It’s been a tough couple of years on Wall Street, as company after company loses the confidence of investors.
And a recent story in the Wall Street Journal will probably give investors another reason to stay out of the market. The story started with an investigation into the multi-million dollar apartment Tyco International bought for its former chairman, who is being investigated for the $1 million in taxes he failed to pay on $13 million in expensive artwork.
But Tyco International isn’t the only company that’s buying expensive digs for its top executives. The Wall Street Journal reported that a number of huge corporations have been purchasing multi-million dollar residences as “corporate” apartments or homes. Except that the only corporate officer who is entitled to use the apartment is the CEO.
The amount of money that’s been paid for these residences runs as high as $18 million, according to the article. The addresses are fancy, and include Park Avenue in Manhattan. For the most part, companies have not had to report the use of these homes as additional income to the CEO, though they may be required to by Securities and Exchange Commission regulations.
The most amazing thing about the Wall Street Journal article is that in the rare instance a company is charging the executive “rent” for the house or condo, it’s at such a reduced rate that the company’s coffers are taking a huge hit.
If Fortune 500 companies don’t know how to rent out real estate to at least cover the costs of owning and maintaining the condo or home, they should let their overpaid CEOs buy their own places to live. Or, do as Congress does, and give their CEOs $500 per night to stay in a fancy hotel room.
Or, give them $1,000 per night. Even at $20,000 per month (assuming 20 business days per month), the cost is far less expensive than the cost of buying and maintaining a $10 million house in Atherton, California, or an $18 million condo on Park Avenue.
According to the story, E*Trade bought a 5,300 square foot Tudor-style home with five bedrooms, and at least four bathrooms in Atherton, California. E*Trade paid $10.5 million for the house.
What are the true expenses associated with owning and maintaining this property? Let’s run through the numbers.
Property taxes. California limits its property taxes to about 1 percent of the purchase price. So for this property, the taxes could be as high as $105,000 per year.
Mortgage. Assuming you could get a mortgage on the property, you’d have to put down 20 percent, or $2.1 million. At 8 percent on the rest (which is generous, since this is a super-jumbo home loan), the monthly mortgage would cost $672,000 per year, or $56,000 per month, on an interest-only mortgage. If you amortized the loan over 30 years, the monthly payment would jump to about $61,636, or $739,630 per year.
Maintenance. Although this is an expensive home to own, it’s not that big, so the annual maintenance bill shouldn’t be that much. Since we don’t know how much land the house has, let’s assume that maintenance includes an annual landscaping bill of $200 per week, or $10,400 per year, and another $10,000 in work on or inside the property. That’s another $20,400 per year for maintenance.
Cleaning. Although the interior cleaning of the property would normally fall under the perview of the owner, rather than the landlord, it’s clear that the CEO needs someone daily to keep the place tidy since at any point in time, he or she could bring home business associates for an “at home” conference or business dinner. A live-in housekeeper who is willing to sign a confidentiality agreement could run at least $30,000 per year.
The property probably has other annual costs, but adding up the costs is these four categories, the cost of owning and maintaining this property for E*Trade’s former president and current company “entrepreneur in residence” will cost the company somewhere around $827,400, plus the additional lost investment income on the $2.1 million down payment.
E*Trade told the Wall Street Journal that the house is declared as compensation. The former president pays a monthly rent of $8,250, or just shy of $100,000 per year. That’s less than one-eighth of the possible annual cost of owning and maintaining the house. SEC rules require the rest of the cost of owning this home to be declared as income.
And perhaps it is.
But for many other huge companies, the standard line is offered: “The company says it is not required to declare apartments because they are used for business purposes.”
Published: May 27, 2002
Leave A Comment