Beneath the Surface

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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.

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Russ Buettner and Susanne Craig. Lucky Loser: How Donald Trump Squandered His Father’s Fortune and Created the Illusion of Success. New York: Penguin, 2024.

This is the most comprehensive and thoroughly documented account of Donald Trump’s financial history, written by two New York Times journalists. The general storyline is that Trump managed to fail as a real estate developer despite the help of his father Fred, a successful New York builder with a large portfolio of properties. But he managed to succeed in creating a public image as a great builder, with the help of a “reality television” show, a large inheritance, and other strokes of good fortune. For a time that image enabled him to make money just by licensing his name, but he eventually cheapened it by attaching it to enterprises of dubious value. The authors find “no evidence that in fifty years of labor Donald Trump added to his lucky fortunes.” They conclude that he would have done better by taking the money he received from his father and investing it in the stock market instead of in his own projects.

Although I think “lucky loser” is a fair description, it does not cover everything the book reveals about its subject. The adjective “crooked” belongs in there too, because of the part that Trump’s dishonesty has played in his financial fortunes. The authors cite the “dubious maneuver” of giving properties “a low value when dealing with tax authorities and a high value when trying to extract money from banks and buyers.” Another bad habit has been fabricating or exaggerating his accomplishments, while denying and covering up his failings. Of course, “crooked” is a word that Trump likes to use for his adversaries, but many observers have suggested that he projects some of his own weaknesses and insecurities when he chooses his epithets.

Fred Trump

The natural starting point for describing Donald Trump’s good fortune is to say that he had a wealthy businessman for a father. Fred Trump was already making money as a builder when the National Housing Act of 1934 helped turn the Great Depression into a “Golden Age for home builders.” The new FHA allowed thirty-year mortgage loans covering 80% of a home’s value, guaranteed by the government. During World War II, Title VI, Section 608 of the Act encouraged construction of apartments near factories and military bases by offering low-interest loans covering 90% of construction costs. Fred took full advantage of these opportunities, notably by building the largest private housing development in Brooklyn, Shore Haven.

By the 1950s, however, the public was learning how developers had been scamming the system. They were making quick profits by taking out loans that exceeded the cost of production and pocketing the difference. Then if renters couldn’t or wouldn’t pay the high rents needed to cover the large loan payments, the developers often defaulted on their loans, to the detriment of the tenants and taxpayers. Although Fred Trump took his own Shore Haven into default, he was able to expand his real estate empire by buying properties at auction when other builders defaulted. Despite his reliance on government-backed loans and weak regulation, Fred liked to portray himself as a self-made man. He claimed in a full-page newspaper ad,  “Shore-Haven is a new monument to the American spirit of free enterprise. The project was conceived, planned, executed by Fred C. Trump, acting as a free and rugged individualist to meet the basic need for human shelter.”

The authors estimate that over the years, Donald Trump would receive “the equivalent of more than $400 million from his father” in gifts, loans—often not repaid—and bequests. To this day, Trump denies receiving more than a small fraction of that amount.

Education and exaggeration

The book describes the young Donald as a “dominant personality,” but with “a reputation for misbehaving.” His father sent him to New York Military Academy at age 13 in the hope of teaching him more discipline. His tendency to embellish his own accomplishments seems to have developed early on. To pose for his yearbook photo, he borrowed the dress jacket from another student who had earned more medals than he had. (As a military school graduate myself, I find that disgustingly dishonorable.) Later he would claim that he was at the “top of the military heap” at the academy, but five pages of awards in the commencement program do not include his name. His students did dub him the class “Ladies Man”; that much seemed to be true.

Trump went on to study business at Fordham University, where he is remembered for cutting class on nice days to play golf. From there he transferred to the Wharton School of Finance and Commerce at the University of Pennsylvania. He would later claim to have graduated at the head of his class, but the commencement program didn’t list him as even making the dean’s list.

