May 30 (Bloomberg) -- It took less time to build the Empire State Building.
Fifteen months after filing for an initial public offering, the Malkin family said yesterday it had won enough investor votes to form a real estate investment trust featuring Manhattan’s signature skyscraper and 20 other properties. Victory didn’t come easily for the family’s Malkin Holdings LLC, which had to fend off a group of shareholders opposed to the deal, poised to be the second-largest U.S. IPO of a REIT.
The fight was uncommon and uncommonly contentious for an IPO plan, most of which sail through with few hitches. Dissident investors said they were being shortchanged by Peter Malkin and his son, Anthony, who run the entity that controls the 102-story Empire State Building. The Malkins said the opposition either misunderstood the deal or was lying in an effort to derail it.
“You had 2,800 people who had a tie” to the building, Lawrence Longua, a professor of real estate finance at New York University, said in an interview before yesterday’s announcement, referring to existing investors in the skyscraper, many of whom have held their stakes since the 1960s. “The individual stories made it more an emotional event than a business transaction.”
The Malkins, who announced plans for an IPO in February 2012 and began formally seeking votes in January, will conclude the solicitation in “due course,” Hugh Burns, a spokesman with Sard Verbinnen & Co., said yesterday. After receiving written notice, holdouts will have 10 days to switch their vote to yes or else receive a token $100 for each of their shares. Empire State Building units may be worth more than $300,000 apiece, according to the offering statement.
New York State Supreme Court Justice O. Peter Sherwood on April 30 rejected a challenge to that provision. Holdout investors are appealing the decision, Richard Edelman, a leader of the group opposing the share sale, said yesterday. He’s planning a conference call tonight to discuss the situation with investors.
The $100 buyout is just one of the perceived inequities the dissidents have attacked. Others include the $75 million earmarked for promoting the plan, recoverable to investors only if the REIT were approved; an estimated $304 million in shares the Malkins proposed to collect by treating the conversion as a sale; and accounting that provides investors with only about half the Empire State Building’s $2.5 billion estimated value, with the rest going to a sublease holder majority-owned by the estate of Leona Helmsley.
Some investors prefer to keep a reliable income stream that is distributed to unit-holders under the current structure. The skyscraper, completed in 1931 after about 14 months of construction, is poised to see net operating income almost double to $160.2 million by 2018 as renovations are completed, according to the prospectus.
The current partnership couldn’t continue because of the Helmsley estate’s need to liquidate, the Malkins have said. They also say that the tower has been hamstrung by an archaic governance structure, and that as part of a REIT it would be able to raise debt and equity to boost growth prospects. In addition, the plan offers liquidity by enabling investors to sell shares of the REIT.
Empire State Realty Trust Inc., as the new company would be called, is seeking to raise about $1 billion for the REIT. Only the 2006 debut of Santa Monica, California-based Douglas Emmett Inc. was bigger in the industry, at $1.6 billion, according to data compiled by Bloomberg.
Under the proposal, the Malkins and their associates would receive shares and units valued at almost $731 million, based on an appraisal of the properties slated for the REIT. That includes the $304 million that some investors have complained about.
David Orlowsky, 66, a retired accountant living in Miami Beach, Florida, said his vote for the REIT was an expression of faith in the Malkins.
“I’ve been with them for a long, long time,” Orlowsky said. “I’ve only had good results from the partnerships I got into. Lots of my clients used to invest with Wien and Malkin, and they always seem to be doing good for their investors,” he said, referring to Lawrence Wien, who helped orchestrate the syndication of the tower in 1961 and was Peter Malkin’s father-in-law.
Krystal McMurry Melton, 31, of Niceville, Florida, voted against the plan. Being an Empire State Building investor has a value beyond mere money, she said.
“I do not want to sell because I would like to pass it on to my son for him to have a piece of American history,” said Melton, full-time mother to 16-month-old Patrick. Melton said she received a half-share from her father, who acquired it from a securities trader around 2003.
Investors who objected to the offering have themselves faced criticism by the Malkins.
Edelman, 58, the grandson of an original unit-holder, has operated a website, organized a phone bank and conference calls for shareholders. He and his cousin, Steven Edelman, were mentioned in multiple regulatory filings by the Malkins, who told investors the dissidents’ conclusions about the offering were false and should be ignored.
