Boardwalk Empire: The Birth, High Times And Corruption of Atlantic City (44 page)

As he branched out into Brooklyn and Staten Island, Fred built thousands of units for sale and rental. In July 1938 the
Brooklyn Eagle
praised Fred Trump as “the Henry Ford of the home-building industry.” By exploiting government financing and tax incentives available after World War II with a skill unequaled by anyone in New York City’s history, Fred amassed a fortune. Throughout the ’50s and ’60s he was dogged by controversy and government inquiries from one development to the next. While there were allegations of bribes and kickbacks, Fred remained unscathed and became the city’s largest landlord. By the time his son, Donald, had completed prep school at the New York Military Academy in Cornwall-on-Hudson and graduated from the Wharton Business School at the University of Pennsylvania in Philadelphia, Fred’s empire comprised nearly 25,000 units, with rental income of more than $50 million annually. And it was his alone—he had no partners.

The enormous equity Fred had built up in his rental properties was irresistible to his son. Donald convinced his father to use that untapped cash to venture where Fred had never gone, across the East River to the island of Manhattan.

The Manhattan real estate market is no place for amateurs. Smart players with equity and good timing can make fortunes in Manhattan but it’s also a graveyard for many would-be real estate barons. Donald Trump had not only his father’s money but also his instincts. From the time he was a child, he had watched and worked with his father whenever he wasn’t in school. He learned much. While still in his 20s, Trump had developed maturity for the real estate game far beyond his years.

Trump’s first opportunity to test his talent in Manhattan came on property owned by the ailing Penn Central Railroad. In 1974, Trump Enterprises secured options to buy several large waterfront parcels along the Hudson River. The timing was critical. Not only was Penn Central in trouble, but New York City was having serious financial and image problems of its own, and there were no other buyers. The purchase price for Penn Central’s land was $62 million, but Trump paid nothing for the option. Better still, the railroad agreed to pay all of Trump’s soft costs for the approvals needed to build a housing project that would contain thousands of units. Tax abatements from the city and long-term, low-interest financing (Fred had close ties to Mayor Abe Beame) assured success of his plans. Another deal where Trump put up little of his own money was the Grand Hyatt. Again, Penn Central was the seller, and this time Trump had a partner in the Hyatt Hotel chain. He agreed to buy the aging Commodore Hotel for $10 million and convinced the city to give him an unprecedented 40-year tax abatement, valued at a minimum of $160 million. When terms of the deal became known to other developers, the city was widely criticized. But Trump was probably the only buyer for the Commodore and, at the time, the only developer willing to gamble on building a new hotel in New York City.

Trump had seized the opportunity created by a city desperate for development. He continued his roll going on to acquire the Bonwit Teller building and the air rights above the adjacent Tiffany’s on Fifth Avenue. There, he built the centerpiece of his Manhattan empire, Trump Tower, a glittering palace housing hundreds of seven-figure condominiums—only in New York. Shortly after that transaction Trump expressed interest in becoming a player in Atlantic City.

Despite the initial success of casino gambling, a mind-set similar to New York’s prevailed in Atlantic City at the time Trump began looking for property—namely, development of any kind was welcomed. It had been so many years since anyone was willing to invest in Atlantic City that for the first 10 to 15 years after the legalization of gambling, any new developer, especially a high-profile real estate tycoon like Trump, was received with open arms. There was so much rebuilding to be done that Donald Trump was embraced immediately. While he was eager to cash in on the Atlantic City boom, Trump had waited too long to get in on the really easy, big money raked in by Resorts, Bally’s, and Caesar’s. During their early years, the first three casinos were virtual money factories. Trump didn’t begin looking seriously for a casino hotel project until early 1980. By that time, there were at least six other casinos under construction and a dozen more on the drawing boards. The lure of a quick return on investments had attracted all types, ranging from established firms like Hilton Hotels and Holiday Inns to stock swindlers and the mob.

