Trump Real Estate Ruling Puts Scrutiny on the Subjectivity of Commercial Property Valuations

By Franco Faraudo

A New York judge has given a summary judgment on a civil case that Former President Donald Trump did use his real estate assets to inflate his net worth in order to make business deals and secure financing. The suit was filed a year ago by the New York Attorney General seeking roughly $250 million in civil penalties. Trump and his team claim that the case is politically motivated and have already stated that they will appeal. Part of the ruling was to revoke a number of business licenses the former President had in New York. Although, it is still not clear whether the assets in question are going to be sold or just “managed under the direction of the receiver.” The judge still has to decide on penalties for a trial starting October 2nd.

Opinions about this trial likely vary as much as political viewpoints in the country. So, as much as I don’t want to wade into the mudslinging around the merits of the trial, I can’t help but think through some of the implications. The basic claim by the Trump organization is that they had every right to value assets with their speculative value.

The 36-page brief spells out the defendant’s claim like this: Defendants argue that the SFCs were not materially misleading, claiming, inter alia that: (1) “there is no such thing as objective value”; (2) “a substantial difference between valuation in the SOFCs and appraisal, per se, is not evidence of inflated values; (3) there is nothing improper about using “fixed assets” valuations as opposed to using the current market valuation approach; and (4) it was proper to include “internally developed intangibles, such as the brand premium used in the valuation of President Trump’s golf clubs, in personal financial statements.”

First off, there is no such thing as objective value; it would make a great book title. The Trump organization stands by its assessment of value because, well, who knows how much the Trump brand is worth (or at least was worth back then). They then defend what they are using to come to these valuations, the fixed assets approach. This is a valuation technique typically used for businesses, not real estate, and therefore explains how they got their numbers that were at times 700 percent more than the real estate appraisers estimated. All of these defenses might be valid, but I can certainly see it being hard to convince a judge or a jury.

This lawsuit certainly brings into question the objective value of real estate, but more so, it gives underwriters and business partners additional reasons to scrutinize financial statements. I doubt there will be any new disclosure laws that stem from this trial, but the notoriety of the case will certainly make more people wonder how much a brand is worth in real estate and how much people have been able to abuse that perceived value for their own gain.

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