Trump Failed To See Inflation Coming—And It’s Costing Him More Than $1 Million A Month

A close examination of the former president’s business shows that Trump was as blindsided by inflation as the Biden administration.

By Dan Alexander, Forbes Staff

Donald Trump’s first major real estate deal after leaving the White House centered on 555 California Street, a three-building office complex in San Francisco. Trump has held a 30% interest in the property for years alongside publicly traded Vornado Realty VNO Trust, which owns the rest. In May 2021, the partners secured a $1.2 billion, variable-rate loan that provided them with more than $600 million of cash. And plenty of risk.

Inflation was already creeping into the economy at that point, though the Federal Reserve and Treasury Department were insisting it would only be temporary. Savvy investors protected themselves from potential rate hikes anyway. Steven Roth, the CEO of Vornado, executed a three-year swap to replace the variable rate on his firm’s $840 million portion of the 555 California loan with a fixed 2.26% rate. Donald Trump, by contrast, let his $360 million chunk float freely, ensuring his interest expenses would fluctuate up and down as central bankers moved rates.

Initially, Trump’s strategy looked smart, as he began with a roughly 2% interest rate while Vornado paid 2.26%. But in early 2022, after the Fed realized that inflation was not going to go away on its own, it jacked rates—and sent Trump’s interest expenses soaring. America’s most famous real-estate tycoon is now contending with an estimated 5.93% rate at the property, putting him on track to hand over $21 million of annual interest expenses, $13 million more than he would if he had followed Roth’s lead and locked in a fixed rate at the outset.

More than a decade of rock-bottom interest rates fooled plenty of property owners into thinking they would stay low forever. “That put a lot of people a little bit to sleep,” says Hessam Nadji, CEO of real estate brokerage and advisory firm Marcus and Millichap, who traveled around the country advising clients to guard against potential interest-rate increases. “You’d be surprised as to how many very astute investors didn’t lock in, you know, three-and-a-half percent interest rates. It’s astonishing. And I mean, I kept jumping up and down going, ‘How much lower do you think you’re going to get?’”

Those who initially ignored the warning signs eventually got the message. Trump appears to have later hedged the variable rate on his portion of the 555 California loan, preventing his interest expenses from ballooning even further. Both partners also seem to have hedged a follow-up refinance at New York’s 1290 Avenue of the Americas, a second property they share together. Trump ditched two variable-rate loans he had against his D.C. hotel and Miami golf resort in May 2022. He has also been paying down an additional variable-rate loan connected to his tower in Chicago.

Nonetheless, the initial miscalculation in San Francisco continues to haunt the former president’s business. Trump’s portion of the 555 California debt is larger than any other loan in his portfolio. The Trump Organization is now on pace to pay an estimated $51 million of interest across all of its properties this year, roughly 30% more than it paid the year Trump left the White House. The most devastating part of all this? Trump could have avoided the trouble, if only he had properly assessed the risk of inflation.

Steven Roth’s interest-rate hedge is just the latest example of him showing up his partner. Roth and Trump got into business together by accident. In the early 1990s, Trump faced debt problems at a patch of land he owned in Manhattan. A group of investors from Hong Kong swooped in to rescue him, taking 70% of the project and full control in the process. In 2005, the investors struck a deal to sell the property, planning to reinvest the proceeds in two office towers, 555 California Street and 1290 Avenue of the Americas. Trump complained bitterly—and even went to court to try to stop the deal. He lost, leaving him with 30% stakes in two buildings he did not want.

While Trump bemoaned the properties, Roth took an interest in them. In 2007, his firm Vornado bought out the Hong Kong investors for $1.8 billion. The Great Recession served as an early setback for Roth, but over time, he turned the assets into money gushers. In 2012, Vornado replaced about $400 million of expiring debt at 1290 Avenue of the Americas with a $950 million loan. Trump eventually got a check that he said totaled $125 million. Other funds went back into the property, with Vornado investing $31 million to spruce up the lobby, storefronts and elevators. Annual rent jumped $32 million by 2015.

More money went into 555 California Street, where Vornado remodeled two of the three buildings. Net operating income jumped 25% from 2017 to 2019 to $85 million. Over the same period, the value of Trump’ 30% stake increased from an estimated $347 million to $517 million, net of debt—making it the most valuable holding in the president’s entire portfolio. The second-most valuable? 1290 Avenue of the Americas.

During the Covid-19 pandemic, the two properties served as life rafts for Trump. As his hotels and golf clubs fired or furloughed thousands of workers, blue-chip tenants mostly continued to pay rent in the office towers. By about June 2020, the president was down to an estimated $64 million of available cash, with another $28 million locked up in the partnership. That would have been plenty of breathing room for most people, but it wasn’t nearly enough for Trump, who had $900 million of debt coming due over the next four years.

Roth came to the rescue, announcing a plan to extract cash from 555 California Street and 1290 Avenue of the Americas, either by selling or refinancing. When no legitimate buyer emerged, the partners replaced their $533 million loan at 555 California with a $1.2 billion one, which allowed them to suck out huge sums. Vornado walked away with about $450 million, and Trump received roughly $150 million.

The $1.2 billion of new debt, which JPMorgan Chase JPM helped arrange, came with a variable rate of LIBOR plus 1.93%. Roth trumpeted the new loan—initially referring to the windfall that Vornado extracted in the deal as “free money”—but he immediately hedged his variable rate by swapping for the fixed one, locking in 2.26% interest until May 2024. “When we do use floating-rate debt,” he said, “we do it with care.”

Still, Roth made some questionable moves. In an ideal world, he would have taken a fixed-rate loan at the outset—or secured that 2.26% rate swap for even longer. In March, Vornado signed up for a second swap that will begin in May 2024, cementing a 5.92% interest rate for another two years. That will protect the firm from even greater rate increases, while also locking in $31 million of annual interest expenses that it does not have to pay today.

Roth also could have done things differently at 1290 Avenue of the Americas. In November 2021, six months after the San Francisco deal closed, Vornado and Trump completed a $950 million refinance in New York, both taking a variable-rate loan. The deal looked alluring at first. The partners started out on track to cut their annual debt payments by more than 50% to $15 million. Then rates soared.

To his credit, Roth again hedged, this time with something called a rate cap, which works like an insurance policy, paying out when rates surge. Vornado documents seem to suggest that the protection covers Trump’s portion of the debt as well. That should limit the partners interest rate to 5.51% until November, when the cap expires. Unless the partners, who did not respond to requests for comment, find another way to hedge before then, their rate could fly above 6.5% at that point. Roth struck a gloomy note in an earnings call late last year: “Nothing can really protect as loans mature into a higher-rate environment.”

If the office market devolves further and interest rates continue to climb, the relationship between Trump and Roth could turn ugly. Trump has previously boasted about how, as a limited partner, he can stick his partner with the problems if things go south. “I put up zero money if there’s any cash flow problems,” he said in a 2015 interview. “To stupid people, the word ‘limited partner’ means, oh, he’s limited. No. You know what limited means? Limited as to liability, okay?”

But Roth’s Vornado, as the general partner, has its own advantage: full control over when to distribute cash from the partnership. Given the potential for trouble in the future, he might be wise to stockpile some extra money. Don’t be surprised if Roth decides to protect his interests again—and limit future payouts to Trump.

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