Opinion and Investing Column

Skarbeck: IPO of N.Y. skyscraper is a real landmark deal

June 1, 2013

Ken Skarbeck InvestingInvestors soon will have the opportunity to own a piece of an American landmark. The Empire State Realty Trust, whose signature property is the Empire State building, will offer shares to the public.

The process to get the building approved for the IPO has been a struggle. The current ownership structure dates to 1961, when Harry Helmsley, Lawrence Wien and his son-in-law, Peter Malkin, bought control of the building for $65 million.

The death of Leona Helmsley in 2007—Harry’s wife, who was once-labeled the “Queen of Mean” in New York society circles—triggered deals that gave the Malkin family control of the building as minority owners. Their plan is to combine the Empire State building, valued at $2.3 billion, with 18 other properties collectively valued at $1.9 billion. It would be the second-largest real estate investment trust IPO in history.

The IPO has been complicated by the disparate ownership structure of the Empire State Building. To help fund the 1961 purchase, the principals raised $33 million by selling $10,000 ownership interests to about 3,000 small investors.

As a result, to proceed with the IPO, the Malkins, as minority owners, needed 80 percent of the small investors to vote in favor of the deal. The transaction values an original $10,000 unit interest at $323,000. Last year, each unit holder received a $5,199 cash distribution.

Many of the current unit holders are second-generation owners whose parents or grandparents scraped together funds to purchase their interest in the Empire State Building. Feelings of sentimental ownership combined with concern the Malkins are hustling control of the building for personal gain have spurred lawsuits that have stymied the IPO. The level of animosity among owners has surprised even New York real estate dealmakers, who are used to mudslinging in property deals.

To secure approval, members of the Malkin family have been calling investors one by one to persuade a vote in favor of the deal. They have been promoting the deal as offering liquidity to unit holders along with the opportunity for rising income from rent increases and property appreciation.

Post-IPO, the Malkin family would own 16.5 percent of the Empire State Realty Trust, a stake valued at $700 million. The REIT will have two classes of stock. The class A public shares have one vote, and the class B shares possess 50 votes, allowing the Malkins to retain voting control. Offering proceeds would be used to pay small investors who opt to cash out, including $670 million to the Helmsley estate.

The 102-story, 1,454-foot-high building cost $41 million to build in 1930. It offers 2.7 million square feet of office space and 169,000 square feet of retail space. It is 68.5-percent leased and generates $85.3 million in annual rent revenue.

In late May, after more than a year of delay, votes in favor of the deal crossed the 80-percent threshold. That and an April legal ruling against the dissident unit holders mean the IPO should occur soon.

The Empire State Realty Trust will allow investors ownership in an American landmark. As with any investment, the best time to buy would be when prices of Manhattan real estate are depressed, and that is not the case today.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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