By the early 1980s, Donald Trump had completed two successful building projects, the Grand Hyatt that opened in 1980, and the Trump Tower that opened in 1983. His reach far exceeded his grasp, however, since he had talked up so many other projects that he was unable to complete or even begin. Buettner and Craig summarize his situation:
Thanks to his father’s wealth and reputation, newspapers conferred an air of credibility on Donald’s every utterance. Those stories, and those that followed, began to establish an image of Donald Trump as a man of consequence and big ideas, and few took notice that most of his proposals went nowhere.
A frenzy of buying
Donald Trump’s image as a super builder made many banks willing to lend him big bucks for new projects. During the mid-1980s, he went on a buying spree with ample amounts of borrowed money. During this period, he:
- partnered with Holiday Inns, Inc. to build his first Atlantic City casino, Harrah’s at Trump Plaza (soon renamed Trump Plaza Hotel and Casino; later he borrowed $250 million to acquire sole ownership)
- bought a second casino across the street and renamed it Trump Castle
- bought the New Jersey Generals football team in the new United States Football League
- bought the West Side Yards, the largest undeveloped piece of land in Manhattan; (he had previously acquired an option to buy it from the bankrupt Penn Central, but allowed it to expire; now he bought it from its current owner)
- bought the Mar-a-Lago beach property in Palm Beach, Florida
- partnered with Lee Iacocca to buy an unfinished condominium project across Lake Worth from Mar-a-Lago; he renamed it Trump Plaza of the Palm Beaches
- bought the Hotel St. Moritz in New York City from Harry Helmsley
- bought the New York Foundling Hospital from the Archdiocese of New York, intending to replace it with an apartment building
By 1986, Trump was rich in assets but deep in debt.
He had excelled at convincing lenders to fund a remarkable number of large acquisitions without requiring him to put in any of his own money…[H]e had taken on, in less than four years, more than $1 billion in debt, much of it at high interest rates and personally guaranteed by him.
Still the acquisitions continued. In 1987 and 1988, he:
- borrowed $220 million to build condominiums for Trump Palace, on the site of the Foundling Hospital
- bought a controlling interest in the Taj Mahal casino from Resorts International, and borrowed $675 million to complete its construction
- bought the Plaza Hotel in New York City
- bought the Boston-New York-Washington shuttle service from Eastern Airlines
The result was $1.7 billion in additional debt. But according to the authors, “He had performed little due diligence on the profit potential of anything he bought.” Usually uninterested in detailed cost-benefit analysis, Trump tended to underestimate development costs and/or overestimate revenue, winding up with a portfolio of assets with operating losses.
Small gains and big losses
As the owner of a team in a struggling summer football league, Donald was noted for overspending and combative litigation. He convinced other owners to pin their hopes on competing with the NFL to play and televise games during the fall season. He had his lawyer, the notorious and soon-to-be disbarred Roy Cohn, sue the NFL for maintaining a monopoly. The jury did find a monopoly, but no specific anti-competitive practices to justify more than one dollar in damages. The new league’s costs exceeded its revenues, and it went out of business.
Trump’s plans for the West Side Yards stalled. He could not find a major tenant to anchor the complex, and he fought with the city over rezoning and tax abatement.
In Atlantic City, the revenue from his casinos failed to cover his expenses, considering his very large loan payments. His only profitable businesses remained his first two projects, the Grand Hyatt and Trump Tower.
Trump did make some money playing the stock market, buying stocks with borrowed money and selling them at a profit. The word that he was buying a stock would help push its price up, especially because other buyers thought he might be interested in taking over the company. Sometimes the executives of a company would buy back his stock at a higher price just to avoid a possible takeover. Some of Trump’s stock dealing got him in trouble with federal regulators, but he made more on the deals than he paid in fines.
In 1987, Trump published The Art of the Deal, boasting of his accomplishments and his business savvy. His “co-author,” Tony Schwartz, who did the actual writing, delivered a flattering portrait of his subject, but he noted at the time that a more truthful description would reveal him to be “just hateful or, worse yet, a one-dimensional blowhard.” Schwartz has been one of Trump’s severest critics ever since.
Trump’s tax return for that same year is revealing:
Trump’s core businesses reported a negative income of $45.4 million…He reported $25.4 million in short-term capital gains, mostly, if not entirely, from the stocks he sold after letting investors believe he might take over the company.
A couple of points about tax law are helpful here. Trump organized his businesses as legal partnerships, which meant that the profits or losses showed up on his personal tax return. Even successful real estate investments sometimes produce losses for tax purposes, at least in the short run. That’s because owners can depreciate a property, spreading its cost over many years. Reported costs easily exceed revenues in the early years, before potential income is fully realized. But Trump’s losses went far beyond that. His revenues remained below costs year after year, making entire projects unprofitable.
The truth was that Trump was hemorrhaging cash, largely from massive interest payments. But it was all other people’s cash. His entire operation, and his lifestyle, was a float. He was living, and creating a phony image, on borrowed money.
