These are tough times in the real estate market. The Covid-19 crisis has hit asset values, particularly commercial real estate in cities such as New York. Investors holding debt with upcoming maturities are preparing for tricky negotiations with their debtors.
The negotiations will be trickier if the debtor is the president of the United States.
Virtually all of Donald Trump's debt — there is at least US$1.1 billion (NZ$1.65 billion) of it, according to his government financial disclosures and other documents — is backed by real estate, mostly linked to a small number of buildings and golf courses that form the core of the Trump business empire. About US$900m of that debt will come due in Mr Trump's second term, should he win the November 3 presidential election.
On paper, Mr Trump is not particularly levered: his net worth has been estimated at US$2.5bn by Forbes. But the economy is still on a precarious footing, and if his debts come under strain, he could play hardball with his creditors, as he has in the past.
The situation is made more pressing for the US president because his primary source of income in recent years — his work on television — "is drying up", according to an investigation by The New York Times. Citing the president's tax filings, the Times also said much of that income was invested in golf courses that are money losers. So while the president is asset-rich, it is unclear how much liquidity he has access to. The Trump Organization declined to comment.
The president's creditors can be broken into five groups.
1. Trump owes US$447m as part of his partnership with Vornado Realty Trust, on towers in New York and San Francisco
Mr Trump owns 30 per cent of 1290 Avenue of the Americas in New York City and 555 California Street in San Francisco, giving him a pro-rata share of the US$1.5bn debt on the two buildings, which comes due over the next two years. The debt is owed by the partnership, not Mr Trump himself, but changes to the value of the debt, or any default, would directly affect his equity value in the buildings. The loan on 1290 was initially made by Deutsche Bank, UBS, Goldman Sachs and the state-owned Bank of China, but they sold it years ago, and it is not clear who the creditor is now. Nor is it clear who owns the loan on California Street. Vornado declined to comment.
California Street is a 1.8m square foot office complex, and while the income from the property was down 5 per cent in the second quarter of this year, it is 99 per cent occupied, according to filings from Vornado. 1290 is a 2.1m sq ft office and retail tower in Midtown Manhattan; Vornado's latest filings do not provide up-to-date occupancy figures for it.
The value of each building has probably taken a hit during the Covid-19 crisis. Office real estate prices have fallen 5 per cent and 13 per cent from a year ago in San Francisco and New York, respectively, according to Green Street, a real estate research group.
2. The bond market: US$257m in loans taken against several of the most famous Trump properties have been packaged, along with a bunch of non-Trump loans, into commercial mortgage-backed securities
The banks that originated these mortgages sold them to a CMBS trust, bundling them with other loans and transforming them into tradable debt securities. A servicer is responsible for collecting payments from borrowers. Should borrowers fail to make a payment, a special servicer steps in to get the borrower paying again or foreclose. It is these debt collectors that could be crucial should Mr Trump's properties fall into arrears.
In total, there are four Trump properties, all in New York, split across six CMBS deals, according to data from Trepp. Most are office buildings and condominiums. The largest is a US$100m loan on Trump Tower, at 725 Fifth Avenue, which accounts for just over 10 per cent of a 2012 deal packaged by Wells Fargo.
Most of the Trump loans are small enough that they are not the driving force behind the CMBS's performance. All the properties are up to date on their payments, according to data from Trepp. There has been little apparent impact on occupancy rates since the Covid-19 crisis began.
However, one loan — the US$6.5m mortgage on the Trump International Hotel at 1 Central Park West, New York — has been flagged as being at risk after income on the property dropped dramatically. The property has two tenants, a parking garage and the now-closed Triomphe Restaurant. Should the property slip further, it will be passed to its special servicer, Midland Loan Services, part of PNC. Midland declined to comment.
3. Trump owes up to US$340m to Deutsche Bank
Mr Trump's biggest bank lender has financed his hotels in Chicago and Washington, and his Miami golf resort.
According to Mr Trump's tax returns, disclosed by The New York Times, both National Doral in Miami and the International Hotel in Washington have generated big losses. The Doral suffered US$162m in losses between 2012 and 2018, and the Washington hotel lost US$55.5m between 2016, when it opened, and 2018.
4. Trump has at least US$25m in debt with four small banks and one asset manager
All of the loans are between US$5m and US$25m. Most do not mature within the next four years. Two of them are mortgages on Trump family properties, in the New York suburbs and in Palm Beach, Florida; two are on Trump golf courses in New Jersey and Washington, DC; and one, which matures this year, is on a residential tower in Midtown Manhattan.
The New York apartment market has experienced a 17 per cent price decline this year, according to Green Street.
5. There is a US$50m debt to Chicago Unit Acquisition Trust, secured against the Trump International Hotel and Tower in Chicago
This debt is mysterious. The trust is a corporation owned by DJT Holdings LLC — that is, Donald J Trump.
Mr Trump appears to owe the money to himself. Asked about this unusual arrangement by The New York Times in 2016, Mr Trump said: "I have the mortgage. That is all there is. Very simple. I am the bank." But he is the debtor, too, and it is not a typical mortgage; it is a "springing loan", meaning it only comes due under specific conditions — typically a credit event such as a decline in credit rating. It has been suggested that this arrangement could be part of a tax avoidance strategy.
- Financial Times