President Donald Trump: a very polarizing figure whose wealth lies at the heart of his
public persona.
For decades Trump has presented himself as a self-made billionaire who started out with
nothing more than a million-dollar loan from his father.
And yet, as it turns out Donald’s father, Fred Trump, had a much bigger part to play
in his son’s rise to prominence.
In this video, we’re gonna look behind Trump’s billions, to see how he really got his real
estate empire.
This video is brought to you by Cheddar, who just released an awesome video on how some
of the most expensive apartments in New York City pay less property tax than your average
home.
Find out how by watching their video.
The story of Donald’s wealth starts almost a century ago with the rise of his father.
Fred Trump was a true hustler.
Having lost his father at the age of 12, Fred had to learn how to work and the industry
he got into was construction.
He had built his first residential house by the time he was 20 and he got into this business
at a very opportune moment.
You see, President Roosevelt had just signed the New Deal, which among other things wanted
to encourage residential construction, providing very cheap loans and subsidies that Fred was
very eager to take.
In fact, from the 1930s onwards America enacted housing subsidy after housing subsidy, starting
with the New Deal, then with military housing during World War 2 and finally with the post-war
housing boom enabled by the GI Bill.
As the American home ownership rate jumped by 20% in the span of just 3 decades, Fred
Trump amassed a fortune, largely enabled by the vast sums he received from the government.
In 1949 alone the FHA gave him a $26 million loan to build two apartment complexes in Brooklyn:
Shore Haven and Beach Haven.
What’s interesting though is not that he got rich using government money, which is
actually pretty typical, but that he began a massive campaign of funneling money to his
children when he was just 40 years old.
The numerous methods he used were simple, but effective.
Before building those two apartment complexes in Brooklyn, Fred purchased the land they
would be built upon using his company.
He then created a trust whose beneficiaries were his children and he donated the land
to the trust.
Now because Fred’s construction company was no longer the owner of the land he would
have to lease it from the trust through a contract known as a ground lease.
Under this contract, the trust would receive over $60,000 a year for the next 99 years,
creating a steady stream of income for Donald who at the time was only 3 years old.
But the ground leases were just the beginning because over the next twenty years, Fred would
start to transfer the buildings themselves to his children.
He’d buy a plot of land through an empty corporation, building apartments on it with
government money and the he would gift the company’s shares directly to his children.
Now, this isn’t a very complicated scheme: in fact it actually incurs a lot of gift tax,
which Fred doesn’t seem to have paid.
If you go through his tax returns it shows that he paid gift tax on only one out of the
eight buildings he transferred this way.
He built it through a partnership for $2.5 million in 1968 and a year later he gifted
15% of the partnership to each one of his children.
If you do the math the gift tax should come close to $100k, but he only paid six and a
half.
Of course, it’s worth noting that Fred Trump has been pursued by the State of New York
multiple times during the 50s and 60s for underpaying his taxes.
Despite these issues though, he had no problem obtaining millions of dollars in subsidies,
no doubt thanks to his political connections.
In fact it is during this period that Fred built his greatest project, the Trump Village,
for which he received $50 million from the State of New York and which he would also
pass down to Donald through questionable means, but that happens later.
After graduating from college in 1968, Donald of course went to work for his father and
this is when the wealth transfer really kicked into high gear.
In 1972 Donald and his father formed a partnership to secure an $8 million loan to build Prospect
Tower.
Interestingly enough, even though it was Fred who did all the work, most of the profits
went to Donald.
On top of his share from the partnership, he was receiving consultancy and management
fees, as well as everything tenants paid to rent air conditioners.
By 1975 Donald was getting over $300k per year just from that building and if you sum
up everything else, by the time he was 29 he had pocketed $9 million from his father.
Of course, Fred’s goal wasn’t just to enrich Donald, but to build up an image for
him to help start his career.
A 1976 profile of Donald put his net worth at $200 million, when in reality the projects
he was claiming as his own were really his father’s.
At the time, Donald was the president of the Trump Organization, which carried with it
a hefty salary, but on top of that he was constantly receiving loans from Fred.
In 1979 Donald received loans for a total of $3 million from his father’s companies
and the way these loans were structured is very interesting.
They did come with a certain amount of interest, but it was paid back as soon as the loan was
taken out and because the loan had no repayment plan Donald was free to keep the money indefinitely.
These loans and many more came flooding into Donald’s wallet when he began his first
project in Manhattan, converting the Commodore Hotel into the Grand Hyatt between 1979 and
1980.
The exact same loans would appear a second time when Donald was building Trump Tower
between 1980 and 1983.
During this time Fred masterminded another scheme for his children.
