Late on Monday, CNN published an October 28, 2015 letter of intent signed by Donald Trump. The talking heads are arguing about what the letter means in terms of Trump and Russia collusion. Those are important discussions. However, as a businessman, the letter gives me an opportunity to look at the inner-workings of Trump’s businesses.
Let’s look at what we can glean from the letter.
There are two important things that should be pointed out.
The first is that agreements like these are difficult to scrutinize because the Trump Organization is a private entity and thus, they have no duty to inform investors publicly. Also, these agreements usually have confidentiality clauses built into them. Second, Donald Trump has been very secretive about his business dealings. We know little about how he makes money, other than selling his name to others.
Selling his name is known as intellectual property licensing. In short, Donald Trump licenses the “Trump” name for the benefit of others. Trump and his company gets paid for the use of his name. The agreement tells us this much. But there are other revenue sources for Trump.
From the letter of intent, we know that I.C. Expert Investment Company represented by Andrey Rozov intended to build a Trump Moscow development in Moscow. Rozov is the only owner of IC. Trump proposed to license the use of the “Trump” name to the development, plus offer management services. This is how Trump makes money.
According to the proposed agreement, the Russian development would consist of “250 first class, luxury residential condominiums.” It would also include at least 150 luxury-style hotel rooms. Parking, commercial and recreational components would also be included.
The proposed agreement states that Donald Trump’s company would have final authority as to how the development is built and operated.
The first source of revenue for Donald Trump is the licensing of his name.
According to the proposed agreement, Donald Trump’s company was to be paid $4,000,000 for the use of his name as upfront fee. Additionally, the Trump Organization was to be paid 5% of the first $100,000,000 generated by selling any condominium. The fee scale drops as more revenue is generated by the sale of each residential unit, all the way down to one percent. Any commercial leases requires that Trump be paid 3% of the lease revenues, plus another 3% of any money generated by any services offered as part of the development, like banquets.
But there is another lucrative source of income for Trump.
The second source of revenue for the Trump Organization is what is known as recurring revenues. Donald Trump’s company gets paid to manage the proposed development. Trump’s company manages the 150 hotel rooms through a Hotel Management Agreement.
The proposed agreement calls for the developer to pay Donald Trump’s company 3% of any money that is paid to the hotel. Starting on the sixth year, the fee increases to 6%. The revenues are defined as any payment for the use of the hotel rooms, food and beverage services, catering, parking, fees for internet television or public space rentals to third-parties. In short, any money paid to the building incurs a 3% to 4% fee payable to Trump.
Now here is the thing that makes this very lucrative to Trump. All expenses, i.e. the building, the maintenance and the employees working in the development are paid by the developer and not by Donald Trump.
This means that each dollar that is paid to the development, three-to-four cents goes into Trump’s pocket without Trump incurring any expenses.
But it gets better. Donald Trump’s company gets to put his hands into many cookie jars through the agreement. The developer is required to use Trump’s “centralized services” which includes things such as advertising, employee services, technology services and other services needed by the hotel and residential component to operate. On other words, the developer pays Trump a percentage of all profits in addition to fees, which are likely marked up, to run the hotel and residential units.
Another provision in the agreement ensures that Donald Trump does not loose any money, even during the negotiations for the final agreement between Trump and the company licensing the Trump name. The provision labeled “Expense Deposit” requires the developer to pay $100,000 upfront to Donald Trump before the drafting of the License Agreement. This is akin to a car dealer demanding that you put upfront $1,000 before the salesperson sits with you to negotiate the sale of the car.
The single most important thing to glean from this agreement is that Donald Trump does not sell anything tangible. Except for office overhead, Donald Trump’s business has no expenses, only revenues. The Trump Organization sells nothing but a name. It is the perfect business.
Readers can download the agreement by clicking on this link.