Chapter 72

It wasn’t until they managed to unpack the truck – because no one but Phil had clean clothes – and sat down for a light supper that Phil got to tell them what he’d been meaning to tell them for hours – but it wasn’t easy.

“Uh, what I wanted to talk to you about earlier is the apartment in the city,” he said. He had planned the words out in his head but now he wasn’t sure of how he wanted to broach the subject.

“We made sure everything was clean and neat,” Tiffany said. “I went through and put fresh sheets on all the beds this morning and I brought the old ones with us to wash here. Katelyn checked the fridge and mopped the floors and Molly went through to make sure everything was unplugged and took care of the vacuuming.”

“That wasn’t what I was talking about,” Phil said with a smile. “Although when I did a last walkthrough I was impressed at how hard you worked. You did a great job. I was going to call in a cleaning crew but I saw that someone even cleaned the bathrooms last week while I was at my parents’ house.”

“Hailey did that,” Tiffany said. “I never thought I’d see her in a pair of rubber gloves scrubbing a toilet bowl but now I can safely say my life is complete. I took a picture to preserve the memory.”

“I’ll have to thank her,” Phil said with a laugh. “And I want a copy of that picture.”

“We’re going to split the chores up here the same way,” Katelyn told him. “I’m going to handle the shopping and the mopping; Molly is going to handle the bills and the vacuuming; Tiffany is going to do the laundry and Hailey is going to take care of the pool and the general upkeep. We’re going to take care of our own bathrooms and split the cooking, though.”

“Wait!” Phil said. “We’re getting off track.”

“This house is going to be a lot to keep up,” Molly said. “We didn’t want you to think we weren’t on top of things.”

“You’re fine,” Phil said, shaking his head. “I’ve already contacted a maid service to come in once a week. We all have classes on Wednesday mornings so they’re going to come in to clean for us. I have someone for the pool because I don’t know anything about keeping it clean. I don’t want the four of you spending all of your time keeping this place looking like a museum. We live here and things are going to get messy. The laundry, the dusting, the mopping, the vacuuming and the pool are taken care of so don’t worry about it. That’s not what I wanted to talk to you about.”

“We need to talk about it,” Tiffany said, crossing her arms. “I love you for your body, not for your money, so you better get that through your head. You’re paying way more than we are so the chores are going to be our responsibility.”

“Let’s come back to that in a moment,” Phil said. “I need to discuss the apartment with you. I’m pleased that each of you treated the place like it was your own and I’m even happier that meant you cleaned up after yourselves and gave it a top to bottom cleaning before we left. My cousins would leave the place looking like a pigsty when they left. I want to talk to you about its future usage.”

“It’s yours and you decide its future use,” Katelyn said simply. “I’m embarrassed that I didn’t think about that sooner.”

He sat back and looked at the three women in front of him. They stared back at him, not with worry or anger but with interest.

“I guess I should start by explaining how I have things set up,” Phil said. “The apartment is separate from the rest of the building. My grandfather set up the first 11 floors to be handled by his property management group but the 12th floor was leased directly to my uncle and his family for a nominal fee. When I took over, I changed that. My grandparents had moved to North Carolina and my uncle, aunt and cousins weren’t staying for months at a time. I was advised to transfer the 12th floor to my property management company, fittingly called Warner Property Management, and I lease it from them for a dollar a year.”

“That saved you a bundle on bundle on personal and property taxes,” Katelyn said.

“That’s what I’m told,” Phil said with a nod. “When I did it, I had no real understanding of why I was doing it or even how. The people my parents put me in touch with told me I should so I did. Now we have a slight problem. The city will not permit what’s called sub-leases. That’s when someone is renting a property and re-rents to someone else. Because I lease from WPM, I couldn’t use the apartment as collateral for a loan and I can’t lease it to anyone else. Do you follow me?”

“I think so,” Tiffany said. “What’s that have to do with us?”

“I’m getting there,” Phil assured her with a laugh. “As you might recall from the thousand times you had to sign your name, there is another property management group we’re all affiliated with, K2G2W. I’d like to transfer ownership of the 12th floor of the Hamilton Building to that group.”

“Why?” Katelyn asked.

“Several reasons,” Phil replied. “First off, my financial advisers have been approached by several tenants who have expressed interested in purchasing their apartments. I am considering listing the apartments for individual sale. Property values in the city have decreased dramatically over the past few years but people who know tell me it’s about to rebound in the next four or five years. That means my property taxes are going to skyrocket – particularly if the present mayor is still in office.

“I’ve also been told it is unlikely that I will be able to increase the rent prices to offset the tax hike. The best way to limit my tax liability is to lower the asset’s value – and the best way to do that is to split ownership of the individual units. I would still own the building and the shops on the first floor but the apartments would be owned by individuals who would then be responsible for their own taxes to the city and county. All the major costs associated with ownership – the employees’ salaries and benefits, the upkeep of the apartments, the taxes, would all be shared among the owners. That would let me essentially dissolve WPM but I can’t do that until I transfer the apartment I want to keep somewhere else.

