Malkin Takes Manhattan: After Snag, IPO Vote Next Month Expected to Succeed

A giant gorilla-like creature scales the Empire State Building, clutching a beautiful blond woman. Fighter jets circle, machine guns shooting to kill. He pounds his chest, roaring, refusing to go down without a fight.

MalkinThe final scene from the 1933 production of King Kong gripped viewers and put them on the edge of their seats like no other drama involving the Empire State Building has to this day. But the tale surrounding Malkin Holdings’ bid to make the storied property part of a public Real Estate Investment Trust now runs a close second.

Peter and Anthony Malkin are facing a web of investors opposed to the REIT and find themselves defending the company against contentious lawsuits.

“It’s great theater for sure,” said Larry Longua, a clinical associate professor at NYU Schack. “There are a lot of twists and turns.”

The fate of Kong, as he stood atop the tower, was inevitable. But the Malkins’ future seemed to brighten last week when word broke that they were edging closer to obtaining the number of shareholder approvals needed to support the controversial $1 billion launch of the IPO and REIT, which would include 18 other properties in Manhattan, Connecticut and Westchester County.

“I feel very comfortable,” Anthony Malkin told The Commercial Observer on Thursday, parsing his words carefully to avoid rattling the Securities and Exchange Commission. “We’re working hard on behalf of our investors as far as moving this process along.”

The latest update on the vote, filed by the Malkins with the SEC on March 15, took the form of a letter to unit-holders that encouraged the “very small percentage of participants who have voted against any proposal to consider now changing their votes to be for all the proposals.”

Of those who had voted at the time, 90 percent of the tower’s unit-holders had approved the plan, as did 95 percent at 1 Grand Central Place and 97 percent at 250 West 57th Street, which equated to roughly three-quarters of the votes needed.

Citing SEC rules, Mr. Malkin was unable to provide The Commercial Observer with the latest update on the voting or make any projections or predictions, but some viewed the SEC filing as indicative of imminent success.

“It sounds like they have generated enough momentum to make this thing happen,” said one Malkin colleague, an executive at a leading real estate firm in New York City.

But the controversial plan requires support from holders of 80 percent of the 3,300 units owned by Empire State Building Associates LLC to proceed, and only two-thirds of the total unit-holders had voted at the time.

Meanwhile, a mounting movement that began over a year ago and culminated in a class-action lawsuit against the Malkins is poised to block the REIT from becoming a reality—and perhaps to make their plans more difficult one way or another.

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It’s nothing new for the Malkin family, which took over the day-to-day management of the building in 2002, gaining full control in 2010. Legal battles have plagued the building for many years and once pitted the Malkins against Helmsley-Spear and the late Leona Helmsley, the building’s largest stakeholder.

“If I’m the widow or the son of an heir, I don’t trust these real estate guys,” Mr. Longua said, explaining how earlier legal struggles may have influenced stakeholders’ decisions on the IPO.

(Credit: Al Barbarino)

(Credit: Al Barbarino)

The plan would give unit-holders half of the skyscraper’s appraised $2.53 billion value in REIT shares, but critics claim no documentation exists supporting the idea that the investors should get only half the value, and they contend that the planned REIT would rob them of a predictable income stream from the building’s rents.

Cousins Richard and Steve Edelman, whose grandparents purchased a stake in the building in 1962, are leading a group of opponents to “vote no” on the proposal or not vote at all, which would be the equivalent of disapproval.

“In a lot of cases the current owners are the children of original owners—these are family heirlooms,” Richard Edelman told The Financial Times earlier this month. “Well over half of these owners are in their 80s and have no interest in going into something akin to the stock market.”

One unit-holder, Robert Machleder, wrote a letter last week urging others to vote “no,” stating that although investors were aware of the potential for a future sale or refinancing, the IPO does not constitute a “capital transaction,” as the Malkins have stated, calling the argument “weightless as a feather, fanciful as a fairy tale.”

But the Malkins argue that their proposal would give investors liquidity, greater growth and diversification opportunities. Mr. Malkin balked at the Edelmans for spearheading the attempts to thwart the IPO.

