Why Donald Trump’s Tax Returns May Prove He’s Not That Rich

Until then, voters can glean a great deal of information from two sets of documents the Trump campaign has already provided: A balance sheet released in June, when Trump declared his candidacy for President, and a 92-page Personal Financial Disclosure (PFD) form submitted to the Federal Election Commission a month later.

Neither document is as telling as a tax return would be. But when closely read together, you can learn a great deal about Trump’s financial affairs. Here’s the most concerning thing I learned: Trump appears to have overstated his income, by a lot, which could be the reason he has so far tried to avoid releasing his returns.

In July, Trump’s campaign in the press release that accompanied the financial filing stated that the candidate made $362 million in 2014. In fact, a close reading of the two documents, especially the PFD, shows that number is actually Trump’s revenues, and not his income, which should be after salaries, IT costs, interest and all other expenses. Indeed, the filing specifically labels these items under such headings as “revenue,” “sales,” “royalties,” “commissions” and other categories—clearly designating them as gross receipts rather than taxable income.

What is Trump’s actual income by my calculations? If I am generous, about half of what he claims, but possibly as little as a third. If that’s the case, and I believe it is, Trump’s net worth is likely a lot less than what he says. It would have to be, or else Trump’s income is pretty modest for someone claiming to boast a net worth exceeding $10 billion. (I’ll show you how I get to my numbers in a little bit. I reached out to the Trump campaign to double check my math, but didn’t hear back.)

By adding up all the revenue that Trump claims as income, a clearer picture emerges of the GOP frontrunner’s business interests. His enterprise looks a heck of a lot smaller than the real estate colossus the candidate claims—and that most of his supporters believe—he presides over. Although, by the way, it’s still impressive.

As far as taxes are concerned, Trump may be paying a relatively small amount to Uncle Sam simply because his business isn’t huge. (Indeed, given the projected modest size of his business, he may be paying an even smaller amount in taxes, thanks to the advantages real estate developers enjoy in our tax code.)

None of this implies that Trump is hiding anything. (Although you have to assume that a successful businessman like Trump would know the difference between revenue and income.) Most of the evidence is right there in the filing. The wonder is that no one has looked at the distinction between income and revenue. It’s one thing to have free cash flow, or taxable income, of $500 million a year. Your bottom line shrinks considerably if you have revenues of $500 million a year.

So let’s get to the specifics. The PFD provides much of the data required to roughly estimate the total sales of Trump’s enterprises. The press release that accompanied the filing states that Trump booked $362 million in “income” in 2014, “which does not include dividends, interest, capital gains, rents, and royalties.” It’s apparent from the labels that these items represent gross income, or sales. They fall under roughly 15 rubrics. For example, the filing reports $56 million in “condo sales.” Another big category is revenues from golf courses, which fall under the headings “golf related revenues” and “golf resort related revenues.” Those categories presumably include things like membership sales, green fees, and the like. They totaled $167 million in 2014.

Resort and hotel “revenues” contribute another $43 million, including $15.6 million from the famed Mar-a-Lago Club in Palm Beach. Other categories are “commissions,” “management fees,” “land sales,” “beauty pageant related revenues” ($3.4 million), “land sales,” and receipts from operating the Wollman Rink in Central Park ($8.7 million).

Once again, all of those items add up to $362 million. The other major categories are rents and royalties—both revenue items—and investment returns from capital gains, dividends, and interest. (These latter items represent income rather than revenue.) For both royalties and rents, the PFD gives a range of income figures. For royalties, the maximum number for 2014 is $37.5 million. The minimum is $10.1 million. Most items give a pretty large gap. One example: The licensing royalties from real estate projects in the Philippines and Puerto Rico are estimated to be between $100,000 to $1,000,000 each.

Where this gets tricky is in the category of rents. For his smaller holdings, Trump also reports rental receipts in a range for each holding. All told, the maximum is $46 million, the minimum $12 million. But Trump also owns, or is a partner, in three major Manhattan office buildings, 40 Wall Street, Trump Tower (his headquarters), and 1290 Avenue of the Americas. He also owns the trophy condo building, Trump Park Avenue, which is fetching some of the highest residential prices in New York. But Trump only discloses revenues for one of his buildings, Trump Plaza, where the filing lists “rent” of $11.5 million.

On the three office towers, the PFD simply puts the “income” at “over $5 million.” What are the real rent rolls on these properties? It’s impossible to know, except that the footprint of rental space in each building is readily available, and the annual rental rates per square foot are pretty well known. Naturally, many of the tenants have long-term leases at lower numbers. Still, it’s possible to get a highly general view of the total rents going to Trump. I estimate this figure at around $100 million a year, including Trump Park Avenue and Trump Tower, and Trump’s 30% partnership position in 1291 Avenue of the Americas.