What he did do was graduate in the late 1960s, “just as his father was prepared to begin passing along a business that would be worth a billion dollars.” The authors call this “the luckiest stroke of a life filled with big breaks.” His father favored Donald over his older brother Freddy, who disappointed his father by wanting to be an airline pilot and developing a drinking problem.

The Commodore/Grand Hyatt Hotel

The Commodore was a run-down hotel that Donald Trump acquired from the bankrupt Penn Central railroad. He proposed to renovate it, relying on his father’s close ties to New York Mayor Abraham Beame to help him get a big break on city taxes. The Wall Street Journal called this “the tax deal of the century.” The tax break attracted a partner, the Pritzker family, who owned the Hyatt Hotels.

Donald brought to the Commodore renovation what he usually would bring to his projects, a grandiose plan and an underestimate of costs. He then “cut costs in ways that created problems later.”  For example, “Rather than installing the typical metal ductwork to draw air from the guests’ bathrooms up to the roof, Trump had shafts built of drywall, which leaked and made balancing the system impossible.” In the end, the renovation cost twice as much as he estimated.

The authors describe Donald’s approach to development this way:

With no real estate or financial staff at his disposal, Donald’s assessment of a potential opportunity started and stopped at the end of his nose. There would be no deliberative planning and very little in the way of an analysis of risks or potential return on investment. Every entrepreneur relies at some level on instinct, typically after running the numbers. Donald Trump went straight to instinct. The only brakes on this endless energy train would be whether he could leverage his father’s wealth to borrow tens of millions of dollars.

In this case, Donald was saved by two things. He could borrow from his father to pay excess costs. And the economic recovery in downtown New York brought back visitors and raised hotel occupancy and rates. The new Commodore—now the Grand Hyatt—did well.

Trump Tower

The first project that Donald Trump built from the ground up was Trump Tower, on the site of the old Bonwit Teller Building. He wanted a tax abatement for this project too, but that proved more difficult. The law he wanted to apply had been written to encourage apartment construction and keep residents in the city. But according to new guidelines, the tax break only applied to replacements for “functionally obsolete” buildings, and city officials ruled that Bonwit Teller did not qualify. Trump sued, eventually winning his case on the grounds that the guidelines in question had not actually been written into the law.

Once again, the project had extravagant designs, cost overruns, and attempts at cost-cutting. Residents of expensive apartments were surprised to find “cheap cabinets, Formica countertops, fake marble, parquet floor tiles, and low-end kitchen appliances.” But once again, favorable market conditions helped, and the project became one of Trump’s few profitable construction projects.

Building an image

Donald Trump’s grandiose proposals, lavish lifestyle and zealous pursuit of publicity were already giving him a reputation far beyond his actual accomplishments. Even before construction had started on any of his buildings, a New York Times reporter described him this way:

He is tall, lean and blond, with dazzling white teeth, and he looks ever so much like Robert Redford…He dates slinky fashion models, belongs to the most elegant clubs and, at only 30 years of age, estimates that he is worth “more than $200 million.”

In addition to the plan for the Commodore, the article cited two other projects, a Manhattan convention center and a huge complex in the West Side Yards of the bankrupt Penn Central, imagined to include 14,500 apartments and the tallest building in the world. Trump would never be able to build either of those projects. And as for the $200 million, that was Fred’s worth, not Donald’s. In 1982, the Forbes list of the 400 wealthiest Americans included Donald by saying that he shared the family fortune with his father. Actually, Donald’s ownership of real estate acquired by his father was limited to a few million dollars in apartments that his father had given him.  Four years later, Forbes dropped Fred from the listings and mistakenly attributed full control to Donald. CBS’s 60 Minutes compounded the error by declaring Donald a billionaire. Then Lifestyles of the Rich and Famous doubled that by estimating his wealth at two billion.

By this time, Donald Trump had those two successful projects, the Grand Hyatt and Trump Tower. But his fame already far exceeded his actual accomplishments, and that would become even truer as his losing projects began to outnumber his winning ones.

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