The above is a picture of what we found in a property we were involved in; needless to say they did not get their security deposit back due to some huge electrical problems, water issues, etc….! Although, all eyes and media attention seems to be focused on Washington politics huge changes to property rights are being implemented in Colorado that will have far reaching consequences and not one of them has been covered in Colorado media outlets!
The most recent bill in the Colorado legislature would effectively prohibit the collection of security deposits on residential and commercial property. Furthermore, it would dictate when a rental housing provider must replace carpet and paint.
What is in the new bill: Tenant Security Deposit Protections
The bill amends and makes additions to existing law concerning security deposits that tenants submit to landlords and the conditions under which a landlord may retain all or part of a security deposit.
- Security deposits effectively banned: The bill requires a landlord to permit a tenant to pay a security deposit in multiple installments of substantially equal amounts with installments due no more frequently than once a month over a period of at least 6 months. If a tenant fails to pay an installment, the landlord may seek compensation through a civil action. But a landlord may not terminate the tenancy or initiate an eviction action, and a court may not enter a judgment for possession, based on a tenant’s failure to pay an installment. In essence if you the tenant doesn’t pay the security deposit, you can’t evict or do anything about it as a property owner. This effectively eliminates security deposits on residential housing in Colorado.
- Replace carpet and paint in less than 5 years: A landlord does not have actual cause to retain any amount from a security deposit for the replacement of carpet or painting unless there is substantial and irreparable damage that exceeds normal wear and tear and did not preexist the tenancy. If a landlord has actual cause, the landlord may retain only the minimum amount necessary to replace the carpet or to repaint in the area that is damaged. A landlord may not deem carpet substantially and irreparably damaged if it has not been replaced with new carpet within the 5 years preceding the termination of the lease or surrender of the premises.
- This is absolutely insane as according to the carpet manufactures association and personal experience you can easily get 7-15 years out of high quality carpet. The bill essentially requires replacement in under 5 years in order to charge a tenant for damages to the carpet
- Opens up even more litigation: In any court action brought by a tenant under the provisions of the bill, the landlord bears the burden of proving the amount of actual damages the landlord incurred. In essence, look for huge litigation over security deposits.
Unintended Consequences of this security deposit bill
By essentially waiving the security deposit requirement as there is no longer a means to collect the security deposit if it is not paid, there will be huge shifts in the market. The purpose of a security deposit is to protect the landlord against damages and also to help vet prospective tenants. If a tenant is unable to come up with one months rent, it begs the question of how good of a paying tenant will they be. Based on this new proposal, property owners will quickly adapt by raising credit score requirements to ensure better paying tenants. This will eliminate lower cost rental units as the risk now far outweighs the rewars from any tenancy.
Colorado’s housing legislation is killing affordable housing
A few weeks ago I wrote about another bill that would allow jury trials for any eviction and now this new bill regarding security deposits, combined the legislature is radically altering the real estate market. Builders have choices when it comes to where to develop additional units and based on these two bills, builders will choose other markets like Salt Lake City, Cheyenne, Boise, Kansas City, etc… as the return on investment is substantially higher. These two bills will lead to a drastic reduction in the building of additional market rent affordable housing throughout Colorado and furthermore lead to many more units moving up the market to higher priced rentals.
These two bills will have the opposite effect by further exacerbating the affordable housing crisis we are seeing in Denver as it will be too risky to rent to lower income tenants with no security deposits and the threat of a jury trial for any eviction action. Although all eyes are on National politics, the radical changes in the Colorado legislature will have a direct impact on every investment property owner in the state of Colorado.
Additional Reading/Resources
- https://leg.colorado.gov/bills/hb25-1249
- HB25-1249 Security Deposit Bill Update | DenCO
- https://coloradohardmoney.com/new-bill-that-radically-alters-rentals-in-colorado-and-implements-statewide-rent-control/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. He is the owner of Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Glen resides in Colorado, lends in Colorado, owns property in Colorado, and services loans in Colorado which provides a unique real estate prospective of what is actually happening on the ground both in Denver and throughout Colorado. My goal of this real estate blog is to provide an honest assessment of what I see happening in Colorado real estate and how it will impact real estate owners, buyers, realtors, mortgage professionals, etc…
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