What, exactly, is Donald Trump’s business? The Trump Organization is unusual in that it doesn’t appear to do the same thing for very long. It was a builder of apartments for the lower middle class, then a builder of luxury buildings and hotels, then a casino company, and, most recently, a brand-licensing firm, selling its name to anybody who wanted “trump” emblazoned on a building, bottled water, or whatever else. These are wildly different businesses. The way a company raises money, plans projects, and gains profit are entirely different in each of these fields. Middle-class housing, for example, is typically a slow, steady business in which profits come from careful cost control; luxury housing, by contrast, is riskier, with bigger and faster rewards but a higher chance of failure. One hires different sorts of accountants and salespeople and construction managers. Casinos are something else entirely, and licensing is entirely different from any of those other businesses.
It is becoming increasingly clear that, in the language of business schools, the Trump Organization’s core competency is in profiting from misrepresentation and deceit and, potentially, fraud. There are many ways to make money in real estate. The normal way is to identify a need in the market, raise money by convincing lenders or investors that your plan is sound, build the structure, then either profit through ongoing rent or by selling units. The key variables in such a business are what is known as product-market fit—the accuracy with which a developer understands the housing or commercial needs of a place—and the ability to execute well by keeping costs down without sacrificing the right level of quality. Perhaps more than anything, practitioners of a successful real-estate business obsessively focus on maintaining the ability to borrow money cheaply. The profit on many real-estate projects often comes down to simple math: the cheaper you can borrow money to build, the more money you make. The more trustworthy you are, through a long period of successful projects, the less interest banks will demand on their loans, so the more profit you can make, and the more successful you will be.
Rather famously, Trump overinvested in luxury housing, spent too much on his casinos, and completely blew his brief foray into a regional airline. Far worse, Trump did the very opposite of insuring a long record of fiscal prudence that would allow him to borrow money cheaply. Despite the company’s mixed record, it has survived and grown. It’s doing something well, so what is it?
This month, two incredible investigative stories have given us an opportunity to lift the hood of the Trump Organization, look inside, and begin to understand what the business of this unusual company actually is. It is not a happy picture. The Times published a remarkable report, on October 2nd, that showed that much of the profit the Trump Organization made came not from successful real-estate investment but from defrauding state and federal governments through tax fraud. This week, ProPublica and WNYC co-published a stunning story and a “Trump, Inc.” podcast that can be seen as the international companion to the Times piece. They show that many of the Trump Organization’s international deals also bore the hallmarks of financial fraud, including money laundering, deceptive borrowing, outright lying to investors, and other potential crimes.
The reporters—Heather Vogell and Peter Elkind of ProPublica, and Andrea Bernstein and Meg Cramer of WNYC—identified a similar pattern that occurred in deals around the world. The basic scheme worked like this: some local developer in Panama, the Dominican Republic, Florida, Canada, or some other location pays Trump, up front, for the use of his name and agrees to pay him a cut of every sale—not only of units but of things like hotel-room minibar items or, even, bathrobes. These projects typically require sixty per cent or more of units to be sold before construction gets under way. The same set of problems occurred in multiple projects. Many of the early units would be sold to shadow buyers—hidden behind shell companies. Donald Trump or, often, Ivanka Trump would deceive future investors by telling them that a much higher percentage of units had been sold than was factual. More investors pour money in, getting enough money into the project, often, to begin construction. Eventually, the project fails and goes bankrupt. Many of those investors lose all of their money. But the Trumps do not. They got paid up front and are paid continuously throughout until the day the project collapses. They are paid for their name and for overseeing the project, and, if the building is opened, the Trumps manage the property day to day, in exchange for hefty fees.
In the Panama City project, Trump licensed his name for an initial fee of a million dollars, ProPublica and WNYC reported. Trump was also paid a portion of apartment-unit sales and minibar fees. Whether the project succeeded or failed, he was paid as well. A final accounting is startling: the project went bankrupt, had a fifty-per-cent default rate, and the Trump Organization was expelled from managing the hotel, yet Donald Trump walked away with between thirty million and fifty-five million dollars.
The same pattern emerged in other projects. In Fort Lauderdale, Trump announced that a hotel-condominium project was “pretty much sold out” in April, 2006, according to a broker who attended the presentation. In reality,sixty-two per cent of units were sold as of July, 2006, according to bank records that emerged in a court case. The project entered foreclosure, and Trump’s name was removed before construction was completed. In Toronto, Ivanka referred to the property as “virtually sold out” in a 2009 interview. In fact, 24.8 per cent of units had sold, according to a 2016 bankruptcy filing by the developers. The project was built but went bankrupt, and Trump’s name was removed from it. In New York, Ivanka told reporters in 2008 that sixty per cent of units had sold in the Trump SoHo. A Trump partner’s affidavit revealed that only fifteen per cent had been sold at the time. The building was constructed, but the project went bankrupt, and Trump’s name was removed from it.
The Trump Organization did not respond to a long list of questions about its transactions from ProPublica and WNYC. The White House did not have a comment.
Many people lose in these schemes. Often a bank loses money that it has lent, or, alternatively, individual investors who bought bonds to support the project lose their money. The people who put a down payment on units often lose their down payments. When the whole thing collapsed, the Trumps, in many cases, stopped claiming—as they had during the rising period—that they were co-owners and developers of the project and began to state they were mere licensees who had no active involvement in the business. This is often untrue, as lawsuits have revealed that the Trumps were intimately involved with every aspect of construction and sales.
It is hard to understand why developers would, again and again, pay the Trumps an unusually large amount of money up front and then a significant share of profits just for their name, especially when their track record of success is so low. One explanation could be that everyone involved is bad at business. The Trumps, their partners, the banks, and others involved simply don’t do proper due diligence, don’t think through the potential risks of a project, and aren’t dissuaded by Trump’s long record of failure. Another explanation, though, is that they are good at a different business. They are not in the real-estate industry. Perhaps, the evidence suggests, some of Trump’s partners are in the money-laundering and financial-fraud industries.
Real estate has long been associated with some types of fraud. Large projects are perfect for a wide variety of schemes. There is an opportunity for fraud in exaggerating the rate of sales. The price one pays for a unit in a new building is affected by how many units were sold earlier, because a well-sold building is worth more than a less well-sold one. How much the developer has put in of its own money is an opportunity to mislead buyers as well. If a developer doesn’t invest in a project that it’s in charge of, it can suggest that it’s not as great as the developer is saying. The Trumps repeatedly lied about these two factors, ProPublica and WNYC found, telling potential investors that far more units had been sold than really were and saying that they had invested much of their own money in the projects. This increases the amount people paid and disguises the very real risks people were taking with their investments.
What is the Trump Organization? What is it good at? Where do its profits come from? It is becoming increasingly clear that much of the company’s business may have come from fraud. Daniel Braun, a former Assistant U.S. Attorney who specialized in fraud cases, told the reporters on the story, “You’re describing the basic elements of a long-running and significant scheme to defraud investors. So is that the sort of thing that the F.B.I. and the Justice Department pay attention to? It is. It has a number of kinds of ingredients that you would typically see in an investigation or even prosecution of fraud.”