Now we should have all the numbers. So let’s calculate a minimum and maximum for Trump’s revenues. For a maximum, add the $362 million mainly from resorts and golf courses, plus the $37.5 max on royalties, plus $46 million rent on lesser holdings, plus $111.5 million estimated rentals on the big Manhattan properties. The total is $557 million.

(The minimum number uses the $10 million low estimate for royalties and $12 million for rental properties where numbers are smaller, for overall revenues of $484 million.)

Let’s use the $557 million number. By the way, that’s hardly chump change—that’s a lot of revenue. Top real estate investment trusts such as Corporate Office Properties Trust ($586 million) and Brandywine Realty ($597 million) are about the same size, though the giants, notably Boston Properties ($2.4 billion), appear to be a lot larger. Most REITs return between 18% and 20% a year on sales; a pace-setter is Vornado Realty Trust at 30%. So let’s assume that Trump is in the Vornado class and achieves an operating margin of 30%. His operating income would then total $167 million. In his June filing, Trump also disclosed debt of $503 million. This presumably includes all the loans on his individual buildings. If that is correct, at a 5% interest rate, he’s paying $25 million a year in interest.

Hence, his pre-tax earnings from his business, not including personal investments, could be something like $142 million (the $167 million in operating profit less interest of $25 million). But that’s not all of his income. Trump disclosed that he’d reaped $27 million in capital gains in January of 2015. His capital gains are impossible to calculate for 2014 because the ranges he presents on his portfolio in the PFD are extremely wide.

Trump, however, did disclose in the June statement that he then held $302 million in marketable securities and cash. A reasonable return on that portfolio would be $10 million. That brings the total to $152 million, not including capital gains. If the Donald turned over one-third of his portfolio in 2014, as he did in early 2015, and made a similar return, we can add another $27 million. That brings us to $180 million.

How much tax would Trump be paying on that $180 million? For a regular billionaire, it should be at least 30% or $50 million-plus. But remember, Trump is a developer. He can depreciate the cost of his buildings over 27 years. For many developers, depreciation and interest expense match their net rental revenues, after operating expenses. Those moguls are really waiting to reap a big capital gain when they sell. That’s particularly true of Manhattan developers, who frequently benefit from markets where prices rise sharply—the story of the past several years. In the meantime, until they sell, they pay no income tax. Eventually, they’ll shoulder a heavy cap gains hit, but those days are often far in the future.

That doesn’t necessarily mean Trump pays a low tax rate. We just won’t know until he files his return. And even if he does, that’s the way developers play the game, and it’s all within the rules.

We should also look at a scenario where Trump earns a more normal 20% operating margin. Then he’d make $86 million on his businesses after interest, plus the estimated $37 million in interest and cap gains, for a total of $123 million.

Here’s the bottom line: Without knowing how much Trump’s business pays in taxes, it’s impossible to calculate his net worth. If he pays no tax, and boasts a 30% operating margin, his empire could be valued at $3 billion, plus cash of $300 million, or $3.3 billion. That’s assuming a rich multiple of 20 times earnings. If the operating margin is far lower, and he pays lots of tax, the number would be greatly reduced.

In the June filing, The Donald estimated his net worth at $8.74 billion, and now says the number exceeds $10 billion. He apparently had lots of fun valuing his brand, reporting an asset of $3.32 billion for “real estate licensing deals, brand and branded development.” In the PFD, however, Trump reported royalty income of somewhere between $10 million and $37.5 million. Assuming he earns 90% margins on his royalties—a generous assumption—and pays no tax, he’s telling the world his brand should carry a price-to-earnings ratio of 100. It’s more like 200 if you take the lower end of the range, and tack on a reasonable tax rate. It’s interesting that Martha Stewart sold her Martha Steward Living, one of the world’s leading licensing brands, for $353 million last year.

Trump doesn’t think his tax returns will tell us much that’s new, advising the curious to look instead at his voluminous PFD. But the return, if it’s forthcoming, will make fascinating reading. It will dispel the confusion between profits and revenues, show the size of the Trump empire and reveal if he’s a big taxpayer, or uses totally legitimate rules to avoid big levies.

I can’t wait for Pope Francis to release complete financial statements for the Vatican. The excitement should be just as great for the unveiling by the pious Pontiff’s ultra-secular nemesis, Donald Trump.