Using multiple trusts, he’d buy off the mortgages of at least 14 of his properties
and he’d transfer them to the trusts, whose beneficiaries were, of course, Donald and
his siblings.
Effectively, during the 80s Donald became his father’s banker, even though he never
actually provided mortgage loans, he just pocketed the interest payments.
By the end of the 1980s all the distribution methods had transferred nearly $50 million
to Donald from his father’s empire, but that only emboldened him to take even bigger
risks.
In 1988 he bought the Plaza Hotel for over $400 million and a year later he spent over
$350 million on Eastern Airlines, which he quaintly named Trump Shuttle.
Most famous of all, of course, is Donald’s entry into the casino business in Atlantic
City.
While that story is vast enough for a whole video on its own, what matters is that when
Donald’s casinos started failing in the early 1990s it was Fred who propped things
up.
He personally gave Donald millions to prevent his casinos from defaulting on their debts
before bankruptcy proceedings could restructure them to give the casinos more time to repay
the loans.
For example, Fred’s personal income skyrocketed by an order of magnitude to $50 million, which
incurred a tax bill of $12 million.
During this time he made no significant debt payments or charitable donations, and a frugal
man like him would never just pay taxes because he could, so the money must have gone somewhere.
Around the same time, one of Fred’s employees went to the Trump Castle casino, bought $3.35
million worth of casino chips and left without placing any bets.
Another technique Fred used was to actually buy stakes in Donald’s properties and then
to resell them back to him at loss a few years later.
In 1987 he purchased 7.5% of Trump Palace, a 55-story building in Manhattan, for over
$15 million.
Just four years later Fred sold back his entire stake for just $10,000 on the pretext that
the business was failing even though it wasn’t.
In fact, that very same year Trump Palace sold 57 condos for over $50 million total.
In the early 1990s, however, Fred’s health began declining and he even started exhibiting
symptoms of dementia.
Because he still hadn’t transferred the majority of his wealth to his children he
began an impressive program to syphon everything he had left to them without paying estate
taxes before he died.
In 1992 his children incorporated a maintenance company which immediately became the subcontractor
for all of Fred’s buildings.
All the millions of dollars Fred’s properties spent on repairs and improvements started
going through this one company and they all incurred a large markup.
During the next few years the costs for Fred’s empire went way up.
In the case of Beach Haven, trash-compacting services increased in price by 64%; janitorial
supplies went up by 100%, and plumbing increased by 120%.
In 1994 Donald and his siblings also became the managers of Fred’s buildings to further
drain cash from his empire.
By 1999 the methods Fred masterminded were providing each one of his children with $2.2
million of income per year.
Eventually, when the day came to transfer the properties themselves, the only thing
that mattered was at what price the buildings would be valued and to that extent Donald
and his siblings hired a notorious real estate appraiser to help them out with their problem.
Using a variety of methods, he brought down the price of 25 apartment complexes with 7000
units to just $40 million.
The most hilarious method of all was the way he calculated two of the buildings in Trump
Village to actually have a negative value.
You see, in 1992 Fred removed those two particular buildings from an affordable housing program
so he could raise rents, but in doing so he lost a tax exemption they had under that program.
This created a one-time accounting charge that, if you base your valuation on it, makes
the building appear unprofitable even though it definitely wasn’t.
In the end, transferring Fred’s entire real estate empire cost him $20 million.
When Fred died in 1999 he had just $2 million in the bank and all the properties he had
spent seven decades to assemble were now in the hands of his children.
Here’s the funny thing though: just five year later, when Donald’s Atlantic City
casinos were once again nearing bankruptcy, he convinced his siblings to sell the entire
portfolio.
In early 2004, Donald and his brothers and sisters sold off the empire their father had
spent his entire life assembling to a New York City real estate investor for $700 million,
officially bringing an end to the legacy of Fred Trump.
Of course, since then Donald has continued doing business and today his net worth is
estimated to be around $3 billion, so clearly even though he got an immense kickstart from
his father, he did achieve a lot on his own.
And with regards to the legality of Fred Trump’s tax-avoiding methods, even if they turned
out to be criminal, the statute of limitations for them has long since expired, so Donald
can only be fined with penalties.
Speaking of tax avoidance, New York City is ripe with it, so much so that the owners of
apartments worth hundreds of millions pay less in property taxes than the average home,
sometimes as low as 0.017%.
If you’re curious how they’re getting away with it, you should head on over to Cheddar,
who did an awesome video on exactly this topic.
If you don’t know, Cheddar’s channel is the home to numerous fun videos that cover
business and technology and if you haven’t seen them you should definitely go and check
them out and even consider subscribing.
In any case, thank you for watching.
You’re gonna see me again in two weeks, and until then: stay smart.