“I believe that Richard and Stephen Edelman and those working with them are spreading lies and deception and that anyone who acts based upon their advice could be economically damaged and have a claim against them,” Mr. Malkin told The Commercial Observer last week.

In addition, the plan does have support among some of the more senior investors.

“To me it’s like a bonanza—like it fell out of the sky,” Leon Jonas, 85, a retiree in Delray Beach, Florida, who originally invested $10,000, told Bloomberg last year. “I would welcome it in a minute.”

The Umbrella Partnership REIT, or UPREIT, would allow the Malkins to defer capital gains taxes, helping them pay for the massive, $550 million, three-year makeover of the building that was designed to cut energy use, upgrade offices and ultimately bring higher rents. The Malkins hoped the recapitalization of the building and the REIT’s deferred tax structure, which would be passed along to investors, as “operating units” instead of cash or shares, would help convince investors that the REIT was viable, some said.

“I think he’s disappointed that it’s come to this, yet I think he’s very excited to get it done and energized by the fact that it’s heading closer to his direction,” said the Malkin colleague, who refused to be identified because of the sensitivity of the matter. The backlash began when a group of investors, led by investor Leon Meyers, filed a lawsuit to stop the planned $1 billion IPO offering in March of last year.

Andrew Penson, owner of Manhattan’s Grand Central Terminal, last month filed two affidavits in support of a group that is trying to block the reported $55 million settlement of that lawsuit. In the filings, Mr. Penson said the IPO would inflict “vast harm” on the about 2,800 co-investors in the building.

In a court response to Mr. Penson, the Malkins called the lawsuit and pending litigation “a publicity stunt, engineered by a handful of investors who have campaigned against the transaction using half-truths and outright lies.”

“Apparently realizing that they are likely to lose the current ongoing vote, they seek to confuse the investors, delay the process and thwart an obviously beneficial settlement,” it stated.

All told, the unit-holders in Empire State Building Associates boast 3,300 shares worth $323,803 or $358,670 each, a prospectus outlining the initial IPO shows. The Malkins, in the letter to investors, asked unit-holders to vote to approve the REIT by March 25 (extended to April 8 on Friday).

“If they get approval on the 25th, my guess is that they will get it out as quickly as they can, during the second quarter or maybe early in the third,” said Tim Pire, a managing director and lead portfolio manager for real estate investment management firm Heitman.

If it goes through, the $1 billion IPO, while substantial, pales in comparison to the REITs that usually come to mind when talking New York City real estate: Simon Properties has a market capitalization of $49 billion; Boston Properties, $15 billion; Vornado Realty Trust, $15 billion; and New York-based SL Green, over $7 billion.

It’s large enough, however, especially given its growth potential, that big investors, including Heitman, will take a close look, Mr. Pire said.

“Right out of the box, as a New York-centric REIT, everyone will make the comparison to SL Green and even Vornado,” said Mr. Pire. But, he added, “They have a longer track record, with seasoned management and larger market caps … like any IPO, the management will have to prove itself in the public market.”

Though the REIT market was hit hard by the so-called great recession, along with the commercial real estate industry at large, it bounced back stronger than the general economy and outpaced the S&P 500 and the other major indexes, as it had in the past.

Total returns on REITs went from negative 28 percent in 2008 to positive 28 percent in 2010. By 2012, costly modifications made in the previous two years bolstered investor confidence and boosted buying power for 2012.

Since 2009, shares of Boston Properties are up almost 100 percent; Brookfield Office Properties, up 126 percent; SL Green, a whopping 200 percent.

“They were a near-death experience during March of 2009,” Mr. Longua said. “It was very expensive to do, but they recapped and returned, outperforming the major indexes.”

The rapid recovery of the REITs proved their effectiveness then. Now, the Malkins keep faith that their own REIT will find its way during these challenging times.

“This is not something which we undertook lightheartedly,” Mr. Malkin said. “We gave it a lot of thought and we are continuing on.”

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