Report Details Malkin's Rebuff Of Empire State Bldg.
By Kaitlin Ugolik
Law360, New York (March 10, 2014, 6:10 PM ET) -- The executives in charge of the real estate investment trust that owns the Empire State Building rejected multiple bids for the building last year to avoid a drawn-out sale process, though a financial adviser suggested a sale might more quickly monetize investor positions, exhibits filed Friday in New York court showed.
After receiving several multibillion-dollar, all-cash bids for the Empire State Building, Malkin Holdings LLC hired financial services firm Lazard to help evaluate the best course of action, which it did in a report dated Sept. 4, 2013.
The report details Malkin's reservations about selling any one asset instead of rolling its whole portfolio up into a REIT that it planned to take public, giving special emphasis to the fact that Leona Helmsley's estate, which ostensibly had veto power over any sale decision, was pushing for the REIT plan.
“The supervisor's decision to recommend the consolidation was, among other factors, in response to representatives of Leona Helmsley's estate expressing intent to liquidate the estate's interest in certain private entities, including each of the operating lessees of the subject LLCs,” the report said. “[A]ny such liquidation, which the supervisor believes is required pursuant to the specific terms of Leona Helmsley's will, may result in the acquisition by a third party who may take actions at ESB's operating lessee ... which adversely affect the value and distributions for the fee owner and its participants.”
Lazard reviewed all the offers that had been made to date — not including Thor Equities LLC's final $1.4 billion bid — and its report reveals several bidders that had not been widely identified, such as a joint venture between Philips International and Princeton Holdings LLC that offered $2.1 billion, and RKRE Inc. and CKS International Group, who offered $2.25 billion.
The report found a mix of pros and cons for accepting the deals, considering the wishes of the Helmsley estate, which holds a 63.75 percent participation in the LLC that owns a sublease to the Empire State Building, according to the report.
One of Malkin's biggest concerns was that the road to the REIT and initial public offering had been a long one, and considering any of the cash offers would essentially mean starting over.
“Based on the duration of the recently completed consent process, the supervisor has a view that a new process may be costly, uncertain as to outcome and lengthy,” the Lazard report said.
The company estimated that a proposed sale would take at least 350 days to close, and noted that it had already spent $95 million on the consolidation plan. That money would be reimbursed if the deal went through; if Malkin accepted one of the cash bids it would have to be absorbed, according to the report.
But the report shows that Lazard believed refusing the deals could be costly as well. It lists benefits to accepting one of the offers that include avoiding the unknown future value of the property through the IPO process, a generally faster monetization of investor positions, the potential to realize private market real estate valuation for the asset, and the establishment of a process for any future potential asset sales.
“The investment bank Malkin Holdings hired confirmed that owners of the ESB were better off with a private sale versus the Malkin family REIT. Yet the Malkins went ahead with the REIT anyway,” said Richard Edelman, a major investor in the building and leader of a group of shareholders who rejected the IPO plan and has litigated against it.
Edelman noted that Malkin had not filed the Lazard report with the U.S. Securities and Exchange Commission, and that his group had made multiple unsuccessful attempts to obtain it prior to its filing Friday in the docket for a consolidated class action against Malkin over the REIT IPO deal.
A spokesperson for Malkin did not immediately respond to a request for comment Monday.
The plaintiffs in the consolidated clsas action are represented by Stephen B. Meister, James M. Ringer and Remy J. Stocks of Meister Seelig & Fein LLP; Mark Lebovitch, John J. Rizio-Hamilton and Katherine A. Stefanou of Bernstein Litowitz Berger & Grossmann LLP; Jeffrey C. Block, Jason M. Leviton and Joel A. Fleming of Block & Leviton LLP; and Lee D. Rudy, Michael C. Wagner and Tamara Gavrilova of Kessler Topaz Meltzer & Check LLP.
Malkin is represented by Thomas E.L. Dewey of Dewey Pegno & Kramarsky LLP.
The case is Postelnek et al. v. Malkin et al., case number 654456/2013, in the Supreme Court of the State of New York, County of New York.
--Editing by Edrienne Su