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Here's What It Means If Trump Is Responsible For $421M In CRE Loans

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Commercial real estate professionals reading The New York Times' analysis of President Donald Trump's tax data this week may have paused at a data point: The president appears to be personally responsible for $421M in real estate loans that are coming due within the next four years.

Exactly what that will mean for the president, and for his creditors, isn't quite as clear-cut, however, and the intricacies of recourse vs. nonrecourse loans may offer some insight beyond the splash of the number.

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President Donald Trump

That Trump might be personally on the hook for that kind of debt fits in with other information reported by the NYT, which paints a picture of deep financial disarray. That data as reported includes ongoing, massive losses by Trump's companies, and some gains, and real estate assets that are sinkholes for cash, and a lengthy dispute with the Internal Revenue Service.

One important caveat about the information is that even if accurate as tax return data, it only presents how the president's business dealings were represented for tax purposes, the NYT article notes. It also isn't problematic in real estate to simply have debt — the NYT's analysis doesn't say if the loans are current.

The types of loans Trump may have taken out are also a key component; some CRE watchers noticed this week that much of the debt as reported by the paper appear to be recourse loans. Under the terms of a recourse loan, in the event of default, a lender can seek recompense not only from the asset itself, but other wealth that the borrower has.

While Trump might indeed personally owe lenders $421M, many of the reported details about the types or amounts of loans are unclear. For example, why Trump may have committed to recourse loans in these cases isn't known.

With his history of bankruptcy, lenders might have insisted. Or the use of recourse may relate more to the performance of the assets themselves and their viability as collateral. Much of the debt is associated with the Trump National Doral Miami ($125M) and the Trump International Hotel Washington ($160M), according to the NYT. Both properties were struggling even before the coronavirus pandemic, a circumstance that might make lenders more reluctant to refinance their debt when Trump's loans come due. 

The concept of recourse lending is simple enough in theory, and widely practiced in commercial real estate, but its execution can be much more complicated, experts say.

For commercial construction loans, nearly all lenders require a personal guarantee of some kind during construction of the project, explains Lane Powell shareholder Bryan Powell, a Portland, Oregon-based real estate attorney. 

"After construction is completed, the loan will typically convert to a term loan or permanent financing loan, which often will not require personal recourse. That depends on a number of variables, including project cash flow, loan-to-value and debt coverage ratios, experience of the owner and operator, market conditions and others," Powell said.

Many lenders are required by their underwriting guidelines to only make recourse real estate loans, so the borrower might have to choose between more favorable loan terms and recourse liability with one lender, or less favorable terms but with nonrecourse liability with another lender, Powell said.

"Nonrecourse lenders focus on the value of the properties on a stand-alone basis, and do not allow for much speculation on the valuation," Mag Mile Capital CEO Rushi Shah said. 

"Currently, lenders are asking for more recourse especially on higher-risk asset classes and for the asset classes that require more operational oversight," Shah said. "However, the recourse is harder to enforce by the lenders because of the bankruptcy code."

Those are the normal perimeters of recourse and nonrecourse loans, but Trump is anything but a normal borrower.

"Even though the headlines might say, Trump owes all this money, it's hard to know what that really will mean for him," said Alliant Credit Union Vice President, Commercial Lending Charles Krawitz. 

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Trump International Doral Miami

"Even if you have a recourse loan, you're typically going to go after the collateral first, foreclose on it and sell it on the marketplace," Krawitz said. "Also, in some states, the law precludes you from going after both the guarantor as well as the collateral."

For one thing, Krawitz said, maybe Trump's loans are in good shape; the tax returns as reported by the NYT don't shed light on that point, with the properties suffering now, but due to recover after the pandemic.

Even if they don't, there are a number of reasons a lender might not go after Trump for recourse. 

Who loaned Trump the money also isn't in the tax data NYT reports. One possibility is Deutsche Bank, which has been the president's go-to bank for some time, even though it has a history of quarreling over exactly how much Trump should pay on loans he personally committed to. In 2008, Trump sued the bank to get out of a $40M commitment he made to facilitate the construction of Trump Chicago International Hotel & Tower. The parties eventually settled out of court.

These are nuances that the legal teams for both sides will be well aware of, but they might not be the determining factors. 

"Who in their right mind is going to pursue Donald Trump personally, as opposed to recovering from the piece of real estate?" Krawitz said. "From a reputational standpoint, maybe a lender wouldn't want to be in the headlines for that."

Cases against Trump can drag out for years, even when he is fighting with a powerful government agency. The NYT reports that long before he became president, the IRS began an audit of a $72.9M refund Trump claimed in 2010, based on losses in earlier years. The paper reports that audit has been ongoing since then to determine whether Trump was actually entitled to the refund, though it isn't clear why the matter remains unresolved after so long.

Exactly which losses sparked the dispute aren't spelled out by the tax data the NYT reports, but it is also true that Trump abandoned his stake in his Atlantic City casinos in 2009, which would have represented a major loss. If the IRS ultimately decides to claw back the refund, Trump would be stuck with a tax bill in excess of $100M.

Also, Krawitz points out, there are serious question marks about Trump's financial worth in any case. Would taking a high-profile action against him actually be worth the trouble? 

"Going after the asset or assets might well prove to be enough of a remedy, without the trouble of tangling with Trump personally," Krawitz said.