A refresher on Trump real estate finance

With the recent New York Times publication of an investigation into Donald Trump’s early-1990s taxes, a lot of bad information has bounced around social media from both Trump’s supporters and his detractors. I wrote a four-part “primer” about how Trump real estate finance works last April, plus a follow-up in May, but this post is a “TL;DR” for those who didn’t make it through the series.

Here is my short summary of what is really going on:

Reality #1. Almost all big real estate developers intentionally show tax losses on their new developments, mostly due to the “non-cash” expense of depreciation, which reduces taxable income without hurting (and sometimes actually helping) the actual flow of cash from the project. But that is the smaller part of what is happening here.

Reality #2. These properties still need to generate a positive cashflow at a very early stage, otherwise they “go south” quickly. The available data clearly indicate that Donald Trump properties frequently did not, and still do not, make this cashflow bar. In other words, a significant chunk of the $1 billion in losses reported over the decade of 1985 through 1994 were very real losses, and not just “tax write-offs” from depreciation as widely claimed. The reported losses far exceed any reasonable estimates of depreciation on his properties.

Reality #3. Another key aspect of standard real estate finance practice is that those “tax losses” need to be offset against other taxable income, for instance older projects that no longer have the depreciation write-offs and just pump back taxable cash to you. This was the “Fred Trump” model of making money off housing developments. In other words, you want the “bottom line” on your business tax return to be zero, not negative. While you can “carry back” and “carry forward” losses to past and future years to offset taxes paid, you still need some profitable years in order to make this strategy work. There is no evidence so far that Trump was able to do this effectively. Never confuse a “tax strategy” with “stupidly losing money.”

Reality #4. Tax returns typically show accounting income and losses (also called GAAP income [1]), adjusted for special IRS rules such as accelerated depreciation. It is very difficult, however, to get a clear view of actual company cashflow, either in or out, just from tax returns without seeing not only the underlying schedules, but also detailed information from subsidiary companies feeding that return. Trump has some 500 of these subsidiary LLCs, partnerships and other business entities, often set up specifically to obfuscate cashflows and income.

Reality #5. That said, some apparent cash inflows do pop up in this reporting and they indeed beg the question as to their sources. For instance, in one year Trump showed a $52.9 million “windfall” in interest income, an order of magnitude greater than any interest income previously reported. Trump has little history of owning interest-earning assets, especially in those years, large enough to generate that level of income. There may be a simple explanation for that, but it is enough to perk of the ears of any auditor.

Reality #6. Questionable cashflows continue to be the big unknown factor in Trump finance. Condominium property purchases often appear to be financed with foreign cash of dubious provenance. He has more recently bought properties like golf courses supposedly for cash, but the estimated Trump cash spin-off does not appear to support the level of cash required to make these purchases. And where there are questionable cash inflows from questionable sources, there are bound to be “collateral arrangements” of the type that are not disclosed through normal registered mortgage agreements.

Reality #7. Donald Trump has a long history of overstating asset values by ridiculous amounts, an assertion not just made in Michael Cohen’s testimony to Congress, but also by the financial magazines Forbes and Fortune. Trump often confuses gross revenues with much smaller net revenues, and states gross asset values for properties that either he does not completely own, or which have substantial loans against them.

I first came across Donald Trump in the 1990s when the publishing company I was working for had acquired a small New York legal publisher, and I was part of the team assigned to work on merger details. Lawyers working for the New York firm told us of a standard business receivable owed to them by the Trump Organization for product sold, but in trying to collect it they were aggressively threatened by someone working for Trump. We quietly wrote off the debt and moved on. Only this year did I learn from Congressional testimony that this was part of Michael Cohen’s job (although in this case it was likely a predecessor making the threats).

We knew then that Donald Trump was part con-man, part Mafia-style goon, and certainly not as rich as he always claimed. Nothing has changed.


Notes:

  1. GAAP stands for generally accepted accounting principles, which are the accounting rules that must be followed in order to “pass muster” through both the outside auditing firms (e.g., KPMG and PricewaterhouseCoopers) and the Internal Revenue Service.

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