Monday, August 28, 2017

TRUMP | The (First) Big Deal

New York City taxpayers are still paying for  the tax abatement that Donald Trump obtained from the City Council in 1977!

The tax benefit does not expire until 2019.

I watched that abatement get baked in 1977 when I was serving as President of the Council on Municipal Performance in New York City.

Two members of the New York City Council who were on my Board of Advisers called me up and asked me:
Could you please speak up against a proposal by Donald Trump to get a huge property-tax concession to renovate the Commodore Hotel while bringing nothing to the table. He will take the concession and sell it. No one else is prepared to say anything about this.
I checked it out and quickly agreed. Yes, it was a giveaway. It should not go ahead. I prepared a critical comment and delivered it on a radio station (ABC affiliate, I recollect).

Imagine my surprise when I discovered a few days later that these two City Council members voted for the concession that they asked me to oppose. I was annoyed...

"What's going on here?" I demanded to know.

"Oh, sorry, we should have called you. One of the deputy mayors said we really need this to turn around the neighborhood. The Commodore Hotel is an embarrassment to the City."

I have been trying to make sense of all this in the 40 years since then. Here's my best understanding of what happened, i.e., the forces that swept away rational discussion.

Fred Trump Cashed in Some Political Chits 

Fred Trump was a serious real estate empire-builder, like Fisher, Lefrak, Rudin, Tishman, and Zeckendorf. He started his personal real-life Monopoly game in 1923, when he was too young to sign his own checks. After the war he immersed himself in federally financed housing projects.

Fred and his wife, Mary, raised three sons and two daughters in a mansion in the most upscale part of Queens, Jamaica Estates. The eldest son succumbed to alcoholism at an early age. The other two sons continued their father's preoccupation with real estate. Fred was especially impressed with his son Donald, of whom he said: ''He was a pretty rough fellow when he was small. He amazes me. He's gone way beyond me, absolutely.’' The two daughters went into law and banking.

Fred and Mary Trump believed in hard work.  They sat at the feet of Reverend Norman Vincent Peale, who spoke highly of the Trumps back in 1983 when he was interviewed by Marylin Bender of the The New York Times.

The family believed in positive thinking. They gave money to politicians and they were positive that their generosity would be appreciated when political support was needed.

Donald Trump

Donald Trump prided himself on being street smart and has called Queens and Brooklyn, where he was raised and started working, among ''the toughest, smartest places in the world.'' After attending the Wharton School for his bachelor's degree, Donald Trump joined his father's business, then a collection of middle-class apartment houses in Brooklyn, Queens and Staten Island worth roughly $40 million in 1983 dollars. 

Fred sent Donald as a difficult teen-ager to the New York Military Academy in Cornwall-on-Hudson. During summers, the boys worked at Trump construction sites or in rent collection offices. ''Not your normal kid's vacations,'' noted Donald's brother Robert Trump. 

Trump told Bender in 1983: ''I don't like to lose.'' She noted that he reneged on a promise to donate to a museum the Art Deco bas-reliefs on the facade of Bonwit Teller's that were  bulldozed to make way for Trump Tower. It was a sin deemed unforgivable by landmark preservationists.
Harry Levinson, a Boston-based business psychologist who has studied family businesses, observed: 
The core problem of the entrepreneur in the family business is the unresolved Oedipal problem, trying to beat the old man. This is particularly so where the father has been very successful. The son feels so inadequate and unable to compete with the father that he works out compensatory behavior. He goes to the opposite and blows himself up to deny his feeling of helplessness.
Commodore Hotel Deal

