Debt helped make him so rich he could finally turn to cash to continue building his portfolio
In the nine years before he ran for president, Donald Trump’s company spent more than $400million (about R5.1billion) in cash on new properties – including 14 transactions paid for in full, without borrowing from banks – during a buying binge that defied real estate industry practices and Trump’s own history as the self-described “King of Debt”.
Why did he turn away from a debt strategy, defying the real estate wisdom that it’s unwise to risk so much of one’s own money in a few projects?
His son, Eric, who helps manage the company, said none of the cash used to buy the 14 properties came from outside investors or from selling major Trump Organization assets. Instead, the firm’s existing businesses – commercial buildings in New York, licensing deals for Trump-branded hotels and clothes – produced so much cash that the Trumps could tap that flow for spending money.Eric added: “It’s a very nice luxury to have.”
The cash purchases began with a $12.6m estate in Scotland in 2006. In the next two years, he snapped up two homes in Beverly Hills, five golf clubs along the East Coast and a winery in Virginia. The biggest cash binge came in 2014, when he paid a combined $79.7m for golf courses in Scotland and Ireland. Since then, those clubs have lost money while Trump renovated them, requiring him to pump in $164m in cash.
Trump’s lavish spending came at a time when his business was leaning largely on just one major financial institution for its new loans, Deutsche Bank, which provided $295m in financing for big projects in Miami and Washington.
Eric said his father wasn’t forced to turn to an all-cash strategy. Trump could have borrowed more, but he soured on borrowing after contending with unpaid debts in the early 1990s.
Real estate investors typically don’t buy big properties with their money alone. They find partners to invest and banks to lend alongside them. That allows the investors to amplify their buying power, and it increases the odds of earning higher returns.
“Privately held real estate firms like to use as much debt as they can. The only brakes are put on by the lending institutions,” said David Geltner, a professor of real estate finance at the Massachusetts Institute of Technology.
Industry experts said avoiding loans can alleviate risk for real estate companies and allow them to manoeuvre more quickly. But they said that approach is typically undertaken by cash-rich investors who aren’t focused on maximising the money they make off a property, or by companies that aren’t trying to minimise their tax bills because interest payments on mortgages are often tax-deductible.
Companies that have trouble obtaining loans would also turn to cash, they noted.
Particularly when pursuing major projects, private real estate firms usually borrow.
“At the end of the day, you want some debt,” said Ed Walter, a Georgetown University real estate professor and former chief executive of Host Hotels.
Trump embraced that philosophy, extolling the virtues of borrowing big, even more enthusiastically than other real estate executives. Until, suddenly, he didn’t.
To total up Trump’s cash payments in real estate transactions, The Washington Post examined land records and corporate reports from six US states, Ireland and the UK. Documents tell the story of Trump’s flashy career in real estate. It was a career built on chutzpah, debt and more debt. “He always used other people’s money. Not cash,” said Barbara Res, a former top executive for Trump.
Debt helped make Trump, allowing the prince of an outer-borough apartment empire to play a king in Manhattan.
In 1988, when Trump bought New York’s Plaza Hotel, he paid $407.5m. He got a $42m loan.
“If the world goes to hell in a handbasket, I won’t lose a dollar,” Trump bragged in 1988. He said he had offloaded the risk by investing and borrowing against other people’s money.
But debt nearly sank Trump when a late 1980s recession undercut his risky investments in hotels, casinos and aircraft. Among the things he lost was the Plaza. The bank took it back and sold it for $325m in 1995. He never personally went bankrupt, but his real estate holdings dwindled.
After several low years in the 1990s, Trump began to rebuild his real estate business with borrowed money. He got mortgages to buy an office building on Wall Street, golf courses in Florida and New York, a home in Palm Beach.
George Ross, a senior counsel who advised Trump for 25 years, summed up the developer’s attitude toward debt
in his book Trump Strategies for Real Estate: “Borrow as much as you can for as long as you can.”
He says borrowing allowed Trump to seed his money into multiple projects at once, then fill out the rest with loans and partners’ investments, protecting his bank account and getting significant tax write-offs on interest he had to pay.
“When Trump invests in a real estate project, he typically puts up less of his own money,” Ross wrote. “Typically, his investors will put up 85% while Trump puts up 15%.”
In 2006, Trump changed his approach. He began buying land near Aberdeen, on Scotland’s North Sea coast. He paid $12.6m for the property and has spent at least $50m more to build a golf course there. Neil Hobday, a British developer who worked on the project, believed it was a personal connection: Trump’s mother was born in Scotland.
“All my conversations with him were almost on an emotional rather than hard business level,” he wrote in an email to The Post.
When the Trumps felt an emotional connection to a property, Eric said, they didn’t wait for banks and outside partners to sign off. They paid cash.
Geltner said it was unusual to see a company not bring in financial partners in either the purchase or construction of such large development projects.
Eric said when he, his brother Donald junior and sister Ivanka joined their father’s business over a decade ago, they agreed to grow the company around properties that would produce income long-term. He said they would never sell any of their properties. The Trumps plan to wait, work and eventually make their money back. – Washington Post