US ELECTION – The future of Trump Inc

Donald Trump is a trouble-prone executive with a knack for reinventing himself after business setbacks. His presidential campaign has hurt his brand in some industries but created opportunities in others. By Gary Silverman

Last month, D  onald Trump’s tongue slipped. Addressing a rally in Florida’s conservative panhandle region, the Republican presidential candidate implored his supporters to “make sure you get out and vote November 28”.

Election day in the US is November 8, so Mr Trump’s gaffe triggered the inevitable chattering-class chortling. But Freudians of the political firmament sensed the stirring of his subconscious. Win, lose or draw at the polls, Mr Trump, the business executive, has reason to worry about what happens on November 28.

On that day, Mr Trump – possibly as president-elect – is scheduled to face trial in a federal court in San Diego, California, in a civil suit accusing him of fraud in the operation of his Trump University. Students who paid up to $34,995 per course for a “complete real estate education” from Mr Trump’s “handpicked” experts claim they were instead pushed into paying for as many seminars as possible by instructors who often had no background in property and had never met Mr Trump. He has denied wrongdoing, claiming his students have been happy with the school.

The suit has figured prominently in the presidential race since Mr Trump made an issue of the ancestry of the judge in the case, Gonzalo Curiel, who was born in the US to Mexican parents. Mr Trump, who has pledged to build a wall on the Mexican border to keep out illegal immigrants, said Mr Curiel’s heritage and membership of a Latino lawyers group translated into “an inherent conflict of interest”.

But the San Diego showdown also underscores the unique character of Mr Trump’s candidacy. At the same time as Mr Trump is trying to persuade Americans that his career as a property developer, casino operator, show business personality and celebrity endorser qualifies him to run the country, he is fighting on multiple fronts to defend his business practices and to prepare his family enterprise for a post-election reality.

Business blow
It is unusual, if not unprecedented, for a major party presidential candidate to be carrying so much business-related baggage into the final days of a campaign. But it is standard operating procedure for the 70-year-old Mr Trump. For decades, he has been an up-and-down, trouble-prone executive, distinguished by an undeniable capacity for reinvention. If there is any precursor for him in US history, it is not Henry Ford or Warren Buffett. It is Harry Houdini. Mr Trump is an escape artist.

Should he beat his Democratic rival Hillary Clinton and make it to the White House, Mr Trump will have to work his old magic in a new place. The Supreme Court has ruled that presidents enjoy no immunity from civil litigation in matters that took place before their election. An analysis by USA Today published last month found 75 current lawsuits involving Mr Trump, including an action filed by New York’s attorney-general alleging that Trump University defrauded customers out of $40m.

“It’s a mess – he’s going to be subpoenaed [and] deposed,” says Richard Painter, a former chief ethics lawyer for President George W Bush. “He’s a litigation magnet and there’s no relief because you’re president. The Supreme Court has held that.”

The election campaign has already spurred a recalibration of the Trump brand. Mr Trump has emerged as a champion of angry white Americans. But his stock has fallen with people upset by his recorded boasts about grabbing women’s genitals without their consent and racial comments of the kind he made about Mr Curiel.

The damage is being done to Trump businesses that cater to a more general audience. Residents of Trump-branded apartments in New York are circulating a petition seeking to strip his name from their homes. A boycott is being organised – #GrabYourWallet is one Twitter hashtag – against retailers of his daughter Ivanka’s clothing line, including Amazon. His hotels are losing customers, such as Adrian Gonzalez, a US baseball star born in California to Mexican parents, who refused to stay at a Trump hotel when his Los Angeles Dodgers played in Chicago in May.

In an apparent recognition of the new climate, the Trump Organisation said in September that it would open a hotels line under the name Scion – rather than the formerly all-purpose Trump brand.

Mr Trump’s emerging opportunity is in the media world, where bad blood can be a selling point. As his campaign headed into the home stretch, Jared Kushner, Mr Trump’s son-in-law and adviser, approached a leading US media banker to sound him out about setting up a Trump television network.

Mr Trump, who has said he would put his assets into a trust overseen by his oldest children if elected, has denied interest in starting a media company. But the size and loyalty of his audience positions him for television ventures, direct marketing offerings, more political activity or some combination of the three. Campaign officials told Bloomberg Businessweek that by November 8, they expect to have email addresses for 12m-14m supporters. By comparison, Apple Music claims 17m subscribers.

The irony for Mr Trump is that his commercial quandary resembles the one he faced as a young man born to one of New York’s richest property developers. From the start, Mr Trump’s career was marked by tension between his theatrical instincts and the prosaic tendencies of the business begun by his father Fred, who left a fortune worth an estimated $250m-$300m when he died aged 93 in 1999.

Fred Trump built drab apartment buildings in Brooklyn and Queens, often using Federal Housing Administration financing secured with the help of his allies in the Democratic party. Young Donald dreamt of being an actor, and at 23 served as a producer of a 1970 Broadway comedy called Paris is Out! that failed at the box office.

Mr Trump’s solution was to embrace the family business and remake it in his own image, marrying his pizzazz to his father’s political pull and financial heft. With a tax break obtained with help from Fred Trump’s friends in City Hall, Donald Trump planted his family’s flag in Manhattan, combining with Chicago’s Pritzker clan to transform the rundown Commodore Hotel on 42nd Street into a glittering Grand Hyatt.

