Why We Took Trump Off The Forbes 400 During His Decade Of Tax Losses

Donald Trump appeared alone on the cover of Forbes magazine for the first time on May 14, 1990. The story inside offered a devastating look at his finances

Фото: FORBES

Donald Trump listed $1.2 billion of losses on his tax filings from 1985 to 1994, according to a blockbuster report released by the New York Times Tuesday. Those were high-flying years for Trump, then a young, brash businessman getting more headlines-per-square-foot than any other developer. In 1985, Trump appeared by himself on the Forbes 400 list of America’s richest people for the first time, after inventing a fake persona to lie about a transfer of wealth from his father.

Forbes fell for that ruse—taking Fred Trump off the list and listing Donald alone. But five years later, we published an explosive story, uncovering the trouble brewing inside Trump's empire. Leaning on nonpublic documents, Forbes writers Richard L. Stern and John Connolly identified the same sort of profitability problems that are still making headlines 29 years later. Forbes took Donald Trump off its list for the first time that year, explaining that a “decline in Atlantic City gaming revenues, unmasking of misstated asset values, declining real estate values and massive debt may have put The Donald within hailing distance of zero.”

Here, Forbes republishes the 1990 magazine story, putting it online for all to read:

By Richard L. Stern and John Connolly

WHAT IS DONALD TRUMP really worth? His estranged wife, Ivana, would like to know. So would his creditors, who are many. The public, fascinated with Trump's exploits and his bigger-than-life personality, relishes the guessing game. This we can say with confidence: His net worth is nothing like the $3 billion Business Week magazine estimated three years ago and has dropped considerably from our own 1989 estimate of $1.7 billion.

Forbes has obtained nonpublic documents submitted by Trump to a governmental body. In it, he lists his assets and liabilities as of May 31, 1989. The documents — which have been amended to include some more recent acquisitions — claim a net worth for Donald Trump, after deducting all debts and mortgages, of $1.5 billion.

But we think this figure is way too high. Why? Even granting his magic touch in upgrading properties, the fact is that virtually all real estate has come down in value the past few years. What is even worse for visionary types like Trump who usually operate on the come, the steady appreciation in prime properties seems to have come to a halt. He can no longer count on steady capital appreciation to help offset the relentless drain of interest costs which almost always exceed the cash flow from his properties. Beyond that, Forbes thinks that some of the values Trump assigned to individual properties in that 1989 document were unrealistically optimistic even then.

Using the list of properties contained in that document and updating it, we come up with properties that we think have a market value of slightly less than $3.7 billion and are encumbered by nearly $3.2 billion in debt. If our estimates are substantially correct — and we think they are generous — Donald Trump's current net worth is about $500 million. Does Trump command an impressive pile of assets? Yes. Do his assets exceed his debts by a comfortable margin? That's a different question.

Keep in mind that all this debt must be serviced. If we move away from balance sheets and look at cash flow, the picture gets blurrier. Take out for the moment Trump's three Atlantic City gambling casinos, and we estimate his properties carry about $1.7 billion in debt, with interest costs of about $180 million. These properties and the net income from the Castle and Plaza casinos yield, we think, about $140 million in cash flow. That leaves Trump bleeding at the rate of at least $40 million a year, $3 million a month, $770,000 a week. Fortunately for Trump, not all of this interest is being paid in cash; some is accruing. Accruing interest may save cash, but at the expense of further mortgaging the future. Clearly, Trump badly needs an additional source of coin on the realm.

Trump's great hope is that his newly opened Taj Mahal hotel and casino in Atlantic City will bring hordes of new gamblers to this decayed New Jersey resort, 125 miles from Manhattan. He will need a win of maybe $1.3 million a day just to cover his overhead and service the casino's debts of $760 million; even the equity Trump put in, $75 million, was borrowed from banks with his management contract as collateral. To achieve a $1.3 million average daily win, Trump will need to do 40% better than the top-performing casino in Atlantic City reaped last year. He's hoping not only to achieve that but also to earn hundreds of thousands a day more to help him meet obligations elsewhere. It is much too early to judge whether the Taj can realize Trump's high hopes.

