Bloomberg News

Empire State Realty Trust Sued by Investor Over Plan to Become Public REIT

March 01, 2012

Empire State Realty Trust Inc. (ESB), the company that controls the Empire State Building, was sued by an investor over its plan to become a real estate investment trust and sell shares on the New York Stock Exchange.

The company said on Feb. 13 that it plans to raise as much as $1 billion in an initial public offering, giving investors the opportunity to own a piece of the landmark 102-story Manhattan skyscraper. A group of closely held companies will be consolidated to form the REIT as part of the IPO, according to regulatory filings.

The investor, Leon Meyers, sued in New York State Supreme Court today, accusing Empire State Realty Trust and Malkin Holdings LLC, supervisor of the company that holds the title to the tower, of breaches of fiduciary duties.

“Defendants seek to consummate this proposed transaction through self-interested consent solicitations that fail to provide the participants with material information sufficient to allow them to make informed decisions regarding whether to support the planned transaction,” Meyers said in the complaint.

Meyers seeks unspecified compensation for losses and damages, as well as a declaration that the transaction is “unfair, unjust and inequitable” to the plaintiff and other investors. He asked a judge to stop the defendants from taking any steps necessary to complete the transaction “via a process that is not fair and equitable.”

‘Reasonable Alternatives’

“The Malkin defendants failed to consider reasonable alternatives to the proposed transaction, which were potentially more beneficial to the participants but less likely to be economically beneficial to the defendants,” according to the complaint.

Malkin Holdings supervises property partnerships led by Peter Malkin and his son Anthony Malkin. It owns the 2.9 million-square-foot (269,000-square-meter) Empire State Building in conjunction with the estate of Leona Helmsley.

“This is a baseless lawsuit,” Brandy Bergman of Sard Verbinnen & Co., a spokeswoman for Malkin Holdings, said in a phone interview. She said the company will fight the suit.

The REIT would consolidate Manhattan and New York-area properties owned by companies including Empire State Building Associates LLC, 60 East 42nd St. Associates LLC and 250 West 57th St. Associates LLC. Participants can opt to receive cash instead of shares for as much as 15 percent of the value.

Twelve Buildings

The companies that would make up Empire State Realty owned 12 buildings totaling about 7.7 million square feet of rentable offices as of Sept. 30, according to the filing. Seven properties, including the Empire State Building, are in Midtown, totaling 5.8 million square feet. The other five are in New York’s Westchester and Connecticut’s Fairfield counties.

The REIT would also hold rights to develop land near the commuter railroad station in Stamford, Connecticut, plus four standalone retail properties in Manhattan and two in Westport, Connecticut.

For years, the Empire State Building underperformed because of friction and litigation between parties in a complex chain of ownership. The landlord, Donald Trump’s organization for a time, leased the entire building to a venture controlled by Peter Malkin and Lawrence Wien, which then subleased it to a Helmsley partnership.

Bigger Suites

The Malkins bought out the Trump Organization in 2002 and settled litigation with Helmsley in 2006, giving them management rights to the tower. They began renovations, making larger office suites to attract higher-paying tenants, at a cost that may exceed $500 million by the end of 2013, according to the filing.

The improvements included retrofitting the tower to reduce its energy consumption and carbon emissions, in part by replacing all 6,500 windows. The $20 million makeover, in which former President Bill Clinton’s foundation was a partner, won the building the second-highest rating in September from the U.S. Green Building Council.

In 2010 and 2011, Li & Fung Ltd., a Hong Kong-based consumer products marketing company, signed leases for 588,944 square feet in the tower.

The Empire State Building -- the tallest in the world from its completion in 1931 until the World Trade Center’s north tower was finished in 1972 -- accounted for 41 percent of Empire Realty’s revenue in the nine months through September, the company said in the filing. The tower’s observatory, one of New York’s most popular tourist attractions, provided 17 percent of the company’s revenue during that period.

Some proceeds from the public offering will be used as payment to investors who choose to receive cash for their equity in existing Malkin entities, according to the filing. Other proceeds will be used to pay fees in connection with debt, and possibly for future acquisitions.

The case is Meyers v. Empire State Realty Trust Inc., 650607/2012, New York State Supreme Court (Manhattan).

To contact the reporter on this story: Chris Dolmetsch in New York at cdolmetsch@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net ESB US <Equity> CN


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