%x1/12 mo x4/30 days | $0.06 |
| 8/4/02 - 8/31/02 | $1,000x3.4%x1/12 mo x26/30 days | $0.86 |
| 9/1/02 - 1/31/03 | $1,000 x 3.4% x 5/12 mo | $8.00 |
| Total | $21.42 | |
The opinions expressed in this article are those of the authors and do not necessarily reflect the view point of the SFAA or the San Francisco Apartment Magazine. The information within this article is general in nature. Consult the advice of an attorney for any special problem. Jeffery P. Woois the principle of Woo & Associates. Stephen Sherman is an associate with Woo & Associates. Both are available at 415-705-6470 . Copyright © 2003 San Francisco Apartment Magazine