Trump

by Donald J. Trump

  It was a very strange situation. As I sat in Jerry’s office, I wasn’t sure who was more eager to break up the deal: my lawyers or theirs.

  As it turned out, the Hilton team was more than two hours late in getting back, which only confirmed my suspicions. By the time they finally showed up, around three-thirty, I was convinced that the only way I’d get the deal done was to shame them into doing it. I stood up and began my pitch. How could they shake my hand and then not stand by the commitment? How could they negotiate for three days and then walk away? How could they force me to spend hundreds of thousands of dollars on lawyers and not follow through? It was a disgrace, I said. It was immoral, it was wrong, it was dishonorable.

  My tone was more hurt than outraged or angry. I can be a screamer when I want to be, but in this case I felt screaming would only scare them off. Much of the deal had already been negotiated, and under the circumstances, unless I gave Hilton a good excuse, it would be hard psychologically for them to walk away. It’s also possible, of course, that Hilton’s hard line was all a pose—a way of trying to ensure that they closed the deal with as few contingencies as possible.

  In the end, we reached a compromise. They would use their best efforts to ready the hotel for opening, and they’d agree to completion of a specific “punch list” of unfinished items. Also, they would allow me to hold back $5 million of the purchase price, subject to the facility’s being delivered complete and in first-class condition, as defined in specific terms in the contract.

  I assumed the construction was sound. If it turned out that I was wrong, and the defects I discovered ended up costing an additional $30 million, I believed Hilton would still be legally responsible. At 9:00 P.M. on April 27, 198S, we shook hands and signed a formal contract. I turned over a nonrefundable $20 million deposit, and we set our closing for sixty days later.

  On May 1, I made my first visit to the facility I’d just purchased for $320 million. As soon as I walked in, I sensed I’d made a good decision. Much work remained to be done, but it was a spectacular-looking building. Immediately I began pushing all my people-very hard. Over the next six weeks we managed to accomplish what it had taken most other casinos as much as a year or more to do. We got our temporary certificate of occupancy, we finished the vast paperwork for our licensing, we hired 1,500 employees over and above those Hilton had hired, and we got the hotel and casino ready for opening.

  We also settled on the name Trump’s Castle. My first choice had actually been Trump Palace, but then Caesars Palace filed for an injunction on the grounds that it had exclusive rights to the name Palace. I decided it just wasn’t worth a battle. We needed to get marketing and advertising campaigns under way, and the last thing I wanted was to be forced to make a name change after we’d already spent millions promoting Trump Palace. Ironically, no sooner did I announce my intention to call the facility Trump’s Castle than Holiday Inns filed their own suit to prevent me from using the name Trump at all on a competitive casino. Within weeks, however, the suit was thrown out.

  Even before we opened Trump’s Castle, I began discussions with several investment banking firms about floating a bond issue to replace my bank financing from Manufacturers Hanover. I wanted to take myself off the hook personally, even if it meant paying a higher interest rate to do so. The major problem with floating a bond issue was that Trump’s Castle had no performance record by which anyone could calculate how much debt it could reasonably handle. Also, the Trump Organization had no track record running a casino, since we’d yet to manage one ourselves.

  In short, anyone who bought Trump’s Castle bonds was making a leap of faith. They were betting that we’d make the facility highly successful from the start. That was the only way we could meet a debt service in the range of $40 million a year. To put that in context, there were several existing casinos in town that couldn’t come close to supporting that kind of debt service.

  Somewhat to my surprise, several investment banking firms bid for the right to handle my offering. In return for a percentage of the total offering, they would guarantee to find buyers for the bonds at a specified price. Among the bidders was Drexel Burnham, which invented the concept of high-yield, junk-bond financing. But Bear Stearns, with whom I’d already done a lot of business, offered to raise $300 million, or nearly 95 percent of the total I needed. Alan Greenberg, the chairman, and Paul Hallingby, managing partner, were willing to bet big on me, and I liked that.

  To attract buyers for a speculative offering like this one, you generally have to offer the inducement of a high yield. The bonds Bear Stearns prepared carried about the same yield as other casinos had offered on their own financings, but those casinos had track records and offered far stronger guarantees to buyers.

  Bear Stearns did a fabulous job—I got a good deal, but so did the buyers. Anyone who bought the bonds is earning an exceptionally good return and the bonds are now selling at a premium.

  The one thing I wanted to avoid above all was a repetition of the sort of problems we had from the beginning at the Boardwalk facility. Rather than hire an outside general manager, I decided to put my wife, Ivana, in charge. I’d studied Atlantic City long enough to be convinced that when it comes to running a casino, good management skills are as important as specific gaming experience. She proved me right.

  By closing the deal with Hilton on June 15, we were able to take advantage of the high summer season. The next day, we opened—without a hitch—as Trump’s Castle. People packed the casino and we did extraordinary business, way beyond our expectations. On our first day we earned gross gaming revenues of $728,000. For the slightly less than six months we were open during 1985, we grossed just over $131 million. That was better than all but three of our competitors, and far better than the Boardwalk facility had done for the same period under Harrah’s.

