Investors Demand $400 Million From Family's Sale of Empire State Building
MANHATTAN (CN) - The family that manages the Empire State Building cost stakeholders more than $400 million by bundling it for sale with 17 other properties they controlled, for their own profit, rather than selling the historic building on its own, an investor claims in a class action.
Lead plaintiff Marc Postelnek claims Anthony and Peter Malkin rolled the landmark building into a real estate investment trust they controlled to boost the value of their other properties in the New York City area and to collect millions of dollars in management fees.
He sued the Malkins and Malkin Holdings in New York County Supreme Court, on behalf of thousands of shareholders.
Postelnek, as trustee for the Mabel Abramson Irrevocable Trust, claims his grandmother was one of the original shareholders in Empire State Building Associates (ESBA), the entity that controlled the fee title and master lease to the Empire State Building until the Malkins established the real estate investment trust.
In 1961, Peter Malkin and his father-in-law took over management of the building with partner Harry Helmsley, after raising $33 million from 2,800 small investors who paid $10,000 per unit.
After Helmsley's death, Peter Malkin and his son Anthony decided to transfer the building to an investment trust with other Malkin-controlled properties and take it public, to avoid losing control of the building when the Helmsley estate sold its share, according to the lawsuit, filed on Christmas Eve.
Malkin, who already owned the 114-year lease on the Empire State Building, bought the building in 2002, becoming both owner and manager.
"As of June 2013, the Malkins were poised to complete a transaction that would provide them with hundreds of millions of dollars in unique and personal benefits not shared with the participants - namely, the roll-up of the iconic Empire State Building with 17 other Malkin-controlled properties into a consolidated real estate investment trust ('REIT'), which would then issue shares through an initial public offering ('IPO')," the complaint states.
"Threatening to derail the Malkins' favored deal, beginning in June 2013, numerous interested bidders made premium all-cash offers for the Empire State Building and ESBA. As described below, the Malkins spurned the all-cash premium offers even though they knew or had reason to know that the prices offered by the bidders were hundreds of millions of dollars greater than the value that the Malkins reasonably could achieve for the Empire State Building through the IPO. 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. This action arises from the Malkins' bad faith response to the premium offers for the Empire State Building and ESBA that they received between June and September 2013.
"Before the premium offers were presented in June 2013, the Malkins had gone to great lengths to garner the support of 80 percent of the participants for the IPO plan - a prerequisite for proceeding with the REIT. Among other things, the Malkins represented to participants that the Empire State Building was worth in excess of $2.5 billion as of June 30, 2012, implying that each of the participants' units was worth approximately $330,000 in the planned REIT. By late May 2013, the Malkins had procured the necessary consents from the participants.
"However, as noted above, beginning in June 2013, a threatening obstacle emerged: a multitude of premium all-cash offers started rolling in for the Empire State Building as a whole and the ESBA individually. The ESBA was the specific entity in which the participants held their interests, and it controlled the fee title and 'master lease' to the Empire State Building. As such, it was the most valuable component of the Empire State Building ownership structure."
Postelnek claims that as many as six real estate tycoons bid up to $2.3 billion for the tower, which was appraised at $2.53 billion as of June 2012.
The Malkins rejected all of the offers, and packaged the Empire State Building with other properties to make their IPO attractive to investors and collect millions in "override interests," according to the lawsuit.
Postelnek claims the Malkins' IPO price of $13 per share drove the value of the building more than $400 million below the offers that they had rejected as inadequate.
The Malkins transferred the building to the Empire State Realty Trust for $1.89 billion in October, which set the value of small investors' units at $240,000, far below the $330,000 the Malkins had promised, according to the complaint.
"Packaging the Malkins' less notable properties with the Empire State Building in a REIT would allow these other properties to siphon off some of the goodwill associated with the iconic 102-story tower," the complaint states. "The 'halo' effect associated with the roll-up is highlighted by the REIT's name - the Empire State Realty Trust. According to a list of REITs compiled by the National Association of REITs, there is not a single other REIT named after an individual building.
"Moreover, a consolidation and IPO would provide the Malkins with liquidity for their otherwise illiquid real estate portfolio. This is because, upon consummation of the IPO, the Malkins' holdings in these 17 different properties would be converted into shares of a publicly traded REIT. In effect, the Malkins saw an opportunity to liquidate, or 'cash out,' all of their real estate holdings in one fell swoop."
Postelnek claims the Malkins hoped to make $304 million in override interests, more than half of it from the Empire State Building, and $15 million in management fees from the consolidation and IPO.
The Malkins last year settled a previous class action filed by long-time shareholders for $55 million and pushed forward with the IPO, according to the new lawsuit.
Postelnek claims that instead of encouraging the bidding war to drive up the value of the building, the Malkins ignored the offers they received between June and September 2013, trying to "run out the clock" until they could launch the IPO.
He says they tried to get shareholders' support by promising the IPO would increase the value of their investment, but instead maximized their own profits at investors' expense.
Postelnek seeks class certification and damages for breach of fiduciary duty.
He is represented by John Rizio-Hamilton with Bernstein Litowitz Berger & Grossmann.
"The investors in the Empire State Building were harmed when the Malkins decided to pursue their own interest instead of choosing to maximize the value of the building for all the people who invested in it," Rizio-Hamilton said in a telephone interview. "We look forward to vindicating the rights of the investors in court."
A spokesperson for Empire State Realty Trust said in a statement: "These claims are wholly without merit, and we will respond to them in court."
The Empire State Building, in Midtown Manhattan, was the world's tallest building for nearly 40 years, until the World Trade Center's North Tower topped it in 1970.
After the Sept. 11, 2001 attacks, the Empire State Building was again the tallest building in New York, until the new One World Trade Center reached a greater height in April 2012. The Empire State Building now is the fourth-tallest skyscraper in the United States and the 23rd-tallest building in the world.
It became iconic in popular culture for its role in "King Kong."