People laughed last night when The New York Times reported that Donald Trump claimed Special Counsel Robert Mueller should be dismissed because he had a conflict of interest with the president over a golf club fee dispute.
It’s not funny.
The dispute may very well strike at the heart of the billionaire’s “unique” cash flow strategy, and it might even have a lot to do with Russian money.
I’ve spent the 15 years writing about hidden fees, Gotchas and mistreated consumers, so I have a unique perspective on the business practices behind them. My ears perked up at this part of the story. Here’s what I found. It’s a little complicated, but stick with me for five minutes and you won’t be giggling any more.
First off, here’s what we know about the golf dispute: It’s not a lot. Mueller left Trump National Golf Club, which is just outside Washington D.C. in 2011, according to both the Times and the Washington Post. When he did, he asked for a refund, which he didn’t get, the Post reports.
“The dispute was hardly a dispute at all. According to a person familiar with the matter, Mueller had sent a letter requesting a dues refund in accordance with normal club practice and never heard back,” it writes.
Sounds like an experience many of us have had, like a fight for an apartment deposit or a wayward rebate. But in the world of golf clubs — a world most of us will never even sniff — there’s a lot more going on. Golf club memberships can cost tens of thousands of dollars each year, or more. In addition, there’s usually something called an initiation fee. That’s a sign-up fee. At some Trump clubs, the initiation fee can be as much as $450,000 (told you it was foreign). But here’s the catch. Some or nearly all of the initiation fee is often refundable, meaning it acts a bit more like a deposit — or like owning equity in the club. Plenty of unusual conditions must be satisfied to get a refund, however, like this: Often, clubbers don’t get the cash back until someone else signs up and forks over an initiation fee. In that way, it’s a bit like owning shares in the club.
But here’s the rub. Initiation fees add to to quite a pile of cash. This McClatchy story last year found that, back in 2004, Trump had access to a pool of $100 million in initiation fees from just four golf clubs. And while it’s generally accepted that this pile of cash is used to fund capital improvements at a club, that’s not necessarily the case. The story claims that Trump’s refund rules are a bit different, and in some cases, there’s a 30-year waiting period for refunds. In other words, that’s a massive 30-year interest-free loan for Trump. Think: Free Mortgage. In other words, golf clubs are fantastic way to generate quick cash. The headline of the McClatchy story was “Trump personally pockets club membership fees, breaking with industry norms.
“It’s definitely unusual,” said Jay Karen, CEO of the National Golf Course Owners Association, who has been in the golf club business for two decades. “It certainly reflects a clever and shrewd way to raise capital.”
Back to Mueller. He at one point belonged to Trump National. But when he quit, in 2011, Trump National hadn’t been Trump National for very long. Trump acquired it in 2009, during the housing collapse, probably for pennies on the dollar. At the time, it was known humbly as the Lowes Island Golf Club. The price wasn’t disclosed, but it had been sitting on the market for some time with a price tag of $18 million.
I don’t know, but it seems likely, that Mueller joined when the club was still Lowes, and decided to leave (and ask for his refund) not long after it became Trump’s club. One can imagine this could be perceived as a personal insult by the club, or even Trump himself, and so the usual, “Oh, we lost your refund request in the mail” charade began. Perhaps that was just the annoying Gotcha that most journalists perceive. But as I’ve written many times, what appears to be a small, annoying hidden fee is often a major (unfair) business model. That’s the real gotcha.
Members leaving and demanding their cash would be a threat to this free-loan business model. Perhaps that’s why Trump and his organization takes these refund requests so badly. And how he’s ended up in court (and lost) over disputes like this. In February 2017, a federal judge ordered Trump’s company to refund $4.85 million to members who quit his Trump National Golf Club in Jupiter, Fla.. The group sued because Trump acquired the club in 2012 from the Ritz-Carlton Hotel Co. and changed membership rules. Each had paid $35,000 to $210,000 in deposits.
The Mueller story bears similarities to the Jupiter case. He was a member, Trump acquired the club and changed the rules, he tried to leave and had trouble getting his money back. I don’t know how much Mueller paid in initiation fees, but a story about his purchase of the club in 2009 set initiation fees at $75,000.
Trump promised to substantially increase the fees at the time.
It’s critical to note that the Post story uses the word “dues,” though it wouldn’t make sense for Mueller to ask for a dues refund. A membership initiation fee dispute makes more sense, but I am speculating.
So, to review, if Mueller thinks Trump owes him $75,000, is that a laughable dispute? Or could that create a real conflict of interest for him as he investigates Trump? It might.
Now, what does all this have to do with Russia? As I’ve mentioned, golf clubs are a very clever way to generate cash flow. For a developer who clearly has trouble with cash flow, it’s a clever financing tool. Like all developers, Trump needs to continually grow cash flow to fund ever-expanding list of projects and ever growing debt payments. In this case, he would have to continue to open golf clubs that spin off interest-free loans to help him make debt payments in other parts of his empire. That’s even more critical, given that no U.S. bank or Wall Street firm will lend Trump money.
Now: It’s hard to keep opening golf courses without lumps of cash coming from somewhere. That’s why golf writer James Dodson’s allegations from playing a round with the Trumps needs to be re-read in this context. He claims the money to open new golf course was coming from Russia. Here’s what he told local public radio:
“Trump was strutting up and down, talking to his new members about how they were part of the greatest club in North Carolina,” Dodson says. “And when I first met him, I asked him how he was — you know, this is the journalist in me — I said, ‘What are you using to pay for these courses?’ And he just sort of tossed off that he had access to $100 million.”
$100 million.
“So when I got in the cart with Eric,” Dodson says, “as we were setting off, I said, ‘Eric, who’s funding? I know no banks — because of the recession, the Great Recession — have touched a golf course. You know, no one’s funding any kind of golf construction. It’s dead in the water the last four or five years.’ And this is what he said. He said, ‘Well, we don’t rely on American banks. We have all the funding we need out of Russia.’ I said, ‘Really?’ And he said, ‘Oh, yeah. We’ve got some guys that really, really love golf, and they’re really invested in our programs. We just go there all the time.’ Now that was [a little more than] three years ago, so it was pretty interesting.”
Eric Trump denied those claims. Even if he did say it, perhaps it was exaggeration. It’s reasonable to believe that rich investors from all over the planet are interested in getting in on elite golf courses, however.
I know this: It’s not funny. Golf club memberships generate cash flow in a unique way, and that seems critical to Trump operations. Russian money may have helped with expansion of that cash-generation machine. Members quitting and demanding refunds is a threat to that structure. If that’s what Mueller did, it’s not a funny footnote to Trump’s rantings. It’s central to any investigation of Trump’s empire and potential undue influence from foreigners.
That’s quite a Gotcha.
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This business model is no different than that used by Buffet to acquire Geico. Large amounts of cash without any likelihood of a payout of those amounts at any given time.
In Trump’s case, however, it reminds me of a massive fraud and resulting conviction of an individual who bought companies holding huge amounts of cash for real estate investors who were engaged in IR Section 1031 tax deferred exchanges. It was the ul
This is so speculative that it’s irresponsible. This is exactly how ugly rumors get started. Shameful.