A lawsuit filed against former President Donald Trump and his real estate firm last week outlined a variety of ways the Trump Organization allegedly tried to influence the valuation of some well-known properties bearing the family name around the country.
The civil complaint filed by New York Attorney General Letitia James offers a window into how esoteric instruments such as ground leases, bonds, donated development rights, conservation easements and real estate licensing deals allegedly can be used to affect what a property is worth.
In all, the allegations paint a picture of straightforward deception in financial statements, such as ignoring accepted accounting practices, misrepresenting and ignoring opinions of outside real estate professionals, exaggerating the size of properties and “cherrypicking” favorable sale comparisons to inflate the value of Trump Organization holdings.
The civil suit seeks at least $250 million in penalties. Trump has called the claims a political “witch hunt,” and his attorney has said the attorney general's claims are meritless and no wrongdoing took place.
The fraud case details allegations related to multiple Trump properties, including Trump Tower on Fifth Avenue in New York and Trump’s personal triplex apartment within it; golf resorts including Mar-a-Largo in Florida, now Trump’s primary residence; Trump International Hotel & Tower, the second-tallest skyscraper in Chicago; and the former Trump International Hotel in Washington, D.C.
One of the more prominent examples of deception alleged in the civil suit involved the 72-story office tower at 40 Wall St. in Manhattan. Here's a closer look at the allegations related to that building. The Trump Organization did not respond to a request to comment from CoStar News.
Ground Lease
The Trump Organization owns the leasehold interest, meaning it controls operations of the skyscraper and collects rents while making payments to the separate owner of the land beneath it.
Ground leases often run 99 years or more and often take relatively little rental revenue to pay off annually. But many New York deals have provisions in which the payments are reset in predetermined years to reflect changes in a property’s value.
The Trump Organization overlooked the pending effects of an upcoming reset on the value of 40 Wall Street, according to the complaint, to inflate its estimate of the property's valuation. In statements of financial condition, the Trump Organization listed its value from almost $525 million to just over $550 million in the years 2011 through 2014, according to the suit.
Real estate firm Cushman & Wakefield appraised the value at $200 million in 2011 and $220 million in 2012. The ground lease on 40 Wall Street will reset in 2032, which the complaint said will cause the Trump Organization’s rental payments to swell to $15.5 million starting in 2033 — compared with $2.8 million annually in 2012.
Even though the ground-lease reset was years down the road, the complaint alleges its looming effect would drive down its price in a sale today, thus explaining the significantly lower appraisals.
Capital One, which held a $160 million mortgage on the property, raised concerns about cash flow in the building as far back as August 2009, the complaint said, leading to a meeting with Trump Organization executives including Trump and his chief financial officer, Allen Weisselberg.
Trump said if the bank tried to restructure the loan because of a low appraisal, he would create a lease with Trump University paying rent on then-vacant space to “pump up” the value, before ordering his own appraisal, prosecutors allege. Trump University shut down in 2010 and years later reached a $25 million settlement with former students who said they were defrauded.
Trump received a loan modification in 2010, with the firm reporting a projected net operating income for the following year of $4.4 million.
Net Operating Income
Net operating income is essentially the rental income remaining after paying operating expenses such as property taxes and insurance.
It was the key metric used to calculate the value of 40 Wall Street, according to the lawsuit. The net operating income was divided by a capitalization rate, or rate of return, to estimate the tower’s market value. That means that the higher the NOI or the lower the cap rate, the more the building is valued.
But the developer used inflated NOI amounts — $26.2 million, or almost six times the previously estimated $4.4 million from the loan modification — in calculating the property’s value from 2011 through 2015, the complaint alleges.
That led to a significant gap between the appraised value and value listed by Trump in separate documents from the lender-ordered appraisals.
Refinancing
The Trump Organization in 2015 negotiated more favorable loan terms for $160 million in debt through Weisselberg’s son to replace the Capital One loan, the suit states. Weisselberg's son was an employee at Ladder Capital Finance, which originates loans that are then securitized, according to the suit. The complaint alleges the Trump Organization overstated the value of the tower to refinance the building. Ladder Capital didn't respond to a request to comment by CoStar News.
