Reichen Kuhl is co-founder, President and Chief of Insurance and Legal of LeaseLock — we help the world find home.
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For some time now, both apartment residents and apartment operators have been too familiar with the drawbacks of security deposits.
Over the years, lawmakers have also grown increasingly concerned. In past efforts to make apartment living more affordable, numerous jurisdictions passed deposit restriction laws imposing limits on deposit amounts, requiring installment plans and regulating how quickly deposits must be returned to renters.
Recently, however, deposit-related legislation has taken on a new dimension. Governments are passing bills that move away from costly deposits completely. For example, a Cincinnati law says that if an operator requires a security deposit, a deposit alternative or payment plan must likewise be offered.
In what is likely a growing trend, a recently proposed Pennsylvania bill goes further by laying the groundwork for total deposit replacement. Among its provisions, the legislation would give operators the choice to eliminate security deposits through lease insurance.
This is where legislators and the industry are increasingly headed: away from deposits.
Deposit regulations and alternatives may improve move-in affordability for residents, but most are not sufficient to address the inadequacies of deposits themselves.
The Longstanding Affordability Issue
Before Covid-19, there were growing concerns about apartment affordability. Moving costs, rising rent and stagnant wages left many renters in a precarious situation.
A study by CareerBuilder found that 78% of U.S. workers were living paycheck to paycheck; even 9% of those earning $100,000 or more said they were also living this way. Another survey revealed that nearly 60% of Americans had less than $1,000 in savings. The current recession, which, as of early June, may have caused unemployment for up to 40 million Americans, has pushed an unprecedented number of residents toward the brink of not being able to afford basic necessities.
“The most important problem that we’re facing is the lack of affordable housing,” said Mark Keam, a member of the Virginia House of Delegates, in January after introducing a bill similar to Cincinnati’s. “And the cash crunch of coming up with two months’ worth of security deposit is a barrier to many people who would like to move out on their own.”
Deposits are costly, and with consumers’ savings depleted, prospective renters often cannot pull together the funds to cover upfront deposits. Of those who can, many must delay their move-in until they are able to gather those necessary funds.
Not only do deposits create an undue financial burden on residents, but they also create significant administrative and liability costs for apartment operators — and often inadequate financial protection in the face of significant losses (e.g., an eviction).
Traditionally, local and state governments have addressed expensive deposits with controversial laws restricting their maximum amount. For example, Seattle and New York state limit deposits to no more than one month’s rent. But these laws seem to have treated the symptom of the problem, rather than eliminating the problem itself: deposits.
An Initial Step And An Important Distinction
Cincinnati’s recently enacted Renter’s Choice law states that if an operator requires a security deposit, the operator must also offer residents an alternative to a full, upfront deposit. Among other alternatives, an operator can offer a surety bond, an installment plan to pay the full deposit or a smaller upfront deposit that cannot exceed 50% of the first month’s rent.
While some in the apartment industry applaud the Cincinnati law and bills like it (e.g., Keam’s Virginia bill) — and the Washington Post has noted that New York City, North Carolina and New Hampshire are interested in comparable legislation — the challenge is that deposit alternatives don’t fully solve the drawbacks of deposits, which often limit both the operator and the resident.
Deposit restrictions and alternatives simply place a bandage on a broken system — secondary options offered on top of deposits, rather than a solution to replace them. The renter’s leasing process is still complex, and there is still a considerable administrative burden for apartment operators.
Pennsylvania House Bill 2427 is distinctive because it sets the stage for total deposit replacement. Similar to the Cincinnati law, the legislation would require apartment operators that charge security deposits to offer residents an alternative, such as a surety bond or an installment plan. However, HB 2427 goes one step further by giving apartment operators the choice to eliminate security deposits entirely through lease insurance.
Options To Fulfill The New Legislation
It’s paramount to note what options are available to address the evolving legislation landscape and examine the benefits and challenges associated with each:
- Deposit Installment Plan (deposit alternative)
- Pro: Greater ability to budget for renters.
- Con: Tracking the monthly payments can create a significant administrative burden, and the resident may still not be able to make those large lump-sum payments.
- Surety Bond (deposit alternative)
- Pro: Increases the affordability of the move-in.
- Con: Bonds require a separate application process and only have a 10% to 30% adoption rate, which means the vast majority of renters are still paying upfront deposits.
- Lease Insurance (deposit replacement)
- Pro: Reduced move-in costs for residents and enhanced financial protection for communities.
- Con: Some apartments might traditionally experience little to no damage or rent loss, meaning they don’t need the additional protection above a security deposit.
Looking Ahead
The pandemic and the subsequent economic recession have further uncovered the situation and intensified concerns about apartment affordability and the financial welfare of residents.
“Operators have grown more frustrated with security deposit restrictions while residents are demanding more affordability. The pandemic is accelerating deposit legislation compounding administrative burdens and liability while reducing loss protection for asset owners,” said Kelli Jo Norris, president of Goodman Real Estate.
The Pennsylvania bill represents an important evolution in deposit legislation. Given the longstanding issue of affordability and the urgency created by the current recession, it’s likely to be the first of a wave of legislation that could finally address the problem of security deposits across the country while providing a dual benefit for both renters and properties that we have not seen in other programs to date.
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