“Right now, I can’t really afford to purchase the penthouse outright. Who am I kidding? It has nothing to do with right now. I could never afford to purchase it outright on the open market. What I can do is transfer title to an entity where I already hold majority ownership without incurring tax liability.”

“So what’s the problem?” Tiffany wondered.

“There is this little thing called the articles of incorporation,” Phil said. “That means we all have a say in whether I can do this. Yes, I have two votes and you each have one. That was the tradeoff for the initial investment here. That doesn’t mean I can do whatever the hell I want. Any three votes can halt a transaction.”

“We’re not going to fight you on something like that!” Molly insisted. “That would be insane.”

“There are reasons you should consider this before agreeing,” Phil pointed out. “The management group would become responsible for the taxes on the property. I still plan to keep WPM to handle the businesses on the first floor and the overall upkeep of the building. But we would pick up the taxes on the apartment.”

“Oh,” Katelyn said. “Yeah, that’s not really possible.”

“It is but it would require your consent,” Phil explained. “It’s pretty widely known there is a luxury apartment up there. It’s better known since it was occupied all summer. Various groups have approached first my grandfather and now WPM about securing the lease if it ever became open. Of course, it never has. What really got me thinking about transferring the management of the apartment over to our group is a call I got last week. The university is hosting a series of lectures over the next school year and they would like to lease the apartment to be used by their speakers. We’re talking about well-known authors, business owners, technology giants and inventors.

“They’ve offered to pay $12,500 a month to use it for eight months – mid-August to mid-April for the next three years. That’s $100,000 a year. My agent tells me he thinks they’ll go as high as $125,000 a year if I push but I don’t really think that’s necessary. That would mean, after taxes, we’d have about $80,000 a year in K2G2W Management. We could use it to pay for renovations here or to free up your personal funds for other uses.”

The three women blinked hard.

“That’s insane!” Molly said. “We haven’t put any money into this company. Why should we get money out?”

“I didn’t put any money into the apartment either,” Phil pointed out. “That was a gift from my grandfather – and he’s seen his investment returned about a hundred times over. At full occupancy, I see $110,000 a month from that building. It’s not all profit, mind you. About half goes into keeping the building running. I set aside the rent from the first five months to pay for next year’s running costs – or to make sure I can withstand a few open apartments that crop up from time to time. Last year I could have made it work with three months but I thought five was better.

“The rest I invest – in mutual funds and bonds right now but also into places like this house. I bought the furnishings here for $35,000. We could post them for auction and see $100,000 easily. The house went for $225,000. With another $100,000 in renovations, we will sell it for a million in three or four years. I’m going to ask you to let me approach the college in a year or two to see if they wouldn’t like to buy this for the president’s use. They’ve talked about upgrading the home they provide for him but haven’t moved on it yet. Don’t you think a place like this would be perfect for the president of a prestigious institution of higher education?”

“In their minds it would be,” Katelyn said with a nod.

“I’m not suggesting that you don’t pick up the cost of the majority of the upkeep here,” Phil said. “I’m talking about the utility bills, the everyday food staples, buying light bulbs when one burns out. The money from the apartment will cover hiring someone to clean for three or four hours a week and making sure we can swim without developing fungi lung or something. We lived within our means all summer long. We didn’t skimp on anything and you all managed to put money into savings for this semester. That’s pretty impressive.”

“We were living rent free,” Tiffany pointed out.

“And we are again,” Phil answered with a shrug. “The house is paid off and the taxes are paid for the next two years. If we can manage to keep the lights on and food in our bellies, we’re golden. I can already see we’re going to need another vehicle, preferably something that will seat all five of us – and a cello.”

“We’ve talked about it,” Katelyn admitted. “I think you’re right.”

“We have funds in the corporate account,” Phil told them. “One person doesn’t buy the vehicle, the company does. I was thinking about a mid-sized SUV, something we can all ride in and still have room for Molly’s instrument or our bags if we go on a trip. You get a lot better deal for a cash sale. I’m going to talk to Hailey about selling her car to the company and leasing it back. I’m going to that with my car, too. It will ease the insurance burden and it will let us write them off as depreciable assets. That will mean the Mercedes is a company vehicle – available for any of you to use. It didn’t really occur to me that you would drive the Saturn while we were here but I have to force you to drive the Mercedes.”

“It’s a nice car,” Katelyn said.

“And you’re nice women,” Phil countered. “I honestly didn’t realize that you three took the bus on days when Hailey’s car was in use. It sat in the garage all day while you three schlepped to the bus stop in the rain or the heat. That was silly. It’s why I got a key for each of you. Well, once I transfer it to the company as a fleet vehicle, you’ll have no reason not to use it if you want. You’ll own a portion of it. You’ll be listed on the insurance as an authorized driver and that will be that.”

“You said there is money in the corporate account,” Molly said. “Why?”

“Incidentals,” Phil said with a shrug. “I moved $500,000 from WPM to here as my initial investment. There is still a little more than $200,000 in there – and if you agree to take over the apartment and let me sign the deal with the university, it’ll be $300,000 in a few days.”

