A brief Twitter flurry recently has been pondering the reason for the odd-looking sale of storage units between different Trump Organization entities for the price of zero dollars. The most-likely reason: Collateral management.

An appropriate subtitle for this post is “What does Eric Trump do all day?” In an earlier post I laid out the most-likely basic financial strategy and structure of Trump’s real estate holdings. I noted there that the basic trick is to keep taxable accounting profits low or negative while at the same time keeping cashflow positive in order to pay for “creative” financing arrangements and “lifestyle.” The focus on this post is to delve deeper into the primary messy consequence of this strategy for owners and managers: Complex collateral arrangements require constant and careful cashflow management.

In short, most Trump properties are collateralized in legally-complex ways, and mostly with private non-bank entities, both domestic and foreign. Trump has not been able to get conventional bank financing since he screwed over a lot of people in the Atlantic City casino debacle in the early 1990s. Even the one big bank name remaining, Germany’s Deutsche Bank, has used their high-risk and controversial “private wealth management” unit to finance some properties while sheltering the main bank holdings. [1]

Private financing arrangements typically come with higher-than-market interest rates and very customized collateral conditions – restrictions on how the properties can be used, and in how generated cash must be prioritized for payback. And thus, somewhat like the sport of curling, there is a lot of “sweeping” typically going on, in this case to move assets in an out of collateralized arrangements to meet various cash flow conditions, covering both cash coming in and going out. This, I maintain, is what Eric Trump spends an inordinate amount of his time doing, rather than “making deals.”

This strategy of complex financing was brought to new heights by Jeffrey Skilling, CEO of Enron up until its collapse in 2001. Enron mastered the use of SPVs, or “Special Purpose Vehicles” (sometimes called “Special Purpose Entities”) that shelter risky investments from each other in the case of failure, collateralize assets in various groupings, hide beneficiary ownership, evade taxes, and accommodate “big money” investors with a minimum of disclosure and transparency.

If we dig into the Trump Organization, we will find an estimated 500 business entities of different types:

1. Domestic or foreign corporations, but only where necessary. Because of tax and disclosure issues, most real estate developers avoid these where possible.
2. Limited liability companies and partnerships. These structures have become preferred alternatives to corporations in the U.S. as they combine the benefits of pass-through taxation of a sole proprietorship or partnership with the limited liability protections of a corporation (all of which are paid for by the taxpayers and other “stakeholders,” by the way) and with much less public scrutiny.
3. Traditional partnerships and trusts. These are used where the above two are not options due to national laws, or in the case of Enron, where they were handy for “offshoring” assets in the Cayman Islands and other tax havens.

While Donald Trump has said that he has no investments in Russia, he has never said that various Russian financial sources do not have investments in him. Son Eric has been quoted as saying, “We don’t rely on American banks. We have all the funding we need out of Russia.” [2] Other Trump properties have been financed with investors, or their money, originating in the other former Soviet republics as well.

Not only are SPVs useful in funneling money to finance real estate projects by obscuring the source of the cash, but they are also very useful on the customer side as well, for instance in purchasing condominium properties in Trump developments. Once cash of dubious origin in invested in a U.S. property, it becomes “clean,” and the property can then itself be used to borrow more “clean” cash from conventional banks in the U.S. This is a likely one explanation for the number of Trump properties that seem to sell at a premium over market prices.

And so, it is not uncommon in real estate developers to see new SPVs like these created, bought, sold, and closed nearly every day in order to deal with changing collateralization demands by investors, tax issues, and cash flow “hiccups.” Despite the strategy, up to half of projects in a real estate portfolio may be “cashflow negative” at any given point in time. Indeed, keeping the cash moving to stay one step ahead of defaults from these “cash sinks” often literally IS the primary job of top management for developers of projects in jeopardy, and some Trump projects are clearly in that category. For the Trump Organization right now, that key “money mover” appears to be Eric Trump.

Part Three of this series has been posted.

An updated and summarized version of this series is posted here.

Notes:

1. Harding, Luke, and Nick Hopkins. “Bank That Lent $300m to Trump Linked to Russian Money Laundering Scam.” The Guardian, 21 Mar. 2017.
2. Nguyen, Tina. “Eric Trump Reportedly Bragged About Access to $100 Million in Russian Money.” The Hive, Vanity Fair, 26 May 2017.