The reader may ask: If his assets exceed his liabilities by as much as $500 million, why does the income from them fall so short of covering interest payments?

To see why, consider Trump's ownership of Manhattan's Plaza Hotel property, for which he paid, according to our information, $407 million. He has since spent at least $25 million renovating it. All this money was borrowed, and certainly at not less than 10%. But we estimate the maximum current cash flow from the property as not more than $26 million a year — a cash return of 6% on his investment.

Put it this way: He bought it with 10% money, but it yields him a cash return of 6%. Real estate people do deals like this because they count on capital appreciation to more than offset any shortfall of cash, but capital appreciation can no longer be taken for granted in these somewhat deflationary times. If Trump were a cash buyer, he could own the Plaza comfortably; as a leveraged buyer, he loses cash on it.

Trump began his rapid ascent to fame and fortune in the late 1970s, at a time of steadily increasing real estate values, and he hit his full stride when values were still climbing. Never mind if you paid top dollar; if it was a prestige property, as most of Trump's were, you could count on steady appreciation. Did cash flow fail to cover interest payments? Never mind, the property was increasing in value, and you could also borrow out some of the appreciation to cover your cash needs. You could even borrow on the appreciation to make a down payment on the next property. Or you could find Japanese buyers. But the Japanese have become scarce, and the steady appreciation has all but ceased.

The time has come to visit Donald Trump, and ask him how he justifies the high numbers he claims for his net worth.

Donald Trump isn't the sort of man who stays on the defensive. As we enter his 26th-floor office in Manhattan's Trump Tower, he is already on the attack: "I'm going to show you cash flow numbers I've never shown anyone before." He waves papers that he says show cash flow last year of $159 million — as against the $140 million we figured. He shows us more numbers attesting to a wealth of cash and negotiable securities but folds the page so we can't see the next column over. Can we take these with us? No. Trump, stalking around the room, says he's actually worth far more than the $1.7 billion Forbes estimated last year. How much? "Four or five billion dollars." What about liabilities? "I always talk net," says Trump.

The opening page of Forbes magazine's 1990 expose into Donald Trump's finances
Фото: FORBES
The opening page of Forbes magazine's 1990 expose into Donald Trump's finances

Let's take a closer look:

Forbes figures Trump's world-class hotel, the Plaza in midtown Manhattan, could be worth $400 million, but only if we assign an extraordinarily high multiple to its cash flow. Is any property in this market worth 15 times cash flow, especially a hotel where depreciation is a real cost? Ordinary hotels these days go for under 10 times cash flow, and world-class properties have been recently evaluated at 13 times cash flow. Trump bought the beautiful old hotel when prices were close to the peak in the realty market from Robert Bass and associates of Fort Worth, who aren't known for giving things away. Why did the Bass group sell the glamorous hotel? A knowledgeable source says Trump offered a price they just couldn't resist.

But never mind, we'll assign $400 million to the Plaza. Trump insists the hotel has increased greatly in value since he took it over two years ago. He claims that the Sultan of Brunei offered him $750 million for it in April and he turned the sultan down. The sultan aside, the evidence suggests that our $400 million figure is, if anything, a too-generous valuation.

In our April interview Trump told Forbes that he could sell the Boston-New York-Washington Trump Shuttle for $550 million, versus the $400 million he has invested in it so far. Sell it for $550 million to whom? Forbes estimates Trump paid a fair price when he bought it from Eastern Air Lines last year, and the shuttle could probably be sold for about what he paid for it but not much more. Guesses in the airline industry are that the Trump shuttle may be taking in $180 million in annual revenues. But Trump borrowed $400 million to finance the deal, including $35 million for refurbishing aircraft. Interest on the debt can scarcely be less than 10% — $40 million a year. Thus Trump would need a net return before taxes of 22% just to meet his debt. A 15% or 16% operating margin is considered extremely good in the business. There's a good chance that the shuttle is yielding Trump less than it is costing him to carry it.

