By Al Barbarino
A group of investors is suing to stop a planned IPO of the Empire State Building.
Led by investor Leon M. Myers, the group filed suit against Empire State Realty Trust in the New York State Court in Manhattan for allegedly breaching its legal duties.
The lawsuit comes in response to Peter and Anthony Malkin’s announcement last month that they plan to raise $1 billion for the initial public offering of a REIT focused on properties across Manhattan and the greater New York metropolitan area.
Seven of the REIT’s 12 properties, including the storied Empire State Building, are located in Midtown Manhattan, while the remaining five are located in Fairfield County, Connecticut and Westchester County, according to the documents.
The plaintiffs are a group of “passive” investors in underlying companies whose equity could be converted into stock if the Malkins go through with the proposed IPO, said a source familiar with the lawsuit.
The investors called the plan “a one-sided, unfair roll up” to convert their equity interests.
However, investors and experts not tied to the company have lauded the public REIT as a smart move for the company and a means of unravelling a notoriously tangled ownership structure.
“It’s not unusual for a REIT to start out in a specific geographic area and branch out later on,” said Brad Case, senior vice president for research at NAREIT, a national association of real estate trusts.
“While existing REITS have trophy buildings as their centerpiece, few are held down by a building as iconic as the Empire State Building,” he added.
Between December 31, 2010 and September 30, 2011, the company generated approximately $156.7 million and $197.4 million of revenue from the Empire State Building.
REITs have become an increasingly sought after holding among investors, as the real estate market recovers steadily in New York and in major cities elsewhere. REITs had a strong 2011, raising $51.3 billion in public equity and debt, which surpassed the $49 billion record previously set in 2006, according to the National Association of Real Estate Investment Trusts.
The FTSE NAREIT All Equity REITs Index’s total returns climbed 8.28 percent for the year, nearly quadrupling the 2.11 percent gain seen in the S&P 500. The dividend yield was 3.82 percent, versus 2.22 percent for the S&P.
Each of the buildings that would be placed into the Empire State Realty Trust has separate owners and multiple partners, a legacy of the real estate syndication model pioneered by Lawrence A. Wien, Peter Malkin’s father-in-law, and Harry B. Helmsley.
In 1961, Helmsley, Wien and Peter Malkin created a syndicate that bought control of the tower from Henry Crown and leased it to a group of investors called Empire State Building Associates. The investors then sold an operating sublease for the tower to an entity controlled by Malkin and the late Leona Helmsley, according to the New York Times.
Wien and Helmsley sold the building to the Prudential Insurance Company then, in 1991, Prudential sold it to a Japanese businessman who later former a partnership with Donald Trump. Peter Malkin, as leader of the partnership that held the master lease for the building, ultimately bought the 102-story tower for $57.5 million in 2002.
A spokesman for Malkin Holdings called the lawsuit “baseless” adding, “It goes without saying that we will vigorously oppose it.”