  The one difficulty that arose in the early months had to do with the clause in my contract with Hilton regarding delivery of the hotel in first-class condition. Under the contract, $5 million of my purchase price was held back pending completion of all work. As time went on, however, we discovered that there were numerous outstanding problems—with the cooling tower, the sewage system, the computer system, and the fire alarm, among others.

  During the first six months we were open, my representatives and Hilton’s quietly negotiated about exactly which defects Hilton was responsible for and which they were not. My people felt strongly that the items not satisfactorily completed ran to considerably more than $5 million. On the other hand, I was eager to resolve the matter amicably.

  I liked Barron Hilton, I felt sorry about his experience in Atlantic City, and for months I was the first to defend him in any conversation. As a result, when the argument over who owed money to whom seemed to be getting nowhere, I decided to call Barron myself, in January 1986.

  I got him on the phone and I said that since our disputes hadn’t been resolved, perhaps we should sit down together and work out some reasonable settlement. Barron seemed delighted that I had called. He said that he would be in New York the following Monday or Tuesday and that he would call me then to set a date.

  Instead, when I came into my office on Monday morning I was served with a lawsuit from Hilton, seeking immediate payment of the $5 million the contract authorized us to hold back. I couldn’t believe it.

  The first thing I did was to call Barron again. “I don’t understand this,” I said. “I’ve just been served with a lawsuit, even though you told me we’d sit down and work this out together this week.” Barron totally stonewalled me. “I don’t know anything about a suit,” he said. He suggested that I call Greg Dillon, Hilton’s executive vice president. Incredibly, Dillon took the same position: that he knew nothing about the suit. Not for one minute did I believe that both Barron Hilton and his top deputy would be ignorant of a major lawsuit filed by the company.

  I recognize that lawsuits are sometimes inevitable, and I accept that as a reality of business. But when a person tells me he
’s going to sit down with me, I expect him to honor that commitment. If we still can’t resolve the situation, that’s another story. From that day on I stopped defending Barron Hilton to anyone.

  I also immediately ordered my attorneys to file a counterclaim. On April 2, 1986, we did precisely that, listing ninety-four separate deficiencies in the Castle, along with our estimated cost of repair. The figure far exceeded the $5 million we’d been authorized to hold back. Both suits are still pending, and I believe that we’ll ultimately be upheld.

  But for that one sour note, the story of Trump’s Castle has been almost entirely a positive one. Much of the credit has to go to Ivana. No detail escapes her. She has systematically hired the best people in Atlantic City at all levels—from croupiers to hosts to her top executives. She oversaw the decoration of the hotel’s public spaces, which are now quite spectacular. The facility is always spotless, because she’s meticulous even about that. And great management pays off. In 1986 we grossed $226 million, a record for first-year operations. We are projecting revenues of $310 million and a gross operating profit well in excess of $70 million.

  It pays to trust your instincts.

  10

  LOW RENT, HIGH STAKES

  The Showdown on Central Park South

  SOMETIMES by losing a battle you find a new way to win the war. What you need, generally, is enough time and a little luck. I had both at 100 Central Park South.

  This is a story about a group of tenants who fought very hard to keep me from tearing down the building they lived in and constructing a new one in its place. They succeeded. But by delaying me for several years during which real estate values soared, and by forcing me to totally change my original plans, they inadvertently helped me come up with a less expensive and more profitable project.

  Ironically, the easiest part of the whole deal was buying the property. Early in 1981, Louise Sunshine, my executive vice president at the time, came in to say she’d heard there might be an opportunity to buy two adjoining buildings in a great location. The first was 100 Central Park South, a fourteen-story residential building on the corner of Central Park South and Avenue of the Americas. The other was the Barbizon-Plaza, a thirty-nine-story hotel which fronted on Central Park and wrapped around behind 100 Central Park South, so that the east side of the hotel faced Avenue of the Americas.

  The buildings were owned by a syndicate that included Marshall Loeb of the Loeb banking family, the Lambert Brussels Corporation, and Henry Greenberg. By virtue of their location, the buildings represented one of the best pieces of real estate anywhere in the world. In addition to being on one of the city’s widest and most elegant streets, the buildings looked out over Central Park.

  The Barbizon-Plaza was a somewhat run-down middle-price hotel earning a modest profit at best. One hundred Central Park South was a building filled with rent-controlled and rent-stabilized apartments, meaning that the rent roll was barely sufficient to cover the operating costs of the building.

  Precisely because of these disadvantages, I was able to negotiate a very favorable purchase price. It helped that the properties hadn’t yet been put up for sale on the open market. As long as there were no other bidders, it was much easier for me to make a case that the buildings’ problems decreased their value.

  It probably also helped that the owners were a group of very wealthy men who had decided to sell not because they needed the money but because one of them was getting older and wanted to put his estate in order. I’m not permitted to say what I paid, but the sum wouldn’t be enough today to buy a vacant lot one-third the size in a far less desirable part of Manhattan.