That set the stage for Mr Trump’s 1980s star turn. He took on more than $3bn in debt – $832m backed by personal guarantees – to accumulate showpiece assets: Trump Tower, the Plaza Hotel, the New Jersey Generals American football club, an eponymous airline and three casinos in the gambling capital of Atlantic City among them.

Missing was a sufficient regard for the economic cycle. According to Mr Trump, his father told him everything he touched turned to gold. In Atlantic City, his son acted as if he believed him. Even as the economy stumbled in the late 1980s, he built a third casino, the junk bond-financed Trump Taj Mahal. When industry analyst Marvin Roffman said in 1990 that he doubted there were enough customers for all the Trump pleasuredomes, Mr Trump called up his boss and demanded he be fired. Mr Roffman was subsequently dismissed.

Mr Roffman, who sued Mr Trump and reached an undisclosed settlement, was correct. The Taj filed for bankruptcy in 1991. Depending on the methodology, it was the first of either four or six Trump corporate bankruptcies.

Leading New York banks still avoid Mr Trump. Current mortgages on such high-profile Trump properties as 40 Wall Street and the commercial space at Trump Tower came from a lesser-known lender called Ladder Capital. Founded in 2008, it has been backed by investors ranging from TowerBrook Capital, a private equity firm founded by former executives at Soros Fund Management, to Meridian Capital, a New York mortgage broker started by former executives of Gelt Funding (“gelt” is a Yiddish term for money).

“He was very involved with the big banks during his Atlantic City days, but none of that worked out well for the banks,” says Roy Smith, a former Goldman Sachs partner who is a professor at the New York University Stern School of Business. “I don’t know anyone in a top position at a major publicly traded financial firm who is for him.”

Mr Trump appears to have crawled out from his corporate wreckage with the help of extraordinary accounting. In general terms, a borrower who fails to pay back debts would be expected to produce losses for his creditors – not himself. Moreover, cancelled debt is viewed as income by US tax authorities. Nevertheless, Mr Trump listed a $916m loss on his 1995 personal income-tax returns, enabling him to shield an equivalent amount of income from taxation over an 18-year period.

Financial makeover
Documents revealed this week by The New York Times suggest he might have been able to avoid reporting cancelled debt by swapping interests in his holdings – known as partnership equity – for debt he was unable to repay. That could create the appearance that his obligations had been satisfied. The NYT said letters from Mr Trump’s tax attorneys questioned whether any law, regulation or court ruling permitted the manoeuvre. A Trump representative says the newspaper’s analysis “suggests either a fundamental misunderstanding or an intentional misreading of the law”.

Less debatable is that Mr Trump’s financial engineering bought him time for a business makeover or two. His first move in the early 1990s was to double down on Atlantic City, shedding other assets to keep control of his casinos. That strategy worked until the emergence of competitors on Native American reservations and in other states undercut Mr Trump and forced him to cede control of his casinos.

By that time, Mr Trump was playing another role – as the reality-television version of himself on NBC’s The Apprentice and The Celebrity Apprentice from 2004 to 2015. His celebrity enabled him to license his name for uses ranging from Trump-branded condominiums to “Success by Trump” cologne.

In the process, Mr Trump became the rare soul who could have his cake and eat it, too. While earning $213.6m playing a successful developer on NBC, he was able to shelter income using losses he incurred as an unsuccessful developer in the previous century.

As of June 30 2011, Mr Trump reported a net worth of more than $4.2bn and “liquidity in excess of more than $250m”, according to a Securities and Exchange Commission filing for a bond backed by Mr Trump’s mortgage on Trump Tower and other properties. Since then, he has said he is worth more than $10bn but has declined to release his full tax returns.

The question looming in San Diego is whether Mr Trump’s strategy in recent years of slapping his name on so many businesses will cost him in the long run. The suit filed by Trump University students seeks their money back, plus damages.

Their case has been buttressed by testimony from former employees describing pressure-sales tactics at the school, which was never licensed and eventually changed its name to the Trump Entrepreneur Initiative under pressure from regulators.

“Trump University was only interested in selling every person the most expensive seminars they could possibly buy on credit,” claimed Corinne Sommer, a former events manager for Trump University in New York. “Some consumers  . . . showed up who were homeless and could not afford the seminars, yet I overheard Trump University representatives telling them: ‘It’s OK; just max out your credit card.’”

Mr Trump’s defence leans heavily on assertions that he had little to do with the day-to-day operations of his school. His lawyers are also moving to make sure his extracurricular activities as a politician are kept from the jury. Last month, they moved to exclude evidence relating to Mr Trump’s campaign speeches, “comments about this case or the court”, tweets, tax issues, “personal conduct accusations”, beauty pageants, casinos and corporate bankruptcies.

The sparring points to perhaps the only certainty about Mr Trump’s forthcoming trial and his wider business affairs. Both promise to be complicated, controversial and compelling. The results will make for good television – perhaps even Trump Television.

Speed read

Post-election reality The Republican candidate will have to fight on multiple fronts to defend his business practices

Frontline hit The campaign for the presidency has caused damage to some Trump businesses

San Diego test Trump’s lawyers aim to keep his political evidence, such as campaign speeches, from the jury

Copyright The Financial Times Limited 2016

(c) 2016 The Financial Times Limited