“This is more than I think I want to deal with,” Katelyn stated. “We agreed to let you finance the house in return for 33 percent ownership of the company. In return, you agreed to allow us to fund the running of the household for the next three years for 16 percent ownership in the company. Now you’re telling us that you moved more money into the account than we discussed and you’re making plans to expand the company.”

“I’m not making plans,” Phil protested. “I’m asking permission. The plan was presented to me. Right now, I’m listed as chairman of K2G2W and the sole signatory on the bank account. I could have already purchased a vehicle, transferred the apartment, paid your tuition, financed a bordello, started a drug ring or anything else and just presented to you as a done deal. The money had to be in some account, Katelyn. I had a fund I closed out and transferred entirely to the corporate account. I suppose I could have paid someone to open a new account or let the government have the rest in taxes but that seemed a little silly. I could transfer it as working capital for a new company and put off the taxes until we see a capital gain from this company.

“That’s what I did. If I had moved it into another fund, I would have to pay a brokerage fee. If I had put it into a personal account, I would have paid about 40 percent of it to one governmental agency or another. By moving where I did, it was a simple transfer from one holding to another with no gains liability. It wasn’t meant to be done in secret. The people who handle my money told me what I should do and I did it. I also didn’t actively seek out the university to see if they wanted the apartment. I admit I was already considering asking to transfer the apartment from WPM but I was willing to pay the taxes on that. I didn’t go behind your backs and do anything – at least not intentionally.”

“Let me ask you this,” Tiffany said, leaning forward on her elbows. “Where do you see K2G2W going in the future? You’ve said you thought we should find a company to make our own. Is this it?”

“I don’t think so,” Phil said, narrowing his eyebrows in thought. “We’re set up as an LLC – limited liability corporation – for the purpose of purchasing and developing property. That’s the only license we have right now and an expansion of that end would be costly. No, I think if we take that step, we start a new company and leverage our assets by rolling them into it. It’s a lot like what I did with WPM. That said, if we see an opportunity for expansion – such as if a nice house comes on the market at a low price – I wouldn’t be opposed to taking a mortgage here or adding to the investment if we could turn a profit. Last year, when I was having so much trouble finding a place to rent, I considered making an offer on that block of apartments on Reading Avenue.

“We could pick them up for about $600,000, put another $100,000 into them, and rent them for a thousand a month easily. That’s $200,000 of income, probably about a third of which would be profit in the short-term. In four years or so, that would rise to about 60 percent profit. That means we pay them off in five years and have a steady stream of income until we’re tired of fooling with it. The key is to find someone to handle the day-to-day details. I was fortunate to find Rex. He worked for the company that handled the building for my grandfather. They didn’t want to maintain that relationship when he passed it off to me. I was too young and they thought I’d turn it into a party pad or something is what they said. What they really wanted was a bigger piece of the pie.

“Rex was blocked for promotion and he approached me. He told me that the company was being short-sighted. They had seen nothing but profit for years from my grandfather because they put very little effort into managing the property. There was a waiting list a year long to get into there. When a vacancy came up, they just went down the list until they found someone ready to move in. The biggest hassle was the background check but with so much of that available online now, even that didn’t take long. He said he thought he could run the building with just an assistant. I talked it over with Mom and Dad – and my grandparents – and we agreed he was probably right. He takes care of the crap work and I sit back and cash the checks.”

“He drove a pretty nice car for someone who just handles grunt work,” Molly said.

“I pay him about a third of what my grandfather paid his former agency,” Phil said. “Well, that’s not true. That counts his assistant, too. It was win-win. He’s making about a third more than he did.”

“What will he do if WPM folds?” Katelyn asked, worried that the guy might lose his job. She had dealt with him after the fiasco at the nightclub and she thought he was really nice.

“He wants to expand but WPM is holding him back,” Phil admitted. “He’s been approached to handle other properties but he’s been reluctant to take them on because he’s worried he won’t be able to handle my building in the way he has in the past. I’ve encouraged him to branch out – told him that his talents are wasted working for me alone – but he’s hedged so far. He’s only 32 and I think he could grow in five or six years to rival the company that let him go if he wasn’t so loyal.”

“So you’re not really interested in ridding yourself of the building your grandfather built, are you?” Molly asked. “But you see a chance to help him and help us so you’re willing to do it. That’s what I couldn’t understand.”

“It would help me out, too,” Phil explained. “Katie, you’ve discussed the mayor in your job. Correct me if I’m wrong: The only people she wants to see making money in the city are her and her cronies.”

“Uh,” Katelyn began before Phil cut in.

“She tried to double the taxes on businesses and business properties. The only reason she backed off that is because one of the suburbs offered tax abatement to anyone who came out there. She tried to put a $1,000 ‘workplace privilege tax’ on everyone who works in the city! How would you three have liked to have your first two weeks’ wages go out in taxes? I heard you grumbling about the amount they took out anyway. What would you have done if they took out $50 from each paycheck for the city?