US real estate: Trump is not the only developer with hype expectations

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Apartment hunters in New York are no strangers to hype. “Cozy” is broker babble for tiny and dark. “Full of character” may mean there is a toilet in the kitchen. A “one bedroom close to nightlife” is an alcove studio above a bar.

Donald Trump — who is seeking a second presidential term in office — stands accused of real estate hyperbole well beyond this. A New York state judge has ruled that the Republican politician is liable for fraud for overstating the value of assets to strike deals and obtain financing.

Judge Arthur Engoron wrote that statements Trump businesses had submitted to banks and insurance companies “clearly contain fraudulent valuations that defendants used in business”.

He found persistent inflation of Trump’s Mar-a-Lago estate in Florida. From 2011 to 2021, the property was assessed by Palm Beach county to be worth $18mn-$27.6mn. During the same period, Trump valued the property at between $426.5mn and $612mn.

According to the judge, Trump claimed his three-storey Trump Tower penthouse was nearly three times its actual size, resulting in an overvaluation of between $114mn-$207mn.

Trump alleges political bias and plans to appeal.

The case will teach professional lenders nothing they did not know already about the brashness of New York property developers, Trump included. What they should be alert to is the growing gap between previously sober valuations and falling market values. This is also regulatory concern in private equity and venture capital.

High interest rates and rising vacancies are pushing down property values and cash flows. As these fall and landlords’ equity shrinks, borrowers have less incentive to make debt repayments.

According to real estate data group Trepp, $270bn in bank-held commercial mortgages — of which about $80bn is in office loans — will mature in 2023, a record.

Trump will not be the only property owner who will be taken to task for clinging to valuations no one else believes in.

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