GEORGE H. ROSS is co-star of the hit TV show The Apprentice and Executive Vice President and Senior Counsel for the Trump Organization. Previously, he was a real estate attorney, private investor, and senior partner at a major law firm. He has served as business advisor, legal counsel, and negotiator for the leading real estate owners and developers in New York City for fifty years. On the side, he cofounded a radio station business that he sold for millions of dollars. Ross also teaches negotiation at NYU’s School of Professional Studies and Continuing Education.

ANDREW JAMES McLEAN is the co-author of seven books, including the bestseller Investing in Real Estate, Fourth Edition, also from Wiley.

Trump Strategies for Real Estate

Billionaire Lessons for the Small InvestorBy George H. Ross

John Wiley & Sons

Copyright © 2006 George H. Ross
All right reserved.
ISBN: 9780471774341

Chapter One

Sell Yourself Like Trump

Five Personal Qualities You Need to Succeed in Real Estate

Key Points

Use your enthusiasm for the project to inspire others. Build relationships with everyone involved in a deal. Showmanship is a real estate strategy. Be better prepared than anyone else. Be tenacious.

Donald Trump became a billionaire in real estate by making a series of incredibly creative and successful investments in New York City properties. He is now the largest real estate developer in New York and is widely acknowledged to be one of the most brilliant real estate investing minds anywhere. For example, in the early 1980s, with the building of Trump Tower on 5th Avenue, he single-handedly created the market for high-end luxury residences in New York City. He continued with a string of successes and in 2003, 9 of the 10 highest selling apartments were in Trump buildings-apartments that sold for millions of dollars each.

What can the small real estate investor learn from a billionaire developer like Trump? After advising Trump on many of his biggest investments over 25 years, I’m convinced that small investors can successfully use many of the same principles that earn him millions. It’s not the scale of your real estate investment project that counts. Whether you are investing in a single-family rental, a four-unit rental, or a multimillion-dollar office building makes no difference to the financial success of your particular project, what’s important are the real estate investing strategies used to acquire and develop the property, and how you design and market the property to buyers or tenants. Many of the same basic principles that work for one of Trump’s $300-million skyscrapers work just as well for smaller properties. Anyone interested in investing in real estate can benefit from a study of Trump’s real estate investor strategies.

For example, you can’t make big real estate investments-or really profitable small investments-without projecting certain personal qualities that inspire confidence in others, and make them want to help you or to see things your way. The key personal qualities you need are enthusiasm, relationship-building skills, showmanship, preparation, and tenacity. Donald Trump has these qualities in spades as he demonstrated on his first big real estate deal, the transformation of the dilapidated Commodore Hotel on 42nd Street in New York City into the magnificent Grand Hyatt. Remarkably, Trump used very little of his own money in this transaction, yet later sold his half interest to Hyatt for $85 million.

This chapter will describe how these five key personal qualities helped Trump make the Commodore-Hyatt deal work, and how small investors can use these same qualities in their own real estate investments to negotiate better deals, sell properties for more money, and dramatically improve real estate profits.

INVESTING CASE STUDY

Trump’s Commodore-Hyatt Project

This real estate investment was a monster as far as complexity was concerned. It was 1974, New York City was struggling to survive, and Trump decided that this was a great time to buy a huge, dilapidated, nearly empty building on 42nd Street next to Grand Central Station. Like many of the best real estate investors, he looks at problem properties and sees opportunities. Trump’s plan was to convert this old building, the Commodore Hotel, into a 1,400-room first-class convention hotel-the largest since the New York Hilton was built 25 years earlier.

When 27-year-old Donald Trump explained his grandiose idea to me during our first meeting, I told him that based on existing conditions he was chasing an impossible dream that would never happen. I thought the idea was brilliant, but it was totally unrealistic given the economic environment and the huge cast of characters who would have to embrace a set of entirely new concepts for the idea to work. Trump would have to win major financial concessions from:

1. Penn Central, a bankrupt railroad that owned the land on which the Commodore Hotel was built;

2. New York City, which was facing bankruptcy;

3. The State of New York, which had no money to contribute to any venture;

4. A lender who was holding many defaulted loans on New York real estate;

5. A major hotel chain that was not pursuing new facilities in New York City since tourism and occupancy rates were extremely low; and

6. Existing tenants occupying the building.

The deal involved successful negotiation of several treacherous interconnected transactions. If Trump failed to conclude any one of these transactions, it would sink the entire project. Using the five personal qualities outlined in this chapter he had to:

