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Empire State Building, Slice and Serve

Tedra DeSue

NEW YORK ( TheStreet) -- It belonged to Cary Grant and Deborah Kerr in 1957's An Affair to Remember. It was love-sick King Kong and Ann's building in 1933. Meg and Tom claimed it in Sleepless in Seattle. Now the real owners want to sell pieces of the Empire State Building to the public.

An overwhelming majority of its unit holders must vote to include the iconic building as the main asset in a real estate investment trust, or REIT, to be sold in an initial public offering. The decision on a class-action suit to stop the REIT IPO is expected on or before May 2. The tally of votes for or against it will not happen before then.

If successful, it would be the second-largest REIT IPO in the country's history.

This deal could lead to $1 billion being raised. The largest REIT IPO was done for Douglas Emmett in 2006. It was valued at $1.6 billion, according to a spokesperson for Dealogic, which tracks data for such IPOs.

The father/son team that manages the Empire State Building is Peter and Anthony Malkin, proprietors of Malkin Holdings. Earlier this year, they set out to convince unit-holders of the 102-story marquee to accept the terms of the IPO and REIT.

As part of the process, Malkin Holdings has to get the majority of unit holders in three separate groups to support the deal. Those groups are the Empire State Building Associates; the 60 East 42 Street Associates; and the 250 West 57 Street Associates.

According to an April 3 letter to unit holders, as of April 2, Malkin Holdings reported that 75% of those in the Empire State Building Associates group had voted for the plan. The required percentage is 80%. Also in the letter, it was noted that 86% of those in the 60 East 42nd Street group had voted in favor of the transaction. The deal needs 90% approval. Lastly, 85% of those in 250 West 57th Street voted for the deal, and only 75% was needed.

Observers familiar with the terms describe the negotiations as tedious, to say the least. These unit holders are retail, not institutional, investors. Working out the terms has boiled down to basically talking to each unit holder and convincing him or her to sign-off on terms that some people claim are foul.

The Wall Street Journal found a unit holder who said he had received a call from Peter Malkin himself, trying to persuade him to vote in favor of the IPO. That unit holder is one of about 2,800 who must vote and approve the terms of the deal, in order for it to move forward.

This is where the issues begin.

According to filings that Malkin Holdings has made to the Securities and Exchange Commission, unit holders would receive half of the appraised value of the Empire State Building in REIT shares. That appraised value is roughly $2.53 billion, according to filings. The company proclaims that the proposed transaction offers unit holders better advantages and opportunities than their current investment.

For example, the liquidity that will come with the REIT could be significant in a unit holder's quest for meaningful income. Martin Sklar, a partner at Kleinberg Kaplan Wolff & Cohen, notes that one of the main advantages of REITs is the liquidity they give long-term shareholders. Sklar says his firm has worked with the Empire State Building in the past, but has no present relationship with it, or the pending IPO.

REIT.com notes that the investor base for listed real estate has grown over the past decade, with the average daily dollar trading volume in the U.S. soaring to $4 billion today from a mere $100 million in 1994.

Other advantages outlined by Malkin Holdings include:

Despite this laundry list of potential benefits unit holders could reap if they vote yes, there is still considerable resistance. The chief concern is that they may miss out on better income that could come from higher rental rates they could charge in the future. Opponents also complain that the deal is tilted in favor of the Malkins, which could make $300 million in the deal, according to filings with the SEC.

Determined to thwart the IPO effort, a class-action lawsuit was filed last year. (The action is Leon Meyers et al. v. Empire State Realty Trust Inc. et al., case number 650607/2012, in the Supreme Court of the State of New York, County of New York) A ruling is pending. Until then, Malkin will not close the voting polls.

The Malkins are anxious to get this done. In the letter to unit holders that I mentioned above, signed by both Peter and Anthony Malkin, it is written: "The sooner we complete the solicitation process, the sooner the expenses and disruption to all participants may be brought to an end, and the benefits can be achieved."

--Written by Tedra DeSue in Atlanta

At the time of publication, the author held no positions in stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

  • The anticipated value enhancement through property diversification and operating and capital structure efficiencies;
  • Anticipated regular quarterly cash distributions on their operating partnership units and shares of common stock, which will include distributions of at least 90% of annual REIT taxable income;
  • The opportunity to continue to hold interests in the Empire State Building and therefore reap the benefits of potential growth in revenue;
  • Having the peace of mind in knowing the investment will be handled by an SEC-reporting company with its Class A common stock expected to be listed on the New York Stock Exchange, which provides accountability through the oversight of the REIT by a board of directors consisting predominantly of independent directors.

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