Empire State Bids Soar Over Approaching REIT Deal

By Kaitlin Ugolik 

Law360, New York (June 28, 2013, 9:39 PM ET) -- The owners of the Empire State Building have fielded a slew of unsolicited bids topping $2 billion in the past two weeks, threatening their plan to put the building into a real estate investment trust as real estate moguls vie to take advantage of the trophy's untapped value, experts say.

In addition to the previously reported bids from high-level investor Rubin Schron two weeks ago and an unnamed bidder last week, Malkin Holdings LLC has received at least one additional bid from mogul Joseph Sitt's Thor Equities LLC, and a fourth was rumored in the press Friday.

The bids, which range from $2 billion to an undisclosed amount of more than $2.1 billion, come just weeks after Malkin Holdings announced that a supermajority of the Empire State Building's investors had voted to approve the controversial plan to put the building in a $1 billion publicly traded REIT, amid ongoing litigation over the proposal.

The plan faces obstacles, not least among them the fact that some shareholders believe the building to be severely undervalued. This opinion may have entered the minds of some of the city's biggest real estate investors as well, piquing their interest in potentially blocking the deal and grabbing the trophy asset at a better price than will be possible once it's rolled up in a REIT, experts say.

“It's not coincidental that all of this activity has spiked while they're getting ready to put the Empire State Building into a REIT,” said Marc Israel, a former real estate attorney and current vice president of Kensington Vanguard National Land Services. “I think [Malkin] might have caught the ear of some other people with their sales talk, and others have realized this is a really undervalued asset that may be worth owning.”

Malkin Holdings announced in February 2012 that it planned to allow the public to invest in 12 of its office buildings in New York and Connecticut, including the Empire State Building, through shares offered by a new publicly listed REIT to be known as Empire State Realty Trust Inc.

But last week, New York real estate mogul Rubin Schron made a surprise $2 billion cash bid for the building, offering about $300 million less than the building's most recent appraisal price.

Though the appraisal forming the basis for the REIT stock allocation to participating investors may be higher, there's no assurance that REIT shares will actually trade at the so-called exchange value or anywhere near it, according to Stephen Meister, an attorney for a group of building investors who oppose the REIT deal.

Schron's offer, which Meister and his clients support, is not less than the sum that would be paid in the proposed REIT transaction, he says.

So the bidders that have come out of the woodwork since Schron's left-field offer may be banking on the assumption that Malkin and its shareholders could be willing to part with the iconic skyscraper in an all-cash deal that would avoid some of the drama associated with the REIT proposal.

“The owners ... may lose the prestige by losing control of the Empire State Building, but they may end up making more money,” said David Reiss, a professor of real estate law at Brooklyn Law School, on Friday. “They may be more than happy to sell to the highest bidder if they’re going to get more than what the REIT would get them for it.”

The bidders appeared to think the unhappy shareholders would find value in their offers as well.

In connection with his bid, Schron agreed to enter into a contract with Malkin with a $50 million nonrefundable deposit immediately and to close the all-cash deal in 90 days. As part of the deal, investors would be able to choose to remain invested in the building and receive a membership interest in Schron's Cammeby's International Group in lieu of cash, according to an offer letter revealed last week.

The offers that followed — one from Thor Equities that was “north of $2.1 billion,” one from a group of investors including Phil Pilevsky and Joseph Tabak, and another from an unnamed bidder — reportedly offered similar assurances.

In addition to the chance to own one of the most famous buildings in the world, experts say those who have thrown their hats into the sudden bidding war for the skyscraper are also keen to take advantage of its retail potential.

“I think there's a belief that this is a valuable property, and that particularly the retail portion of it — and to some extent the office portion too — is undervalued,” Israel said. “I think they feel they could do a major upgrade.”

Those who may have been previously interested in the building also now have the assurance, after a May court ruling in one of the lawsuits over the proposed deal, that verified the legality of a controversial $100-per-share buyout provision, according to Reiss.

Potential buyers now know “that the buyout provision is valid and ... that a good bid can get the requisite votes,” he said.

An appeal of the ruling on the buyout provision remains pending.

But at least some of the Empire State Building's shareholders are already pushing back against the bids. On an investor conference call late Thursday, a group of shareholders who had previously opposed the REIT deal pushed Malkin to sell the building in a public auction in order to get the highest possible price.

A representative for Malkin could not immediately be reached for comment Friday.  

--Additional reporting by Natalie Rodriguez. Editing by Kat Laskowski and Chris Yates.

http://www.law360.com/realestate/articles/453953/empire-state-bids-soar-over-approaching-reit-deal