The cousins “and those working for them are using lies and deceptions to influence votes,” the Malkins said in an April 18 filing. “Malkin Holdings thinks anyone who votes on their message will be exposed to economic harm and will have a claim against the Edelmans.”
Richard Edelman, an online business development consultant from Solana Beach, California, said his group has spent about $120,000 on its efforts, about half of that donated by Empire State Building co-investors.
“We wanted it to be a debate of ideas,” he said in an interview before the approval announcement. “The Malkins instead chose to assault and attack investors who wanted to have that debate. And they did it in a public way.”
The Malkins disagree with that characterization, Burns said.
Others who challenged the proposal include Robert Machleder, a former partner in the Malkins’ law firm who objected to the $304 million in stakes they would collect; and Andrew Penson, the New York real estate investor who owns Grand Central Terminal.
Penson, a member of a company that holds about 10 Empire State Building shares, submitted affidavits in support of the opposition. He said on an April 4 conference call that the Malkins had drafted the proposal in a way that is “extremely favorable” to them, without first consulting unit-holders.
For at least one Empire State Building investor who favors the REIT, the dissidents miss the point.
The offering is a way to be rewarded for an investment that has been close to illiquid over the years, said Seth Poppel, 69, of Seattle, the operator of a company that licenses celebrity high-school yearbook pictures. All the opposition-produced delays have done is increase the risk that the stock will hit the market at a bearish time, he said.
“I’m less concerned with counting their money than counting my money,” said Poppel, whose unit was handed down from his grandfather. “The piece of the pie I get looks pretty good to me, and I’m not an unsophisticated investor.”
To promote the plan, the Malkins set up an investors-only website, held conference calls and produced a DVD touting the REIT and showing shareholders how to file a ballot. They hired MacKenzie Partners Inc., a New York-based proxy service, to make calls to and take questions from unit-holders; and a legal team that includes the firms Proskauer Rose LLP, Clifford Chance LLP and Dewey Pegno & Kramarsky LLP.
Howard Wagenheim, 70, said he was visiting friends in Las Vegas earlier this month when Anthony Malkin called his mobile phone and tried to persuade him to change his vote to yes. Wagenheim, who owns three Empire State Building units, said they talked for more than a half-hour.
“I told him flat-out that I wouldn’t change my vote until I get a certified envelope that says he got his 80 percent,” said Wagenheim, a Navy veteran and retired restaurateur from Arlington, Texas.
The clash with investors has been the rare controversy for a building that routinely generates positive publicity, from the movies it appears in to the parade of colors with which it lights the New York night. The skyscraper was blue and purple on May 10 in honor of Police Memorial Week, and yellow on April 25 for Project Sunshine, a nonprofit organization that helps children with health problems.
A 10-year renovation of the skyscraper is scheduled to be mostly complete by the end of 2016. In addition to making the building more energy-efficient, the project involves knocking out walls to attract larger tenants willing to sign longer leases at higher rents.
The tower’s location, at Fifth Avenue and 34th Street, is close to the northern fringe of midtown south, an office submarket whose appeal to technology, media and fashion tenants has driven its vacancy rate to the lowest in the U.S. The building’s offices were about 67 percent occupied as of Sept. 30, the most recent figure disclosed in regulatory filings.
“They’ve really done a great job repositioning the building,” said Ruth Colp-Haber, founding partner of Wharton Property Advisors Inc., who represents Manhattan office tenants, including some who have taken space there. “It used to be very small, sleepy tenants. Most tenants, if you even brought up the Empire State Building as a potential relocation site, they wouldn’t set foot in there.”
Tenants include LinkedIn Corp., the Federal Deposit Insurance Corp. and Coty Inc.
The observatories, a destination for tourists from all over the world, netted a $71.2 million profit last year, an 18 percent jump from 2011, according to the tower’s annual report.
The skyscraper’s allure may not matter much when the REIT finally hits the market, according to Longua of New York University. Individual investors tend to own about 15 percent of the typical REIT’s stock, while the rest “is all institutions, mutual funds and so forth,” he said.
“It is New York, it’s iconic, and people are anticipating it will get a lot of retail investors,” Longua said. “I’m not sure if that’s going to be the case. Nobody’s going to be dazzled by the fact that it’s the Empire State Building. The question is, what do the numbers look like?”
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