Mar.22

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Trump Legal News: Some Assembly Required

AG Letitia James gave Donald Trump a 30-day grace period to come up with the bond he needs to post in order to protect his assets while he appeals the judgment against him for criminal fraud. He claims he can't do it, and so, with 3 days to go, she's begun taking steps to collect.

Specifically, James already filed notices of judgment in New York City, which is the first step in going after Trump properties in that municipality, including Trump Tower. And yesterday, she did the same in Westchester County, NY, where Trump has an estate, Seven Springs, and golf course called Trump National Golf Club Westchester. According to CNN, James has not yet filed paperwork in Chicago or in Florida, though presumably those are on her to do list. Neither CNN nor anyone else appears to be certain whether James has filed paperwork in New Jersey, home to Bedminster. The loss of that property would be particularly bitter for Trump, as it's his favorite, and is where he has said he wants to be interred when he dies.

We've already written a fair bit about this subject in the last several days, but let's do one more, exhaustive rundown of Trump's options here. We suspect this is as thorough a breakdown as you'll find, so buckle up:

1. Let James Do Her Thing: Trump could wash his hands of this particular problem, and let James collect in whatever way she sees fit. He really, really, really does not want to do this, however, as James will sell whatever properties are easiest to sell, and at whatever price she can easily obtain. Then she will turn around and satisfy any creditors who have claims against the various properties. This approach will produce less money for Trump than any other.
   
   
2. Sell, Sell, Sell: Alternatively, Trump could sell his properties himself. Of course, time is running out, and it's not so easy to sell nine-figure real estate in just a few days. He would probably get better prices than James would, but he'd still be negotiating from a position of weakness. That's not good for someone who's already a poor negotiator. And again, most or all of his properties are likely encumbered in one way or another, plus he'd probably be on the hook for capital gains taxes. So, he might struggle to realize the $500 million or so he needs.
   
   To give a small sense of the many nuances and subtleties that Trump (or James) will have to deal with, consider this case study, courtesy of reader M.R. in New York City, NY:

   You had written about the value of 40 Wall Street and the amount of equity Donald Trump may still have in it. New York City offers a free online recorded documents database (called ACRIS, in case you want to start looking up other properties or find the source documents yourself), so I took the opportunity to see what is publicly available for this asset. It appears the property is actually set up as a ground lease where Trump is the tenant and another entity is the landlord. Trump has secured a $160,000,000 mortgage on the property with Ladder Capital, which he has had since 2015. Ladder Capital's reputation in New York is not great as they are known to be sharks. Prior to Ladder Capital he had a $160,000,000 loan with Capital One starting in 2005. A few conclusions that can be drawn here:
   
   

   1. Trump's leverage on the property did not increase since 2005 and, in fact, likely decreased due to natural rent growth that would be included in his lease.
      
      
   2. Trump's use of a ground lease allowed him to purchase the property for less than it would otherwise be worth, seeing as it will revert to the leaseholder at the expiration of the lease's term. He will have to pay rent during the lease term to the landlord as well.
      
      
   3. It is typical for a New York City office building to have a mortgage worth between 35-50% of the asset's value. While it's a minor quibble, I think it's wrong to imply that it would be unusual or financially irresponsible to have this sort of financing. Rather, it is unusual for commercial office buildings to be owned without any debt.
      
      
   4. If the loan makes up 50% of the property's value, then he has $160,000,000 of equity left in the asset. If the loan is 35% then he has about $300,000,000.
      
      
   5. His loan documents will prohibit him from using that equity as collateral for anything else, including a surety bond.

   Thanks, M.R.!
   
   
3. Surety Bond: Speaking of surety bonds, earlier this week, we wrote that it's nearly impossible to secure such bonds these days using commercial real estate. We're hardly experts in this area, but we read several commentaries that said that was the case, including one from Mark Cuban.
   
   That said, reader J.P. in Hancock, ME wrote in to push back against that assertion:

   I am writing to respectfully disagree with your analysis today of Trump's difficulty in posting a bond.
   
   I worked at a bank for 30 years (JPMC), and while I was not on the loan side, I was close enough to have a good sense of how it works and what the lending policies are.
   
   You are far too categorical in your statement that no one will lend against commercial real estate in the current environment. In doing so, you are unwittingly validating his claims and thus letting Trump off the hook a little too easily. While many of the midsize and smaller banks may be in crisis mode due to bad real estate exposure, plenty of the large stable banks—think JPMC, BofA, Wells, and a small handful of large foreign banks—will still lend against real estate collateral, albeit in a highly conservative and selective manner. This is exactly the kind of environment when strong banks try to press their competitive advantage and make loans to good customers with solid properties. Yes, there are certain sectors of commercial real estate they might not touch, but lending against a prime property in a good location, with sufficient overcollateralization, is something that lots of banks might look at in general.
   
