October 29, 2007
COMMENTARY: Moving in | A new Maine law allowing surety bonds as a security deposit alternative is good news for landlords and renters
By David Williamson, National Marketing Director, Suredeposit, Livingston, N.j.
Thanks to passage of a new law, Maine apartment owners now can more aggressively market their vacant units without having to offer rental concessions to boost leasing office traffic. At the same time, these owners and property managers of the state's some 130,000 units will be able to trim their write-offs due to damaged units or skipped rent.
Earlier this year, Gov. John Baldacci signed LD 1651, which made an important update to Maine's landlord-tenant law. The new statute, which became effective in June, allows landlords to offer their apartment residents the option of purchasing a surety bond in lieu of paying all or part of a traditional security deposit.
LD1651 benefits both renters and landlords. Renters can dramatically lower their move-in costs at lease signing by opting to pay the lower-cost surety bond premium instead of a larger, traditional cash security deposit, which the landlord holds in escrow for the duration of the lease term. For example, one program that offers surety bonds now offers Maine apartment owners a minimum coverage of $500, with coverage in $250 increments thereafter. For $1,000 worth of coverage against losses, the resident only pays $175 for the surety bond premium as an alternative to the traditional security deposit.
Despite the lower upfront costs, renters who opt for the surety bond are still entitled to all protections afforded to them under prior versions of the landlord/tenant law. But this lower-cost alternative also better protects landlords and property managers against losses that result from damage within an apartment unit or to skipped rent.
How does the security deposit alternative work? At lease signing, the renter chooses between the surety bond and the traditional security deposit. If the renter selects the bond, he makes payment directly to the surety, which in turn assures the landlord or property manager that the renter will fulfill the lease obligations at the end of the lease term. The one-time, non-refundable bond premium remains in effect for as long as the renter resides at the leased apartment. And because the program is available nationally, residents can transfer their coverage to different communities within an owner's portfolio.
At move-out, if the resident meets his rental obligations and vacates the apartment in good condition, he moves out without any further obligation. If, however, any lease-covered damages, rent loss or lease violations occur, owners file a claim with the surety for prompt reimbursement of the debt amount up to the coverage limit.
The benefits of the surety bond program to owners can be substantial. It discourages renters from failing to pay their rent or leaving their units in poor condition when they move out. This is because the renter remains fully liable for his lease obligations under the terms of the surety bond. In addition, the resident's lower up-front costs required to move into a new apartment make it easier for a leasing agent to close the sale.
Protecting the bottom line
The most dramatic benefit to owners, however, can be found in their enhanced level of protection and the subsequent and significant impact on a property's bottom line, particularly in markets where requiring full cash deposits puts a property at a competitive disadvantage. This is because the surety bond provides a level of coverage to the apartment community against losses or lease violations that may exceed that of a market-based, traditional security deposit, allowing apartment owners and managers to reduce the amount of unrecovered debt and improve their net operating income.
For example, in Maine where security deposits as high as one month's rent are commonplace, an owner gains a significant marketing advantage by offering a prospective resident the opportunity to pay only $175 for the surety bond premium for the same level of coverage. In those select markets around the state where landlords tend to offer significantly reduced security deposits as a marketing tool, those same landlords would be far better protected by the $1,000 surety bond while still offering a highly competitive move-in rate of $175.
Furthermore, this significantly improved financial protection costs property owners nothing because the surety bond premiums are paid by residents. The only indirect cost to owners is the time required to evaluate and integrate the product into their leasing process.
With security deposit alternatives in the form of a surety bond already in use at more than one million apartment units in 40 states, Maine's multi-family housing industry is now in position to boost its marketing and risk management efforts.
Earlier this year, Gov. John Baldacci signed LD 1651, which made an important update to Maine's landlord-tenant law. The new statute, which became effective in June, allows landlords to offer their apartment residents the option of purchasing a surety bond in lieu of paying all or part of a traditional security deposit.
LD1651 benefits both renters and landlords. Renters can dramatically lower their move-in costs at lease signing by opting to pay the lower-cost surety bond premium instead of a larger, traditional cash security deposit, which the landlord holds in escrow for the duration of the lease term. For example, one program that offers surety bonds now offers Maine apartment owners a minimum coverage of $500, with coverage in $250 increments thereafter. For $1,000 worth of coverage against losses, the resident only pays $175 for the surety bond premium as an alternative to the traditional security deposit.
Despite the lower upfront costs, renters who opt for the surety bond are still entitled to all protections afforded to them under prior versions of the landlord/tenant law. But this lower-cost alternative also better protects landlords and property managers against losses that result from damage within an apartment unit or to skipped rent.
How does the security deposit alternative work? At lease signing, the renter chooses between the surety bond and the traditional security deposit. If the renter selects the bond, he makes payment directly to the surety, which in turn assures the landlord or property manager that the renter will fulfill the lease obligations at the end of the lease term. The one-time, non-refundable bond premium remains in effect for as long as the renter resides at the leased apartment. And because the program is available nationally, residents can transfer their coverage to different communities within an owner's portfolio.
At move-out, if the resident meets his rental obligations and vacates the apartment in good condition, he moves out without any further obligation. If, however, any lease-covered damages, rent loss or lease violations occur, owners file a claim with the surety for prompt reimbursement of the debt amount up to the coverage limit.
The benefits of the surety bond program to owners can be substantial. It discourages renters from failing to pay their rent or leaving their units in poor condition when they move out. This is because the renter remains fully liable for his lease obligations under the terms of the surety bond. In addition, the resident's lower up-front costs required to move into a new apartment make it easier for a leasing agent to close the sale.
Protecting the bottom line
The most dramatic benefit to owners, however, can be found in their enhanced level of protection and the subsequent and significant impact on a property's bottom line, particularly in markets where requiring full cash deposits puts a property at a competitive disadvantage. This is because the surety bond provides a level of coverage to the apartment community against losses or lease violations that may exceed that of a market-based, traditional security deposit, allowing apartment owners and managers to reduce the amount of unrecovered debt and improve their net operating income.
For example, in Maine where security deposits as high as one month's rent are commonplace, an owner gains a significant marketing advantage by offering a prospective resident the opportunity to pay only $175 for the surety bond premium for the same level of coverage. In those select markets around the state where landlords tend to offer significantly reduced security deposits as a marketing tool, those same landlords would be far better protected by the $1,000 surety bond while still offering a highly competitive move-in rate of $175.
Furthermore, this significantly improved financial protection costs property owners nothing because the surety bond premiums are paid by residents. The only indirect cost to owners is the time required to evaluate and integrate the product into their leasing process.
With security deposit alternatives in the form of a surety bond already in use at more than one million apartment units in 40 states, Maine's multi-family housing industry is now in position to boost its marketing and risk management efforts.
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