Donald Trump’s first casino hotel, the Trump Plaza, was one of those projects that started as a con game. Plans for the casino were first developed by Robert Maheu, an associate of reclusive billionaire Howard Hughes. It had been eight years since he was forced out of Hughes’ Summa Corporation, where he was involved in the company’s extensive Las Vegas casino operations. In 1978 when Resorts International opened, he was president of Houston Complex, Inc., a Las Vegas company that claimed to be in the computer software business. His partner in the venture was Grady Sanders, president of Network One, Inc. Like Steve Wynn, Maheu and Sanders saw gamblers waiting in line to lose their money at Resorts International and they wanted a casino of their own. With a bravado bested only by the likes of Donald Trump, Maheu and Sanders announced they would build a 1,000-room hotel on an undersized Boardwalk lot next to Convention Hall. It would cost more than $100 million.

Maheu’s press release attracted the attention of the Securities and Exchange Commission (SEC). Comments by Maheu and Sanders about their plans had generated intense speculation on Wall Street, and the price of the stock of the two companies shot up. In late August 1978, just days after they signed a lease for the property, the SEC halted trading in the stock for 10 days while it took a closer look. About two weeks after the SEC first intervened, Maheu and Sanders unveiled plans for another project, a $60 million, 600-room casino hotel. “The marching orders have been given and everyone is gung-ho,” Maheu said at a press conference. The announcements continued. Partners were added, leases and financing packages were developed, and construction plans were revised. There were other projects, too. Network One told stockholders earlier in the year that it was developing a “tamper proof” videotaping system that would be sold through 90 distributors and generate $2 million in sales in the first year. A year later, there were no distributors and no sales. The firms also made announcements about a planned satellite cable television network and a two-mile-long roller coaster project in Las Vegas—neither of which ever got off the ground. Then the SEC returned. It charged the two companies had issued “false and misleading statements about the firms which were designed to create the illusion that they were well established, highly regarded Las Vegas firms engaged in diverse activities.” Instead, the two were nothing but “defunct publicly traded shell corporations.”

With financing next to impossible, Maheu and Sanders recruited partners Midland Resources and developers Robert Lifton and Howard Weingrow to help salvage the project. But Maheu and Sanders didn’t have the resources to continue and control of the venture was turned over to the new partners. Plans again were revised, but they were unable to secure funding for what they dubbed the “Atlantic Plaza Hotel Casino.” That’s when Trump arrived. The Donald reached a deal to lease the land from the partnership and took over the project, permitting him to enter Atlantic City cheaply.

At the time of Trump’s arrival, Atlantic City’s casino industry was having growing pains. The industry had expanded faster than the market could grow, and that led to some difficult moments. There were nine casinos in place—several losing money—and none under construction. With the resort far from rebuilt, state and local officials were desperate for someone to put construction workers back to work and bring additional tax ratables and employment to the city. Trump sensed the anxiety and seized the moment. He moved in with grand plans, which officials praised as the start of the “second wave.” Then he held his plans hostage until he received concessions from city and state government that would insure his investment.

Trump brashly insisted he wouldn’t go forward unless he was first licensed as a casino operator. “I didn’t want to be in a weak negotiating position with the Casino Control Commission. … My strongest card was the fact that construction of new casinos in Atlantic City had come to a complete standstill. State and city officials, I knew, were hungry for new evidence that Atlantic City was a good investment.” He told the state he wasn’t willing to “sit around twiddling my thumbs waiting for answers” if the license investigation took a year or more. The result was an informal agreement to complete the process within six months.

Technically such a request was impossible to fulfill. Regulators license a building and find that its owners are qualified to run and operate it. The distinction had not been a problem before Trump because every other operator opened its gaming hall under a temporary license—a convenience that allowed regulators to open a casino complex as soon as it was physically ready even though investigation of the owners wasn’t complete. By this time, temporary licenses had been abolished and Trump wouldn’t risk building a casino without first knowing he could run it. The move accomplished two goals simultaneously. It gave Trump the excuse he needed to go out and find others to risk their money on the project and also put pressure on regulators to move quickly with their investigation. The commission couldn’t issue a license to him, but it did the next best thing—it held a hearing and determined Trump met all the qualifications to hold a license, once his building was complete.

