Hidden Treasure
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Is there anything more exciting than finding money? When I acquired my apartments in Phoenix, that’s just what happened to me. I found a big chunk of cash in a most unexpected spot, in the laundry room. No, it wasn’t lying on the floor or stuffed in a laundry hamper, it was hidden in a new contract with the laundry company that owned and serviced the washers and dryers.
Here’s what happened. I acquired an 80-unit apartment project in Phoenix by way of a foreclosure on the first deed of trust. In the foreclosure, all of the junior liens and encumbrances were wiped out by foreclosure law.
One of the junior liens eliminated at foreclosure was the last two years of a 10-year lease on the laundry room with a company, let’s call ABC Laundry, that owns the 8 washers and 8 dryers, and services and maintains the machines. The owner provides the space, in this case 200 sq. ft., as well as the water, gas, and electricity. The old contract provided for a 50/50 split of the gross income from the machines.
There are no provisions in the apartments themselves for washer and dryer hook ups. Therefore, the laundry room is the only conveniently located laundry facility available to the tenants.
I asked my property manager, David, to inform ABC Laundry of the foreclosure and the resulting elimination of their contract. He was to let them know that we would be willing to negotiate a new long term contract, but that we were also going to solicit proposals from a couple of the other large coin laundry companies in Phoenix. To prepare for the negotiations, I wanted the records of payments under the old contract for the past two years. I already knew that the former owner had been reporting to his limited partners an income of about $300 per month during that period. However, I wanted the actual records to get a more accurate number.
After playing telephone tag with ABC Laundry for several days, David wrote a letter to the company and sent a copy to me. David’s letter contained a couple of sentences that really caught my attention, as they referenced two concepts totally new to me. The letter read, “Please provide a proposal for a 10-year contract. It may be possible to obtain non-disturbance language from our lender or a guaranty against any up front funds which you may provide to us.”
Non-disturbance language from our lender? What was that all about? Given the fact that they had just lost their lease through foreclosure, I assumed that it might mean that we could get the lender to agree to keep the lease intact in the event of another foreclosure. Later, it turned out that my assumption was correct.
The more intriguing provision was the reference to “any up front funds which you may provide to us.” I had not even contemplated a cash amount paid up front. I thought how much could that be? $1,000, maybe $2,000?
The next day, before I could call David and ask him about his letter, he called me and said that he had just received a response from ABC Laundry. They had faxed him the records of payments for the past two years. The average payment to the former owner during that period was $800 per month. That was $500 per month higher than the general partner had been reporting to his limited partners. To me, that news was like finding $500 per month income that I had not expected.
Wait, it gets even better! David went on to say that ABC Laundry was requesting a 12-year lease, which, in their minds, was the remaining two years on the old lease plus an extension of 10 years. Based on the same 50/50 split, they were willing to pay an up front fee, or signing bonus, of $20,000.
My response was an exclamation of, “$20,000!”
Over the phone, David misunderstood my expression of surprise for one of displeasure and quickly said, “Don’t worry, Virgil, that is only their opening offer. We both know it is worth a lot more than $20,000 to them to keep this site in their portfolio.”
I quickly regained my composure and said, “Of course it is! How much do you thinks its worth for signing the contract?”
He answered, “Probably $30,000, maybe more. There are some big bucks in those machines. We need to do the math.”
Over the next several weeks, the negotiations continued and the signing bonus grew from $20,000 to $25,000, then to $32,000. At that point, I was looking for ways to get an even larger bonus, as every dollar would be very helpful in meeting my cash requirement for the rehab work that we already had underway.
I told my manager, “David, if they are willing to pay $32,000 for a 50/50 split, let’s ask them to propose a bonus for a 60/40 split where I receive 40% rather than 50%.”
A week or so later, ABC Laundry increased the ante to $38,000 for a 12-year lease with a 60/40 split.
I asked David to tell ABC, “$40,000, and we have a deal.”
A few days later, David called and said, “We have a deal and they are preparing the paper work.”
A few weeks later, we have received their check for $40,000, which was deposited in my working capital account and used to make improvements to the property.
With $40,000 cash in the bank, and $650 per month income on a 200 square foot room with only 8 washers and 8 dryers, I now look at laundry rooms in apartment projects in a whole new light. There was indeed hidden treasure in the laundry room.