1. Obtain an option to buy the Commodore Hotel from the Penn Central Railroad for $12 million dollars;

2. Convince the representatives of Penn Central Railroad to turn over the $12 million purchase price to New York City, which was owed $15 million in back taxes from the Penn Central;

3. Convince New York City to accept the $12 million to cover $15 million in back taxes and agree to the creation of a long-term lease that would give the city a share of profits in lieu of future real estate taxes;

4. Convince the Urban Development Corporation, a New York State Agency, to accept title to the property, then grant a long-term lease of the property to Trump and to use its right of eminent domain to obtain possession from existing tenants;

5. Find a major hotel operator willing to participate in the ownership and operation of the new hotel to give credibility to the creation of profits in which New York City would share; and

6. Find a bank willing to lend $80 million to cover all of the costs involved in purchasing and developing the property.

This was as complex as it sounds. Something like this had never been done before.

To jump ahead to the end of the story, Trump pulled it off, convincing all these parties to work with him, using his enthusiasm, relationship-building skills, showmanship, preparation, and tenacity. In September of 1980, the Grand Hyatt opened-and it was a great success from day one. The renovated Hyatt helped revitalize the whole Grand Central Station neighborhood in New York City, which in turn played a major role in reversing the failing, bankrupt image of the city in the 1970s. By 1987, gross operating profits at the Hyatt exceeded $30 million annually. Years later, after recouping his modest cash investment in the property, Trump sold his half interest to Hyatt for $85 million.

Here’s how Donald Trump used critical personal qualities to clinch that monumental real estate deal. You can use the same qualities in your own dealings regardless of their size or complexity.

Use Your Enthusiasm for the Project to Inspire Others

Enthusiasm is a crucial element of the investment game because your success depends largely on capturing the imagination and securing the cooperation of key players-buyers, sellers, lenders, tenants, contractors, and others. If you’re not enthusiastic about your real estate investment idea, there’s no way you can get someone else to sign on. Remember that people will initially be skeptical of whatever you say. So be like Trump, sell hard. If you can maintain your level of commitment and enthusiasm in the face of initial doubts, you’ve taken the first step toward getting the support you will need to succeed. Trump knows that enthusiasm is contagious.

For example, Trump’s enthusiasm for the Commodore-Hyatt project and the way he envisioned it benefiting the entire city of New York were boundless. He communicated his vision over and over to all of the people who were involved in the various governmental agencies, including the mayor’s office and the railroad. He argued that this one project could help turn around the entire blighted midtown Manhattan area. They all agreed that it was important to do something about this eyesore, the Commodore, because of its critical location next to Grand Central Station. Trump’s enthusiasm convinced them that he was the only person capable of putting all the pieces together. For example, he told the city, “Forget real estate taxes and concentrate on the money you’ll earn from room taxes, income taxes paid to the city on the salaries earned by the employees working in the new hotel, and the profits from the hotel operation.” (Trump offered to make New York City a partner in the profits.) “Think about how the new construction will bring desperately needed jobs to New York and reestablish New York City as the capital of the world.”

Trump’s enthusiasm was the catalyst for getting key people, whose support he needed to achieve success, interested in the deal and to getting the city to embrace the idea. He prepared charts and graphics showing the dreary existing conditions of the area, the likelihood of an extended recession in property values leading to further erosion of the city’s tax base. He explained, “This is what you’ve got now but here’s what I can do for you.” He would then display a dramatic color rendering of the building as it would appear when renovated and sell this as the linchpin of revitalizing the Grand Central area-which in turn was the cornerstone of the reconstruction of the image of New York City. All he initially sought was the city’s acknowledgment that this was a great idea coupled with a loose commitment to cooperate in bringing it to fruition, if they got everything they wanted. He never talked numbers with the key players in this deal until after he got an initial expression of interest and support for his plan. He knew that talking numbers too soon would give people a reason to say no to his plan. It’s a valuable lesson for you to remember in any real estate investment of yours: Enthusiasm (and focusing initially on the large outlines of a deal rather than the financial details) can overcome many obstacles.

How Small Real Estate Investors Can Use Enthusiasm

The Hotel Commodore conversion was a huge project that took over two years and 23 drafts of a complicated and intensely negotiated ground lease to finish. But no matter what the size or complexity of your real estate project, at various stages of the transaction you’ll need to convince other people to help you, and do what you want them to do. This takes enthusiasm and perseverance. Share with the seller, your lenders, contractors, and others what you envision for the property you want to buy or renovate. Tell a great story about how you found it, what your inspiration was, and the difficulties you have already overcome. Play up what you see as its best or most unique features. Trump knows that people like to be excited. You just have to find creative ways to excite them.