One of the first design problems faced by Trump was that the hotel was to be built on a narrow sliver of land. The location next to the Boardwalk Convention Hall was fine, but a hotel less than 200 feet wide would be difficult to build and operate. Trump needed more width for his project. To handle this problem, he reached out to local attorney Pat McGahn. Resorts International had used McGahn effectively for years to get matters through local government, and Trump recognized the value of a local player. Quietly, McGahn arranged several private meetings with his friends in city hall to discuss a radical new plan for the project. A proposal was developed to allow Trump to buy the air rights over Mississippi Avenue, the street separating the hotel site from Convention Hall. The street is the only access to the Hall’s underground parking garage and was used heavily by traffic visiting the Hall. Being able to build above it permitted Trump to develop a much wider casino, more attractive to gamblers. In a period of just one month—lightning speed by Atlantic City standards—the new plan was approved by the city, and the air rights over Mississippi Avenue were sold for $100. McGahn’s ability to secure the air rights for a token is in stark contrast to a similar situation at Caesar’s Boardwalk Regency. When Caesar’s requested the air rights over a narrow alley, rarely used by the public, city hall demanded $500,000.

Shortly after work started, Trump reached a deal with Holiday Corporation, the Memphis-based firm that owned Harrah’s Casino Hotels in Nevada and the Harrah’s Marina Hotel Casino in Atlantic City. It was July 1982, and Holiday agreed to provide the financing and manage the casino hotel. All Trump had to do was build it and turn over the keys. In exchange, he would receive one-half the profits. Trump had found someone else to assume the risks while he shared in the rewards, but he wasn’t happy. Within months of the Plaza’s opening, Trump grew restless with Harrah’s control of
his
casino. He wasn’t content to sit on the sidelines and let someone else get all the glory. There was constant bickering between the partners over how the facility should be run. Trump was convinced that Harrah’s was doing a lousy job.

To the Donald, one of Harrah’s biggest mistakes was the failure to take advantage of
his
name. Trump felt his name had drawing power and he wanted it shouted to the world. The official name of “Harrah’s Boardwalk Hotel Casino at Trump Plaza” had to be changed. He demanded that his name be moved up. So it became “Harrah’s at Trump Plaza.” While the name change fed his ego, it didn’t solve the underlying differences between the partners, nor did it quench his thirst to run a place of his own. Trump got the opportunity in 1985 by a means no one could have predicted.

The Casino Control Commission, in what will likely be remembered as that agency’s biggest blunder ever, denied a license to the Hilton Hotels Corporation. Unlike Trump, Hilton had started construction of its $325 million casino hotel prior to being cleared by the regulators. After all, who could anticipate the denial of a license for an international hotel chain that hosted presidents and kings at its luxurious hotels? Under intense pressure, the commission agreed to reopen the Hilton hearing and reconsider additional evidence. But the initial denial left the Hilton organization so angry it refused to risk further damage to its reputation and gave up on being licensed. To make things worse, Hilton was facing several other problems at the time. Steve Wynn of Golden Nugget, Inc. was threatening a takeover of the company, and the estate of the company’s founder, Conrad Hilton, was contesting a claim by his son Barron to the estate’s controlling block of company stock. To add to the problems, an order of nuns who were the principal beneficiaries of the estate believed the estate would receive more for the stock in a sale to someone other than Barron Hilton—a sale that could help them in their mission to care for orphans and the poor. Unable or unwilling to fight major battles on both coasts, Hilton put the casino up for sale and the Donald was ready to buy.

Trump obtained a $325 million loan from Manufacturers Hanover Trust Corporation to purchase the Atlantic City Hilton—a large risk for a single bank, but revealing of how strong Trump’s standing was then at only age 39. Uncomfortable, perhaps because he was on the hook for the money, Trump quickly sold $350 million in mortgage bonds in the junk bond market to finance the property, removing his personal guarantee. He didn’t have to worry about finding someone to run “Trump’s Castle Hotel Casino,” since part of the deal with Hilton required its management team to stay in place, at least until the end of the year.