Behind Trump's Billions: How He Really Got His Real Estate

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 II, 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 three 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 three 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, build apartments on it with government money, and then 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 '80s, 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 resell them back  to him at a 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 '90s, 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  siphon 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 7,000 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 years  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.