Since the Grand Hyatt opened in 1980, it has been credited by some with reversing the deterioration of East 42d Street. The renovated Commodore Hotel emerged from this sequence:
  • Donald Trump purchased for $500,000 an option to buy the run-down Commodore Hotel, where sex was openly for sale, from the bankrupt Penn Central trustees. At that time several nearby office buildings were on the edge of foreclosure, as New York City faced bankruptcy starting in 1974.
  • Donald Trump took his option on the Commodore, for which he would ultimately pay $10 million, less $2 million from the sale of its furniture and equipment, to line up a partner in the Hyatt Corporation, which was looking for a New York link for its hotel chain. He would build it and Hyatt would manage it. They would be equal partners.
  • Trump enlisted George Peacock, senior vice president of the Equitable Life Assurance Society to put together financing. Concerned about the area, the Equitable brought in the Bowery Savings Bank and several smaller banks and promised Trump $70 million in mortgages once the doors of the renovated hotel opened.
  • ''So I took this commitment, which was a statement with 100 stipulations, to the city,'' Trump said. One of those conditions was that the financing be predicated on obtaining a tax abatement. ''I said, 'I will build you this incredible, gorgeous, gleaming hotel. I will put people to work in the construction trades and save hotel jobs and the Grand Central area will come around.' So the city made the deal.’’
  • Trump obtained a tax abatement worth $160 million over 42 years (the abatement is still in effect in 2017).
  • Besides the tax abatement, Stanley Friedman arranged for a special permit to allow Trump to build the hotel's restaurant. Friedman then left his government post to join the law firm of the Roy Cohn, of which Trump was a major client.  
  • The 42-year tax abatement from the city was the first ever granted to a commercial property. The city had no legal authority to grant it, so the Urban Development Corporation was enlisted to take title for $1 and lease the hotel property back to Trump for 99 years for an annual "rental" of $200,000 a year, which was called a PILOT, a payment in lieu of taxes. If the PILOT was a rental, then the property was totally exempt from property taxes. A sweet deal, either way. Meanwhile, Trump had at his disposal the agency's powers of condemnation to rid himself of undesirable retail tenants. 
  • Rival hotel operator Robert Tisch objected to the abatement on the grounds of unfair advantage. Tisch said the $200,000-a-year PILOT from the Grand Hyatt was the equivalent of the tax bill for a motel on Eighth Avenue. 
After construction was underway, in 1979, New York City's economy picked up. Hotel rates doubled and Trump changed his plans from a modest $38 a night to a luxury $90+ a night. Donald Trump said:
The whole economics of the deal changed. It was timing. In another year, I wouldn't have gotten the abatement and no one ever will again. 

Roy Cohn
Fred Trump was closely involved with the Brooklyn Democratic organization that produced Mayor Abraham D. Beame and a New York State Governor Hugh L. Carey. They were in power when Donald Trump decided to enter the Manhattan real estate scene in 1974 and 1975.

The Trump Organization hired lawyers with political access – Roy Cohn of Saxe, Bacon, Bolan & Manley, and the firm of Shea & Gould. 

Donald Trump supported Ronald Reagan in 1980 and was invited to the White House several times.

Although Donald Trump grew up in Queens and learned about real estate in Brooklyn, and cut his teeth on 42nd Street in Manhattan, his political power base was in the Bronx. Corrupt Bronx politicians helped Trump. The only photograph of Donald Trump in the book by Jack Newfield and Wayne Barrett  shows Trump scowling as Bronx native Roy Cohn wags his finger at him. Cohn served as Senator Joseph McCarthy’s chief counsel on the House Un-American Activities Committee. He became Trump's mentor.

Cohn’s law partner was Stanley Friedman, boss of the Bronx Democratic Partyunder Beame and Koch, and a deputy mayor under Beame. In 1977, Friedman was the engineer of the tax abatement for the Commodore Hotel for Donald Trump. Cohn made Friedman a partner based on the Trump deal. 

After that deal, Friedman and Cohn went into decline. Cohn died of AIDS in 1986. A year later, Friedman was sentenced to 12 years in prison on federal charges. He was convicted of promising kickbacks in connection with obtaining contracts from the New York City Parking Violations Bureau for a company that wanted to manufacture hand-held computers. He served four of the twelve years. The scandal, exposed during a City Club of New York luncheon that I attended, cost Koch his hope of winning a fourth term.

Trump’s legacy in the Bronx was a golf course named after him. The city built the course and let Trump operate it. Revenue was down in 1983, the course lacked a permanent clubhouse and residents complained that they couldn't afford the fees.

Media Relations

Wayne Barrett wrote a long article on the genesis of the Hyatt Hotel. When Trump announced his candidacy for the presidency, he said: “After four or five years in Brooklyn, I ventured into Manhattan and did a lot of great deals [starting with] the Grand Hyatt Hotel.” 

Over the course of Barrett’s reporting, Trump both threatened to sue Barrett and tried to bribe him.  Trump hinted he could get Barrett a nice apartment in midtown. Barrett said:
[My wife and I lived in] the poorest neighborhood in the city. But both of us were young radicals. We were doing all kinds of organizing there. We published a paper called The People’s Voice. We were doing it as a political thing. … He had checked this out. I certainly hadn’t said anything. And he says to me, in the interview, "You know, Wayne, you don’t have to live in Brownsville. I can get you an apartment."

Barkan, Ross, "How a Young Donald Trump Forced His Way from Avenue Z to Manhattan," Village Voice, July 20, 2015. 

Bender, Marylin, "The Empire and Ego of Donald Trump, New York Times,  August 7, 1983

Fabricant, Neil, "Politics and Real Estate," Bloomberg Watch
Lachman, Seymour P. and Robert Polner, The Man Who Saved New York: 
Hugh Carey and the Great Fiscal Crisis of 1975 (Albany: State University of New York Press, 2010).

Newfield, Jack and Wayne Barrett, City for Sale: Ed Koch and the Betrayal of New York (New York: Harper & Row, 1989).