   But there is one big problem: One of the cornerstones of solid lending policy is to know the character of the borrower. Do they have a history of defaulting in the past? (Yes for Trump, three times, I think.) Are they litigious? (Yes, again.) Do they possibly pose reputational risk given what you know of their conduct in the past? (Another yes.) I think many financial firms would gladly lend perhaps 70 cents against 1$ of real estate value for a loan collateralized by some of the prime properties under Trump's control. The reason they won't is the risk of reputation, litigation, and potential for fraud. Or they don't feel comfortable that the collateral isn't already pledged.
   
   The more lightly regulated hedge funds (or the people behind them) might make these sorts of loans in a minute, and there are plenty of them with right-wing sympathies (think Renaissance and the Mercer family). This might still be a way out. The caveat here is that they are no dopes and would only lend if the collateral was free and clear. And there are lots of hedge funds, both liberal and conservative, that would simply love to do a loan at the right rate with the right amount of collateral.
   
   My suspicion is that either offers have been made for a loan and Trump doesn't like the rate or the amount of collateral required, or that the lenders have been unable to find sufficient unencumbered assets. It's quite possible that the whole Trump empire is a house of cards that's about to fall.
   
   But if he walked into a number of firms tomorrow with the right amount of good-quality real estate collateral, he could get a loan within 24 hours.

   Thanks, J.P.!
   
   
4. Creative Bond: As we noted yesterday, an alternative to one surety bond (or one loan from a hedge fund) would be to secure a bunch of smaller bonds/loans from different entities, so as to spread the risk around. This is the solution that James has suggested to Trump, and he's rejected it out of hand. One has to assume this means he doesn't have the assets to pull it off.
   
   
5. SPAC: As we noted yesterday, the Miami-based SPAC Digital World Acquisition Corporation (DWAC) is supposed to hold a meeting today at which the stockholders will vote whether or not to merge with Trump Media and Technology Group (TMTG). If the meeting goes forward (DWAC has been known to cancel such meetings at the last minute), then the merger might give Trump the money he needs to cover his exposure.
   
   We do not presume to understand the finer points of this sort of high finance. However, we will quote one sentence from the linked article (from Investor's Business Daily): "If the merger is completed, Trump's 90% stake in TMTG could be valued at around $4 billion, based on DWAC's current stock price." There are two clauses there doing a LOT of heavy lifting. The first is "could be valued at around $4 billion." The main asset of Trump Media is Truth Social, which is failing. We do not see why anyone would cough up $4 billion in order to own it. But maybe that's beyond us.
   
   The second clause is "If the merger is completed." There are currently four lawsuits from various parties linked to either DWAC or TMTG, and there is also an ongoing federal investigation. It strikes us as rather unlikely that the merger will be signed, sealed and delivered in the next 72 hours. Or the next 72 months, for that matter. Plus, as we noted yesterday, even if the merger does go through, Trump will not be able to sell stock for 6 months. He COULD try to use stock as collateral, but then the lender would be at risk of getting stuck if the price collapses.
   
   Maybe Trump knows better than we do about this SPAC business, but if he did, why would he be working so hard to reduce his bond?
   
   
6. Mercy from the Judge: As we have noted, Trump has asked an appellate court in New York to reduce the bond. Maybe they'll do it, although there's really no legal basis for it. They're expected to rule next week.
   
   
7. Mercy from James: Alternatively, Trump could go to James and ask her to extend his grace period. He surely would not be pleased to ask a Black woman for a favor, however. Meanwhile, she has indicated that she's not really open to negotiating. That said, if he offers some more substantive amount than the $100 million he's currently trying to get the courts to accept, then she might become more flexible.
   
   
8. Phone a Friend: The sleazy option is for Trump to get a loan from a supporter who has the cash to spare. The problem is that most individuals aren't going to be too open to pledging $500 million they might well not get back. And those individuals who would not mind losing the $500 million, because of other potential benefits, like Vladimir Putin or Mohammed bin Salman, are extra sleazy and would become a political millstone around Trump's neck. "Do you really want to vote for a president who is deeply in debt to Saudi Arabia/Russia?" Democrats would ask.
   
   
9. Bankruptcy: Finally, Trump could go bankrupt. He's done that before, but this would be his first personal bankruptcy. The good news for him is that going BK would buy him some time. The bad news is that he would be subjecting himself to the fiats of the bankruptcy court and the trustee that would be appointed. So, this would basically be a variant of the first option on the list (Let James Do Her Thing), just slower. Also, since his "success" as a businessman is a huge part of the brand, there could be some political fallout from admitting failure in such a high-profile fashion.

In short, Trump needs to pull a rabbit out of a hat, and there might not be any rabbits to pull. (Z)