  I barely looked at what the two buildings were earning. I was drawn to the real estate value, not the income. I was buying a great location at a modest price, and the way I looked at the deal, there was virtually no downside. Almost immediately I was able to get a mortgage for the buildings, which covered my purchase price. In the worst case, I felt, I could always turn around and sell at a profit. Even in bad times, there are buyers for first-class locations.

  Another option was to do a modest renovation of the hotel and raise the rents on the ground-floor stores to market levels as their leases came up. In addition, as tenants in rent-controlled and rent-stabilized apartments passed away or moved out of 100 Central Park South, I could raise the rents on those apartments. Even by doing these relatively minor things, I could earn at least a modest return on my investment.

  But then, “modest” isn’t my favorite word. The way to derive the most value from the site, I believed, was to knock down both buildings and to construct in their place one huge, beautiful modern luxury condominium tower. That posed two problems. The first, which I recognized from the start, is that it’s neither easy nor cheap to demolish a forty-four-story building such as the Barbizon. Still, I was certain that the prices we’d be able to get for new apartments in such a premium location would more than justify any added demolition costs.

  The second problem, which I didn’t fully understand until much later, is that it’s almost impossible to legally vacate a building filled with rent-controlled and rent-stabilized apartments. I knew that some tenants were sure to resist moving, but I figured time was on my side. I could afford delay. I was prepared to be as patient—and as persistent—as I needed to be.

  What I underestimated was how much the tenants stood to lose. I soon came to understand a simple axiom: the lower the rent, the bigger the apartment, and the better the location, the harder people will fight to keep what they have. It’s no great hardship to consider moving if you’re living in a mediocre apartment in a marginal neighborhood. Likewise, if you’re paying market rent for a good apartment and you can find a comparable one at the same price, a small financial inducement will often prompt you to move.

  But at 100 Central Park South, many tenants were fighting to protect the ultimate in New York real estate: beautiful apartments with high ceilings, fireplaces, and great views—at an unbeatable location. Most important, with rent control and rent stabilization, they were enjoying one of the great windfall subsidies in the free world. On the open market, their apartments would have rented for as much as ten times what they were paying. If I’d been a tenant at 100 Central Park South, I’d have led the fight against anyone who tried to get me to move.

  Unfortunately, rent control is a disaster for all but the privileged minority who are protected by it. As much as any other single factor, rent control is responsible for the desperate housing crisis that has plagued New York City for the past twenty years.

  Like a lot of failed government programs, rent control grew out of a decent idea that ended up achieving exactly the opposite of its intended effect. Rent control began as a temporary federal policy in 1943. The government froze rent on every apartment in America as a way to provide affordable housing for returning veterans. Having achieved that, the law was rescinded in 1948. But New York City adopted its own rent control law in 1962. Under the city statute, any dwelling built before 1947 was subject to rent control. In effect, the city created an inalienable right for five million New Yorkers—namely, low-price housing.

  It sounds wonderful. The only problem was that the city had no intention of underwriting it. Instead, they forced landlords to subsidize tenants. The costs of fuel, labor, and maintenance rose steadily, but the city refused to let landlords raise their rents to keep pace with inflation, much less the market itself.

  When landlords simply couldn’t make ends meet anymore, they began abandoning their buildings. Between 1960 and 1976, approximately 300,000 housing units in New York were abandoned. The first apartments to go, either by abandonment or arson, were the ones in the worst neighborhoods. Apartments in these buildings had the lowest rents. Landlords therefore earned the smallest profit margins and were least able to absorb rising costs. The other victims were the poor tenants who had been living in these buildings. Whole neighborhoods in the South Bronx and Brooklyn turned into ghost towns. The city, in turn, lost h
undreds of millions of dollars in real estate taxes that landlords stopped paying once they’d abandoned their buildings.

  Perhaps the worst thing about rent control is that it stopped protecting the people who needed it the most. The best rent-controlled apartments have always been prized and difficult to come by, and people with power and money have always had an inside track on them. During the past year, an independent researcher and writer, William Tucker, has set out to document particularly egregious examples. He cites buildings such as one on Central Park West at 73rd Street. Magnificently designed, it has huge apartments, wonderful detailing, a beautiful double-height marble lobby, and, of course, gorgeous views. It’s no surprise that people with money and taste would want to live there. Mia Farrow, for example, has ten rooms overlooking the park. She pays about $2,000 a month for an apartment that might rent for upward of $10,000 a month on the open market. Carly Simon, the singer and songwriter, lives in the same building and pays about $2,200 a month for her ten rooms overlooking the park.

  Down the street, Tucker found that Suzanne Farrell of the New York City Ballet has a fourteen-room duplex near Lincoln Center, for which she pays under $1,000 a month. William Vanden Heuvel, a very prominent attorney who served as ambassador to the United Nations under Jimmy Carter, pays less than $650 a month for a six-room apartment in a terrific building on East 72nd Street near Fifth Avenue. Alistair Cooke, the TV personality, pays about $1,100 for an eight-room apartment on Fifth Avenue. William Shawn, former editor of The New Yorker, lives in the same building and pays $1,000 a month for his eight rooms.