Wall Street Journal
Empire State Owners Go Ape Over IPO Tax Issue
- COMMERCIAL REAL ESTATE
- Updated April 8, 2012, 8:47 p.m. ET
By CRAIG KARMINThe fight over the proposed Empire State Building public offering, which has aroused King Kong-size passions, has moved to a new battleground: a spat between small investors and the Malkin family over taxes arising from the iconic skyscraper's coming listing.
The tax bill from the initial public offering could more than wipe out any cash many of the 2,800 investors would initially receive from the sale, according to filings with the Securities and Exchange Commission.
Everett CollectionIPO of Empire State Building, pictured in 'King Kong,' fuels a tax spat
The Malkins, who control the building and are spearheading the IPO, would receive a different treatment. They would be allowed to defer some of their tax and could be reimbursed about $83 million for other tax liabilities, the filings say. A spokeswoman for Anthony Malkin, president of Malkin Holdings LLC, declined to comment about their tax treatment.
"Some people could end up sending Uncle Sam a couple hundred grand," said Peter Benjamin, an investor with a small stake who retired near Greenville, S.C. "I question whether this truly is the best deal for investors."
Robert Robbins, head of the corporate-securities practice at Pillsbury Winthrop Shaw Pittman LLP, said it is unusual for certain investors to get different tax treatment than the rest.
"Many of these people are going to have an enormous tax bill that is way in excess of any cash they will receive from the IPO," he said.
The tax issue is the latest criticism from Empire State Building investors of this closely watched proposed public offering. Some investors have owned stakes since control was acquired in 1961 by Harry Helmsley and Lawrence Wien, Mr. Malkin's grandfather.
Five lawsuits have been filed in New York State Supreme Court attempting to block the sale by alleging that it isn't fair and equitable or to challenge the offering's terms. A spokeswoman for the Malkins has called the lawsuits "baseless."
The plan requires approval from 80% of the partnership units held by approximately 2,800 current investors. No date has been set for that vote. The Malkins control the voting rights for about 8% of these units, while the Helmsley stake is primarily in a separate partnership that isn't part of that vote.
Some think tax concerns are so severe that owners will either reject the proposed sale or force the Malkins to rewrite tax treatment and other parts of the offering, subject to change.
"I'm not happy to give my consent on a plan that may have unfair consequences for some of the investors," said Jeff Klein, an investor in Stamford, Conn.
A number of investors have been meeting or emailing each other to discuss the IPO's tax ramifications and, in some cases, organize opposition. Many are retired seniors and may not be in position to pay their taxes without dipping into savings. One investor near San Diego has created a website to generate opposition to the IPO under its current terms. "We are getting shortchanged by this process," said Richard Edelman, creator of the website, who added that thousands of visitors have clicked on it.
The proposed IPO has no set timetable but is expected to be months away. The new company, to be named Empire State Realty Trust Inc., will include 17 other properties in New York and Connecticut and be a real-estate investment trust valued at about $4 billion. The Empire State Building alone was appraised at $2.52 billion.
A nonprofit foundation named for Leona and Harry Helmsley would receive the largest stake in the REIT, valued at about $1 billion, according to the filings. The trust won't be taxed because it is a charity.
The Malkin real-estate family would get the second-largest stake, valued at $642 million.
Taxes on capital gains would be coming due for thousands of investors, because the value of the Empire State Building has appreciated severalfold over 50 years.
Under the proposed structure, the 2,800 owners initially must take most of their stake in the new company in stock and are limited to no more than 15% in cash, the filings say. These restrictions were applied so the new company could qualify for favorable tax treatment from New York, the filings say. The investors have to wait six months before they can sell any stock, according to the offering. But federal and local tax bills on the full amount of their gains could hit them faster. That would amount to between 24% to 35% of those gains, tax attorneys estimated. Some may end up paying more.
Those tax liabilities could be due the April following the IPO. "As a result of the cap on the cash option…you may not be able to receive sufficient cash to pay your tax liabilities, " the SEC filings say.
"It's all quite mysterious," said Robert Wachs, a New York City-based investor, of his tax implications. For now, he said, "I'm absolutely not voting for it."
The new public company, led by Mr. Malkin, will also be able to delay future share sales if they feel it will flood the market and hurt the price. Investors can sell half their shares six months after the IPO but may not be able to sell the rest for up to 18 months, the filings say.
The SEC documents also spell out the different tax treatment for the Malkins. "Unlike other holders of participation interests" the Malkins "will receive their interests in what are expected to be tax-deferred transactions," the documents say.
The Malkins may also be reimbursed for certain tax liabilities related to some Connecticut properties. that are being rolled into the new company. The Malkins' tax reimbursement could be for around $83 million, according to securities filings.