Some observers began to see that Trump’s business success was highly overrated. Financial analyst Marvin Roffman publicly stated his view that the revenue from the Taj Mahal casino could not possibly make up for its debt payments. Trump’s response was to get Roffman fired from the brokerage firm he worked for by threatening a lawsuit against the firm. (Roffman later sued for defamation, and Trump settled with him.)
In 1989, the expenses of Trump’s businesses exceeded revenue by $36.1 million. Soon he was trying to stop the negative cash flow by withholding millions from contractors and cutting staffing at the casinos. In June of 1990, he failed to make $73 million in debt payments. At that point, the bankers stepped in. A front-page story in the Wall Street Journal was headlined, “Shaky Empire: Trump’s Bankers Join to Seek Restructuring of Developer’s Assets.” The bankers forced him to sell losing properties and reduce his spending. His “allowance” for personal expenses would be a mere $450,000 a month ($5.4 million a year). This was less than he was accustomed to spending on Mar-a-Lago alone, but it was generous enough to maintain his popular image as a financial success.
A struggle for solvency
In the 1990s, Donald Trump had to sell one property after another to cut his losses and pay off his creditors. He sold the Plaza Hotel for $100 million less than he had borrowed to buy it. He turned over the unsold units in the failing Trump Palace to the bank. He gave up control of the West Side Yards to a Hong Kong developer, leaving his future returns to the discretion of the new owners. (This deal would provide an unexpected windfall many years later.) He even had to sell what had been his first success, the Grand Hyatt hotel. He did manage to hold on to the places where he resided, Trump Tower and Mar-a-Lago. He converted Mar-a-Lago to a private club, generating income from expensive memberships.
An interesting question is how Donald managed to avoid personal bankruptcy while so many of his businesses incurred operating and capital losses. Part of the answer is that he could cover operating losses with borrowed money, as long as banks would keep making new loans. And by putting very little of his own money into his projects, he could limit the personal damage from capital losses. His businesses could go bankrupt while he remained personally solvent.
In 1995, Trump turned his casino operation into his first public company, Trump Hotels and Casino Resorts. He made millions on the sale of public shares. He saddled the new company with debts on borrowed money that either had been used or would be used to pay off his previous loans. That made the public company a losing business with a falling stock price, but those losses were borne by the shareholders. (The company would file for bankruptcy three times beginning in 2004. All its properties would eventually be closed and sold.)
By 1996, Trump:
…had finally cleared the last of the loans from banks that had threatened to force him into personal bankruptcy. He had in the prior decade recorded more than $1.1 billion in business losses on his tax returns, a failure of historical proportions.
That raises another question. Did Donald Trump ever invest $1.1 billion of his own money? And if not, how did he claim that much in losses? In theory, if he sold a building for less than he borrowed to buy it, that was his loss. At least, it would be if he fully repaid the loan out of personal funds. But if the bank accepted the sale proceeds in lieu of full repayment, that would shift some of his loss to the bank. (For tax purposes, his loss would be offset by a form of taxable income known as cancellation of debt income.) However, by using an unusual—and possibly illegal—tax maneuver, Trump apparently got away with claiming excess losses for himself. Those losses enabled him to pay zero taxes for many years.
Trump was still making new acquisitions, but with fewer lenders willing to lend, he had to reduce the scale of his projects. When he partnered with the South Korean conglomerate Daewoo to build Trump World Tower across the street from the UN, he invested much less than his partner and had to settle for a smaller share of the profits. He also started investing in golf courses, which cost a lot less than building hotels and casinos. But he continued to claim, “I’m the biggest in real estate in New York, and I’m the biggest in the gaming industry.”
Generational transfers
Another big factor in Trump’s financial survival was the large amounts he received from his father’s estate. Ever since they were children, Fred Trump had been giving Donald and his siblings annual tax-free gifts. At first, he limited them to several thousand dollars a year per child, since larger gifts would be recorded and subjected to estate taxes when his estate was settled.
When Donald got into financial trouble in the 1990s, Fred transferred larger amounts to his children through a fraudulent scheme that evaded gift and estate taxes. The family created companies owned by the children, whose sole purpose was to purchase millions of dollars of goods and materials for Fred’s business and sell them to him at a substantial markup. The children made a profit, but it was subject to income tax instead of the higher estate tax. Donald did not pay income taxes either, as long as his income was offset by his overstated capital losses.
Fred Trump retained ownership of his own properties until 1995, when his children got him to give his son Robert power of attorney. “Donald and his siblings could begin taking ownership of their father’s massive cash machine, and Fred could do nothing to stop them.” They immediately starting transferring his properties to a grantor retained annuity trust (GRAT). This type of trust allows assets to pass to heirs without estate taxes, as long as the heirs are buying the assets at fair market value. Buettner and Craig reckon that the assets were appraised for only about 5% of their market value, resulting in a large windfall with minimal taxes. When the transfers were completed a couple years later, “Donald Trump’s net worth instantly increased by tens of millions of dollars,” and his “share of profits from his father’s company averaged about $6 million a year going forward.
Thanks to his father, he continued to be a rich man despite his own business failures. And more good luck was on the way.
Beneath the Surface 