Internal worksheets prepared by Cushman showed a Ladder Capital valuation of $600 million and a Trump valuation of $533 million, with Cushman eventually arriving at a $540 million appraisal — more than double its previous appraisals, according to the complaint, “under pressure from the Trump Organization and Ladder Capital.”
Valuation was calculated by using inflated market rents, as well as claiming a $1.4 million lease with grocery chain Dean & DeLuca, which had yet to sign the deal, the complaint said. Dean & DeLuca later signed a lease but never opened before filing for bankruptcy.
Even after understating costs such as management fees, Trump received a valuation from Cushman of $500 million. From there, Trump and Ladder Capital worked to increase the valuation by making “unreasonable adjustments,” such as reclassifying recurring expenses as one-time expenses, the suit alleges.
Those changes, combined with changing assumptions about the effects of the ground-lease reset on valuation, led to an eventual $540 million appraisal, according to the lawsuit.
In a recurring theme in the complaint, one adjustment in the appraisal was to the size of the 40 Wall Street tower, with the Cushman appraisal reducing the previously stated usable square footage by 10% to account for mechanical space. Because density of development on the site is part of the formula used to calculate the ground-lease reset, decreasing the amount of space would reduce ground-lease payments by more than $5 million annually in the nearly 1.2 million-square-foot tower, according to the complaint.
“Incongruously then, while the value of the building purportedly more than doubled from 2012 to 2015, the ground lease reset, based on the value of the building, purportedly dropped,” the complaint said.
Further Increases
The Trump Organization provided partial information from the $540 million appraisal to its accounting firm, Mazars USA, withholding information such as sale comps it was using to estimate the Wall Street building’s value at more than $735 million in its 2015 financial statement, according to the suit.
That high valuation was achieved by choosing overly optimistic sale comps, the lawsuit alleges.
Mazars earlier this year cut ties with the Trump Organization and retracted financial statements it produced using information provided by its client.
Although Cushman’s appraisal calculated a 4.25% cap rate, the Trump Organization changed it to 3.29% — implying a much higher potential sale price — “based upon a particular comparable sale,” according to the complaint. Even though Cushman did not use that cap rate, and instead settled on 4.25% as the appropriate percentage, the Trump Organization attributed the higher sale comp to the appraisal in its financial reporting, the suit alleges.
Because the debt was securitized and sold to investors as part of commercial mortgage-backed securities offering, the valuation was scrutinized by Morningstar.
For a loan report, Morningstar adjusted the rental rates, net operating income and cap rates used in the appraisal, which it used to calculate an actual value of $262.3 million, according to the complaint.
That was about $474 million less than the value in Trump’s 2015 financial statement.
Changing Methodology
By the following year, the ratio of income to debt service expenses at 40 Wall Street dropped to a point where a loan originated by Ladder Capital was added to a watchlist.
At that point, the Trump Organization switched its valuation formula, focusing solely on sale comps, the complaint said, without disclosing the change in methodology in its financial statements as required.
The valuation peaked in statements in 2016, with a building value listed above $796 million. The Trump Organization kept the estimated values inflated by not accounting for the ground-lease reset and by using unrealistic sale comps, according to the allegations.
In 2016, the Trump Organization multiplied the square footage by $684 — well above the $464 per square foot used in the 2015 appraisal for Ladder Capital and even further above the $225 calculated by Morningstar.
The $684-per-square-foot figure came from the sale of a nearby building at 60 Wall St., according to the complaint, although it was completed in 1989 and the Trump Organization’s building opened in 1930.
In following years, the Trump Organization used comps of more than $600 per square foot.
In 2020 and 2021, documents indicate the Trump Organization used a comp of $692 per square foot, based on the sale of nearby 44 Wall St., with 15% then subtracted to account for the difference in the buildings’ sizes and the effects of COVID-19, according to the complaint.
But that sale price in that comparison actually was $564 per square foot, a mistake that prosecutors allege added $130 million to the estimated value.
“And once again, while the 2020 valuation does account for the ground lease, it fails to account for the present value impact of the ground lease reset in 2032,” the complaint said.
(Corrected on Sept. 29 to reflect that mortgage payments weren't included in the operating income calculations.)