The New York Supreme Court, in the person of Judge Arthur Engoron, has caused an earthquake in the New York real estate market.

Investors don’t like risk, and they particularly don’t like political risk.

To a great many observers, the trial which resulted in Engoron’s ruling, a trial which some characterize as more worthy of Putin’s Russia than of “the land of the free,” was primarily politically motivated, pursued, and adjudicated.

Even the New York Times, no fan of Trump, has observed that “In Trump Cases, Supreme Court Cannot Avoid Politics.”[1]

An unintended consequence of the NY Supreme Court’s ruling is an increase in the perceived risk of owning real estate in New York.

Real estate investors are cutting investment in New York

In the past few weeks — following the court’s verdict that Donald Trump was guilty of fraud and subsequent penalty of $355 million of fines — numerous real estate investors and property owners have expressed concern about, or have stopped investing in, New York real estate. The alleged (and adjudicated) crime was that Trump overstated his wealth. Property owners virtually all recognize that the value of any piece of real estate is a subjective judgement. Furthermore, property owners habitually, regularly, predictably tend to estimate the value of their properties on the high side. And everyone, especially lenders, knows this, which is why they do their own valuations.

The alleged crime is, that Trump supposedly relied on such misrepresentations to him, to acquire more favorable loan terms than would otherwise be available. The alleged damages are that because Trump received loans, he was, “pricing out honest borrowers” and “distorting the market.”[2]

If Trump doesn’t pay the fines, his assets – i.e. his real estate — may be seized, according to statements from New York’s attorney general.[3]

Regardless of whether these charges are justified, and if they appear to most knowledgeable observers to be completely political, many prominent investors are fearful. That may pose a risk to the market.

Grant Cardone, head of investment fund Cardone Capital, publicly instructed his team to “Immediately discontinue ALL underwriting in New York City real estate”[4] following the Trump decision.

“Shark Tank” investor Kevin O’Leary called the ruling “un-American.” He added that Trump’s actions were no different than those of any other real estate developer. Given the penalty laid on Trump, said O’Leary, we might as well “penalize all developers across America. They’ve done the same thing.”[5]

Are investor worries justified?

Reactions from these and other investors prompt two questions: 1) Even if Trump was guilty, is the giant fine justified, and 2) What does the very fact of the prosecution mean for the risk of owning property in New York.

 Was Trump targeted for primarily political reasons? If investors believe the answer is yes, they will wonder who’s next. Thus, they understandably may hesitate to invest in New York real estate.   Where the risk in an investment rises, investors demand higher risk premiums than before. The perception that New York state will persecute real estate owners for political reasons is certainly an increase in risk.

Some people are suspicious of the fact that Trump is being charged for actions he committed long ago. Others are suspicious of the fact that the alleged victims of fraud, the banks themselves, did not seek damages; New York’s Attorney General did.[6] Others view the punishment as overly harsh: New York Attorney General has stated that “only” $168 million of the fine Trump now owes is the sum of money that he would have owed to banks had he accurately represented his net worth.[7] Others are suspicious of the fact that the judge unilaterally decided the penalty; no jury was involved.

We offer no opinion on the legal details of the case.  But the legal details seem irrelevant, given the overtly political nature of the prosecution. A significant number of important voices believe that Trump was not guilty. And from an investment perspective, it doesn’t matter whether he was or not. Instead, what matters is how the market perceives the changed risk environment.

 No investor is likely to see the ruling as reducing the risk for property owners.  And because prices in any market are determined by the marginal buyer and seller, this ruling, regardless of whether it is upheld or overturned, has raised the risk, and therefore reduced the value, everything else equal, of New York commercial real estate.

This could lead prices to drop, and returns will be lower than they otherwise would have been.

Investors and real estate developers halt investing

Kevin O’Leary publicly stated that he would stop investing in New York real estate, and asserted that “every investor is worried, because where’s the victim?”[8]  It is unclear to many whom the victim in this case is. Deutsche Bank, from which Trump borrowed large sums of money, has stated that they were happy to have Trump as a customer.[9]

And commercial real estate development firms are worried too. Tony Seruga published a list of 21 commercial real estate firms that are considering leaving New York[10] following the Trump decision.

Since 2019, over 160 Wall Street Firms have left New York, taking $1 TRILLION with them in assets. This doesn’t necessarily mean that the value of real estate will fall, but it does indicate New York is becoming a less desirable place to live for many people, which could easily have a negative impact on the price of real estate.

Tax-Efficient Sale

The increased political risk of holding New York real estate is a strong reason for some to sell. Against that, however, is the loss of net worth caused by the capital gains tax on a sale. Real estate investors are no doubt familiar with the 1031 exchange which defers tax on a qualifying 1031 transaction. But they may be less familiar with an alternative that permits actual sale and diversification out of real estate.

Real Estate Shelter Trusts

That alternative to selling without paying the capital gains tax is called a Real Estate Shelter Trust.

These trusts enable real estate owners to sell without paying capital gains tax while the assets are in the trust.

Beneficiaries of the trust are entitled to receive income equivalent to 5% of the value of the trust at the beginning of the year for their entire lives. If their heirs are named as beneficiaries, such heirs are also entitled to receive lifetime income.

This tends to work well for owners of real estate who want to diversify out of real estate and redeploy their assets somewhere else. Once inside the trust, the assets can be sold without tax. The trust will retain 100% of the net (after sales costs) from the sale. The proceeds can be invested in almost anything.

To learn more about Real Estate Shelter Trusts, click to request a copy of our Advisor Guide. Or call 703 437 9720 and ask for Connor.

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[1] https://www.nytimes.com/2024/03/05/us/politics/trump-supreme-court-election.html

[2] https://news.yahoo.com/trump-may-face-harsh-punishment-130101816.html              

[3] https://www.pbs.org/newshour/politics/donald-trumps-properties-could-be-seized-if-454-million-civil-fraud-debt-not-paid-warns-ny-ag-james

[4] https://finance.yahoo.com/news/grant-cardone-team-immediately-discontinue-173431156.html

[5] https://thehill.com/homenews/media/4479150-shark-tanks-oleary-on-355m-decision-against-trump-what-fraud/

[6] https://deadline.com/2023/09/donald-trump-found-liable-for-fraud-new-york-1235556777/

[7] https://news.yahoo.com/trump-may-face-harsh-punishment-130101816.html

[8] https://thehill.com/business/4477608-kevin-oleary-says-he-will-no-longer-invest-in-loser-new-york-after-trump-verdict/

[9] https://apnews.com/article/trump-civil-fraud-lawsuit-trial-deutsche-bank-fe02ac8f11b9307f22ec0e5e86e8e992

[10] https://twitter.com/TonySeruga/status/1760428638397510122