Bloomberg News

Empire State Building Investors Claim $410 Million IPO Loss (1)

December 26, 2013

Empire State Building Investors Claim IPO Cost Them $410 Million

The Empire State building from the 68th floor of 4 World Trade Center in New York City. Photographer: Jin Lee/Bloomberg

The Empire State Building’s managers were sued over claims they deprived thousands of early investors of as much as $410 million in profit when they took the New York skyscraper public as part of a group of properties.

The managers, Peter Malkin and his son, Anthony, wrongfully turned down higher offers for the standalone 103-story tower in favor of making it the centerpiece of a real estate investment trust, or REIT, that would drive up the value of 17 other Malkin-owned buildings in the group, according to a proposed class-action lawsuit filed Dec. 24 in state court in Manhattan.

“The Malkins knew or had reason to know that these cash offers, if accepted, would derail the proposed REIT and eviscerate their opportunity to enjoy hundreds of millions of dollars of benefits for themselves,” Marc Postelnek, an investor in the lease-holder, said in the complaint.

Empire State Realty Trust Inc. (ESRT:US), whose properties include the Empire State Building, sold 71.5 million shares for $13 each on Oct. 1. The sale culminated an almost two-year quest by the Malkins to take the iconic skyscraper and 20 other New York-area properties public, a process marked by battles with some of the tower’s longtime investors.

The $13-a-share price valued the Empire State Building, completed in 1931, at $1.89 billion, or about $410 million less that the highest cash offer for the building before the IPO, according to the complaint.

“These claims are wholly without merit and we will respond to them in court,” Brandy Bergman, a spokeswoman for the Malkins, said in a phone interview.

Other Bidders

From June to September 2013, as many as six real estate developers made unsolicited offers for the Empire State Building, with bids topping $2.3 billion, according to the complaint. The Malkins gained almost $150 million in “override” interest through the IPO by liquidating their other properties included in the REIT, the shareholder alleges.

“By rejecting these offers and proceeding with the public REIT, the Malkins unjustly enriched themselves at the expense of the participants, whose interests they were required by fiduciary duty to safeguard and promote,” Postelnek said in the complaint.

“Without the prized Empire State Building serving as the anchor, the REIT would not be as financially attractive to investors, and there would not be sufficient demand for a public offering of the Malkins’ other properties,” Postelnek said in the complaint.

Income Stream

Anthony Malkin is chief executive officer of the new publicly traded company, which owns six other office properties in Midtown Manhattan, including the 55-story One Grand Central Place. Peter Malkin is chairman. The men were considered supervisors of the Empire State Building before the IPO.

The previous ownership structure was based on a 1961 plan to buy the building by raising money from “working class New York families,” selling shares of the tower for $10,000 each, and half-shares for $5,000 each, according to John J. Rizio-Hamilton, one of the class-action lawyers.

“They went out and raised that money from these small-time investors because they were the types of folks who were interested in owning a small piece of something so iconic,” Rizio-Hamilton said today in a phone interview. “Bigger investors would have created control problems.”

Postelnek claims he and other investors were told by the Malkins that their shares in the REIT would be worth about $330,000 each, with the building valued at more than $2.5 billion as of June 30, 2012, according to the complaint. Based on those figures, the Malkins won the consent of about 80 percent of the current investors by May 2013, according to the complaint.

Legacy Unit

Of about 2,800 Empire State Building legacy unit holders, a minority challenged the REIT proposal, preferring to keep a steady income stream and the bragging rights that come with owning a piece of such a landmark property.

Earlier lawsuits by the legacy investors alleged the IPO plan violated the state’s rules for limited liability partnerships by preventing them from getting fair value for their assets. In April, Judge O. Peter Sherwood in New York state court in Manhattan denied a request to intervene in the case, allowing the IPO to move forward. The following month, the judge approved a $55 million settlement of the case.

In November, opponents of the IPO asked an appeals court to declare illegal a provision that could have seen some holders of ownership units paid $100 a unit if they refused to go along with a planned initial public offering.

Peter Malkin purchased the Empire State Building in 2002, after previously owning the 114-year lease for the tower, according to the skyscraper’s website.

The 1,453-foot (443-meter), skyscraper was was the tallest building in the world until New York’s World Trade Center was built in the 1970s. Its 86th- and 102nd-floor observatories attract about 4 million visitors a year, according to its website.

The case is Postelnek v. Malkin, 654456/2013, Supreme Court of the State of New York (Manhattan).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net


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Companies Mentioned

  • ESRT
    (Empire State Realty Trust Inc)
    • $15.67 USD
    • 0.06
    • 0.38%
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