Monday, December 3, 2007

Trumpy trump trump trump, trumpy trump trump trump, look at Donald go....

Yesterday the Tribune had a lengthy story titled "Towering Troubles?" about the Trump International Hotel & Tower going up at the former site of its competitor. It asks pointedly whether people are going to show up when The Donald gets his certificate of occupancy for the hotel floors, triggering the first round of closings for the condotel portion of the project. The story goes on to talk about throwing more equity into deals to keep lenders happy as well as the state of this high-end market in general, including the fact that two major projects are stalled for financing reasons. But they are not this far into the sky.

Here's the reality, or at least my take on it. I've come out publicly to say I am no fan of Trump's tactics, especially related to dumping the friends and family buyers. (He might have another side of the story, I understand, but this is just what I read.) And even though The Trump Organization hires small firms like mine, I don't think I'd ever work for the guy or someone of his ilk. But Donald's going to come out just fine on this, and here's why.

The sales will probably go all right. But let's say for the sake of argument that 30% or even more of the buyers dump out on the deal and walk away from the closings. In addition to keeping the earnest money as liquidated damages, you then rent out the hotel rooms (which will probably have very high occupancy when the hotel opens), don't share profit and then use those revenue numbers to sell to new buyers, probably at the same or a higher price. Trump also probably has the funds to pump in more equity if need be.

Finally, let's just say for the heck of it that the whole darn thing goes bust. According to the Trib, Trump says he has $40 million in equity, and then there's a $640 million construction loan with Deutsche Bank and a $135 million mezz loan. Let's go on to say that hypothetically the lenders foreclose and there's no workout, and the guy is wiped out of his entire equity position (in which event maybe you still get some licensing revenue for the name if you want to keep it). Even in an absolute worst-case scenario, if Trump loses the whole $40 million or even a little more, let's go to relative terms. If Donald's net worth is $2.9 billion per Forbes (Trump says it is $6 billion), you are looking at roughly 1.4% of his net worth. Think about that compared to your own net worth.

Now, of course, there is one huge, key assumption here: that Trump's loans are all non-recourse, meaning that if there is a default the lenders cannot go after him or even his companies personally. The sole recourse for the lenders would therefore be against the property. (There are usually exceptions for this for fraud or environmental issues, by the way, but let's stay on track. I can talk about non-recourse debt another time.) As I recall, Trump is on record as saying that after his workouts in the 1980s he doesn't do recourse deals any more. And I believe him.


BawldGuy said...

I'm not a fan of The Donald either. That said, though he's certainly made mistakes, his learning curve is nearly vertically straight up.

I think you called this one pretty close to the bulls eye.

David Stejkowski said...

Thanks for the kind words...sometimes you learn from your mistakes! Having that kind of recourse debt could affect your sleep, but then again that is our business.

Lisa Michelle Galley: said...

Oh the Donald... having officed near one of his buildings in a prior life - and witnessed the throngs of people coming by to buy Trump Water and Apprentice trinkets, I agree that he may have the dough to pony up if it ever got that bad with his condos. Whether he actually would pay up is another matter. Thanks for the update.