Trumped Up Charges

by Michael Dorf

I begin with a confession. From fall 2002 through the summer of 2008, I lived in a building that had the word "TRUMP" displayed above each of the two main entries. It was one of a number of buildings that a real estate development group had built on the west side of Manhattan. My understanding at the time was that although Donald Trump was the front man for the developers, he put up only a small fraction of the money for the development, most of which came from other investors. And then the individual apartment units were sold, so that Trump owned virtually none of the building. I say "virtually" because he or another family member may have owned one or more units, but in any event, their ownership interest was relatively small. There were over 400 apartments in the building. During the nearly six years I lived in the building, "the Donald" was sited on the premises on only two occasions, but neither time by me.

Although he had not yet made a name for himself as a xenophobe, during my period of residency Trump was already well established as an egomaniac. For example, the following statement, which I just pulled from his company's website bio, is typical of the pronouncements he has long made about himself: "Donald J. Trump is the very definition of the American success story, continually setting the standards of excellence while expanding his interests in real estate, sports, and entertainment. He is the archetypal businessman – a deal maker without peer."

I found it embarrassing to live in a building that boldly announced to the world its connection to the Trump empire. Trump's management company was in charge of building maintenance, and truth be told, the staff did a fine job--better than the management companies in other buildings I had lived in. But given that Trump didn't own the building and that NYC buildings, if they have names at all, are typically not named for the management company, I saw no reason why my home and the homes of the hundreds of other residents had to be branded with the Trump name.

Accordingly, I made inquiries about removing the Trump name from the facade. I was told that a few others had also sought its removal but that this was a bad idea because having the Trump name made the building and its units more valuable. I found this hard to believe until I saw a market analsyis of Trump-branded properties and comparable properties that did not bear his name. Other things being equal, the Trump name added value. Apparently, people associated it with quality.

How could this be? I developed two (non-exclusive) hypotheses. First, suppose you are in the market for an apartment. You think (for whatever reason) that Trump only puts his name on high-quality properties. You shop around and you are trying to decide between an apartment in a Trump-branded building and another building. Even though you think that the apartments and buildings appear to be of equal quality, you believe that buildings and apartments often have hidden aspects, and so you are willing to pay a Trump premium for the apartment in the Trump-branded building. Second, many purchasers of apartment units in NYC buildings are foreign investors who don't even see the units before purchasing, and so they may be paying a Trump premium because they are buying from afar. Although I had chosen to live in the building despite its bearing the Trump name, it appeared that more people chose to live there because of the Trump name.

Various recent news stories report on how Trump's remarks about undocumented immigrants from Mexico have hurt his business, with various companies canceling collaborations with him. My question is whether the damage to the Trump name will cause a diminution in (or reversal of) the Trump premium for individuals. Undoubtedly, there will be people who, prior to the Donald's presidential announcement, would have paid a premium to stay in a Trump hotel or live in a Trump apartment but who will now regard these prospects as less appealing. And given constant supply, reduced demand should result in lower prices. But whether the demand is reduced sufficiently to turn the Trump premium negative remains to be seen.

If it does, then Trump's troubles could pose an existential threat to his empire. As I understand the business model, a great many of Trump's real estate ventures are like the building I lived in: Other people provide the capital and then they essentially pay Trump a fee to be able to associate their property with his name. Once that name carries a negative connotation with the public, no one not already under contract to pay for the use of his name will continue to do so. Eventually, the Trump name will come off the buildings.