Trump says he gets about another $157 million in cash each year from selling condominiums. Examining Trump's sworn net worth statements, it appears he could be valuing his condo projects at around $230 million after debt. However, Forbes estimates that the current market value is probably under $100 million; New York and Florida condos are not exactly a hot item these days.

The biggest hole in Trump's net worth claims probably lies on Manhattan's Upper West Side. In his sworn filing, Trump puts a value of $650 million on the 100 acres of now-vacant railroad yards he owns there. He paid $110 million for the property in 1985 and has neither developed the land nor won approval for any development plan. Wealthy Manhattan Westsiders have raised a war chest to fight him. They are against development. So the property is an idle asset. A year and a half ago there were talks between Trump and developer William Zeckendorf Jr. about buying the yards. Zeckendorf, however, says he never made a bid. Almost every expert Forbes talked with felt that the $650 million was a fantasy price. Its current fair market value is much closer to $200 million than $650 million.

In his recent interview with Forbes, Trump said that as of last November he owned $159 million in stock in Alexander's and municipal bonds — all unencumbered. But public documents filed with the SEC reveal that he borrowed heavily to buy his stake in Alexander's, which currently is worth $63 million, $5 million less than it cost him.

Two years ago Trump sent Forbes a document listing his personal residences — which include Mar-a-Lago in Palm Beach — as worth $50 million. But the sworn statements list total value of residences at $30 million, with debt of $40 million.

The Taj Mahal could be a bonanza for Trump — or yet another big hole. Even before the opening of the Taj, which increases the city's gambling capacity by 18%, the seaside resort appeared to have ample capacity in its 11 other casinos, 2 of them owned by Trump himself. Therefore, Trump counts heavily on the glitter of the Taj to draw a new, larger audience.

The Taj opened Apr. 5 to good crowds — a promising but inconclusive sign. Clearly, Trump remains nervous and is highly sensitive to any questioning of the casino's prospects. Days before the opening, Trump frightened executives of the small Philadelphia-based Janney Montgomery Scott & Co. into firing gambling analyst Marvin Roffman. The analyst, who once was a paid expert witness for Trump, had said, both in writing and in talks with reporters, that the Taj couldn't produce the average daily win of $1.3 million that Roffman estimates Trump needs to cover the Taj's capital and operating costs.

Yet Roffman's numbers cannot be dismissed lightly. With 7,000 employees, the Taj has a very high overhead. On top of that it must carry interest payments of about $100 million a year — nearly $275,000 a day.

If it is a great success, the Taj will almost certainly hurt the other two Atlantic City casinos that are so important to Trump's solvency. During the first three weeks of the Taj's operations, the win at the Trump Plaza was down 12.3%, and the win was down 1.7% at the Trump Castle. Meanwhile, the Castle and the Plaza are encumbered with debt, including junk bonds, of $683 million. The Trump Plaza has been a real winner and last year generated $24 million in net profits. That could have gone a long way toward covering deficits elsewhere in the Trump empire.

The Trump Castle, also in Atlantic City, is a less happy picture for Trump. It slipped into the red last year to the tune of $7 million. Part of the loss is attributable to the nearly $5 million that Trump charged to the Castle for his yacht, the Trump Princess. But even without the cost of leasing the yacht from another Trump company, the Castle lost money.

Last year Trump had to put $5 million into the Castle. Trump attributes the Castle's 1989 losses to construction that temporarily kept players away, but documents filed with the Securities & Exchange Commission warn that in 1990 the Castle will continue to require infusions of capital for operating expenses.

Trump is a gambler, a gambler with a fantastic win record. Right now he's gambling on hitting it very big in Atlantic City. If the Taj proves to be the world's most successful gambling casino, he may be able to overcome the drag of an eroding real estate market and the burden of billions in high-cost debt. He's probably counting, too, on a stock market that will allow him to offer a minority equity interest to the public in a triumphant Taj and his other casinos. He could then use the proceeds to restore liquidity to the rest of his empire. But all this — a giant win at the Taj and a stock market more hospitable to new offerings — is on the come.

When Donald Trump looks back some day, this artist of the deal may well remember 1990 as the toughest year of his life.

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