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Empire State Building Associates L.L.C.
c/o Wien & Malkin llc
60 East 42nd Street
New York, New York 10165
Telephone: (212) 687-8700
Telecopier: (212) 986-7679
STATEMENT BY THE AGENTS
IN THE
SOLICITATION OF PARTICIPANT CONSENTS
Dated: June 9, 2008
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Under this financing program, debt will not be incurred at any time for improvements or investments when it would cause aggregate mortgage debt to exceed 50% of the appraised value of all property subordinate to mortgage lien(s).
The loan will be structured so that (a) loan proceeds will be applied to ESB improvements and investments, (b) the lender will have a mortgage lien on all the interests of Associates and/or the fee owner, which is a subsidiary of Associates, and (c) for all ESB improvements and any joint Associates-Lessee investment, the increase in debt will be serviced by an increase in Lessee's basic rent (subject to an automatic adjustment in basic rent as needed to match any charge from time to time in such debt service for the authorized debt), and payments will generally be borne equally by Associates and Lessee through overage rent. Lessee's leasehold will not be subordinated to such mortgage lien. The legal borrower of the loan and owner of the improvements will be Associates and/or the fee owner, as determined by the Supervisor based on its evaluation of loan pricing, tax and operating efficiency, and lender requirements.
The improvement program includes authorization for any future refinancings of the new mortgage debt by Associates, to be serviced on its then existing format, so long as the refinancing in each case is with an institutional lender, non-recourse, and the aggregate principal amount does not exceed the then existing debt plus refinancing costs.
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II. OPERATIONS MATTERS
A. Leasing and Needed Building Improvements
Under the program, smaller spaces are being aggregated, demolished, and re-demised to assemble larger, more efficient spaces with improved lay-outs for modern tenant uses. Such consolidation should also result in greater efficiencies for ESB. Certain floors will be set aside for full floor users to which ESB is leasing successfully presently. Suites between 2,500 and 5,000 square feet are being pre-built.
Pre-built spaces include new ceilings, lighting, and base building systems (including electric distribution, mechanicals, air handling units, and pantries) for immediate occupancy. Experience elsewhere in the portfolio indicates pre-built suites require only minor tenant installations, such as painting and carpeting, for re-leasing and have proven successful in attracting new, better credit tenants at higher rents for longer lease terms.
To enhance ESB's stature as an office building while operating its Observatory, a lobby renovation and restoration is underway which will result in a clearly defined and identifiable office tenant and tenant visitor area with modern reception and security and a designated entrance and exit for tourists. Led by the renowned firm of Beyer, Blinder, Belle, the Landmarks-approved lobby renovation is sensitive to historic features, such as the recreation of the original ceiling and to modern needs for service and security.
ESB's market share of New York metro area broadcasters has increased substantially in recent years. Ongoing investment in the antenna, masthead and electric power infrastructure is being made to ensure ESB's dominant position for this important income source.
The overall improvement plan anticipates costs to complete deferred maintenance and base building enhancements and to upgrade Observatory and broadcast facilities, as well as major expenditures for tenant installation and leasing commissions and compliance with law to reposition ESB to increased occupancy with quality tenants. As leasing activity increases, funds will be applied to certain commissions, base building work in tenant spaces, and tenant installation allowances.
Projects are planned for elevator equipment modernization, replacement of 50 year old handlers, common area hallway upgrades (with air conditioning), lobby restoration and improvement, designated separate entrances for office tenants and observatory tourists, upgrade and standardization of retail storefronts and signage, plumbing repairs, Local Law 26 (sprinklering) compliance, emergency generator for emergency elevator service as well as costs for space consolidations, and the pre-built program.
Also anticipated are borrowings to defray the cost of estimated mortgage taxes, loan fees, expenses of the transaction including compensation to Wien & Malkin at its normal rates for services rendered, and contingencies for uncertainties and inflation.
B. Use of the Proposed New Financing for Investments
New investment opportunities are continually reviewed by Peter and Anthony Malkin and their affiliates. Select opportunities would benefit Associates, and the Agents believe pricing is more attractive currently, since credit market problems have effectively eliminated the recently dominant investors who rely on cheap, abundant debt for high-leverage purchases.
Associates owns its interest in ESB with minimal debt in relation to total value. Its equity can be borrowed against, very conservatively, to allow pursuit of sound investment opportunities. Taking advantage of an investment opportunity requires prompt action. Commitments must be made and exposures taken in a time period shorter than allowed by Associates' requirements for consent on each property. Your approval now will permit Associates to act in its best interest on a timely basis.
Any borrowing for new investments will be made only if Peter and Anthony Malkin believe (a) the terms are favorable and (b) the projected investment results would increase Associates' total distributions over time.
C. Recommended New Mortgage
The Agents recommend that Participants consent to incur new mortgage debt (the "New Mortgage"), as needed from time to time for ESB work and leasing costs and for new investments, all as described herein, so long as mortgage debt is not incurred at any time which would cause aggregate mortgage debt on ESB to exceed 50% of the then appraised value of all property subordinate to the mortgage lien(s). Only funds required and approved by Lessee will be borrowed for improvements, and if improvement costs are less than projected, the mortgage debt will be less.
This consent will allow for the full program of borrowing as projected. As agreed with Lessee to date, there will be an initial borrowing of up to $29.4 million for 2008 improvements, plus closing costs and fees. Actual borrowing for improvements will be reviewed and determined from time to time with Lessee. The improvement program contemplates a total per square foot borrowing over a 10 year period that is consistent with the Agents' experience to date in the balance of the portfolio, with adjustment for ESB's additional, unique Observatory and broadcasting elements. Projected debt for that purpose by the end of year 10 will be approximately $300 per square foot, subject to adjustment for future inflation and any new investment.
To preserve flexibility and minimize interest and other costs, advances will be drawn only as required. It is expected that there will be separate debt tranches: the only debt planned at this time is for immediate and mid-term work and leasing needs, and at a floating rate of interest which can be prepaid.
Based on relationships established and track records earned through the successful financing and improvement programs for the other W&H Portfolio buildings, discussions are already underway with several institutional lenders who have indicated an ability and desire to proceed now with the improvement financing on the above terms.
D. Loan Structure
For the New Mortgage, it is currently contemplated that the Fee Owner and/or Associates will be the borrower and grant a mortgage lien on the fee title and Master Lease of the Property. The Senior Mortgage will continue with the Fee Owner as sole borrower. Principal amortization will be determined from time to time as borrowings are made.
Under this structure, Associates will own the improvements paid from the New Mortgage, and Participants will receive the applicable income tax shelter from depreciation deductions except at any time when non-deductible amortization payments exceed depreciation to create phantom income. Under the recently enacted stimulus package, there is a 50% "bonus" depreciation for tenant improvements incurred in 2008. Phantom income is not expected to occur for at least 15 years.
Associates will own any new investment acquired with proceeds from the New Mortgage, except to the extent Associates may permit Lessee to join in such investment based on increasing Lessee's basic rent to service the resulting debt.
The final loan structure, which will seek to minimize interest and other loan costs and to maximize tax and operating efficiency, will be determined by the Supervisor based on then existing authorizations, market conditions and lender requirements.
E. Payment of Debt Service; Basic Rent