If you’re not enthusiastic, the people you’re trying to convince to lend you money, sell you a property, or invest in your partnership are not going to stick their necks out. But if you can tell a great story about your investment idea, if you are articulate and enthusiastic about the opportunity you are offering others, you are on your way to developing the requisite rapport with buyers, sellers, lenders, or other decision makers.

Build Relationships with Everyone Involved in a Deal

The success of any real estate investment or any business deal, for that matter, is not strictly a matter of dollars-and-cents. A lot of it comes down to personal relationships-your ability to forge strong cooperative relationships with all parties, whether they are directly or even tangentially involved. Trump does this by taking the time necessary to gain insight into the people he is dealing with-who they are, what they do, how they do business, who are their family members or friends, and if appropriate, what their hobbies are. If you can establish a rapport and a feeling of mutual trust it invariably makes for an easier negotiation and a faster, more amicable conclusion to any problems that arise. The principle here is, “No one intends to buy a bucket of trust but they will pay for it if it’s delivered.” Give people reasons to trust you by building a relationship with them, and you will be laying the foundation for long-term real estate investing success.

The reason you have to build relationships, especially at the beginning of a real estate transaction, is that people are naturally suspicious of others. Until you have built up a level of trust, it is likely that what you say will be somewhat discounted.

One way to build a good relationship is to assume that the present transaction you’re working on is only the beginning of negotiating many deals with your counterparts. Work hard to create the impression of being “a nice person to deal with.” Some of Trump’s best deals were the result of recommendations from adversaries with whom he had past dealings. Leaving pleasant memories is the best personal advertisement in any real estate transaction.

Here’s a great example of Trump’s relationship-building skill in action from the Commodore-Hyatt deal. Trump had never met Victor Palmieri, an executive with Penn Central Railroad, which owned the Commodore Hotel, but Trump knew Palmieri would have to play a key role if Trump’s idea were to become reality. With full confidence in his project and his salesmanship, Donald Trump called Palmieri, introduced himself, and said, “Give me 15 minutes of your time and we can reverse the decline of the City of New York and increase the value of your Penn Central holdings.” In the meeting, Trump got Palmieri’s attention and a solid working relationship was created. Without Trump building a strong cooperative relationship with Victor Palmieri, the decision maker for Penn Central, he would have never had the opportunity to purchase the Commodore from Penn Central, let alone get Palmieri’s help in pressuring the city for its cooperation, which became critical later on.

Small investors tend to think that they have no basis for building a personal relationship, and therefore no negotiating power. Negative thoughts create their own problems. You may be dealing with someone who’s much more successful, or who works for a large, impersonal bank. You may think they can’t (or won’t) relate to you, but that’s not true. You can relate to each other as human beings. Look for anything at all you may have in common.

If you’re going into a meeting with someone, learn as much about them beforehand as you can. Ask someone else about them, find out what they know. If you’re going to meet with an owner of a rental property, speak to one of his tenants beforehand. Ask questions, such as, Is it a good property? What do you think about the landlord? Now you have information that may help you establish rapport with the owner, and probably some ammunition that will be useful when you enter into negotiations.

Showmanship Is a ReaL Estate Strategy

Once you have conviction about how your real estate investment can benefit not just you but the other people whose help you need, and you’ve started to build relationships, the next step is to find concrete ways to communicate your vision to your potential real estate partners. Anyone who is involved with a real estate transaction, especially a fixer-upper project or new construction, has undoubtedly spent a lot of time and effort thinking about the details of it: how it will work, why it will be good for everyone involved, how it will be successful, and what the end reward will be. The challenge now is to condense everything that you’ve done and thought into something that you can show or tell other people so that they get the same degree of enthusiasm. It’s difficult, but that’s your challenge. Keep in mind that other people whose help you need are starting off cold. They haven’t spent the weeks or the months living with this project that you have. To get them to share in your dream, you have to come up with a way of making it interesting to them. This is called showmanship-and it is one of Trump’s signature traits.

Continues…
Excerpted from Trump Strategies for Real Estateby George H. Ross Copyright © 2006 by George H. Ross. Excerpted by permission.
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