S-4 Empire State Realty Trust February 13, 2012, page 154
Too see page at SEC.gov click here and go to page 154
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Table of Contents
Ground Lease and Operating Lease Methodology
The following table shows the individual properties that are subject to ground leases or operating leases:
Property Ground Lease Type
The Empire State Building Operating Lease with Private Entity
One Grand Central Place Operating Lease with Private Entity
250 W 57th Street Operating Lease with Private Entity
1350 Broadway Third-Party
501 Seventh Avenue Operating Lease with Private Entity
Four of the properties owned by the subject LLCs and private entities listed above are subject to operating leases with a private entity. A subsidiary of Malkin Holdings LLC is supervisor to both the property owner or ground lessee with a third-party and the operating lessee.
One of the properties (which is owned by a private entity) listed above is subject to a “third-party” ground lease, which is a standard ground lease in which a third-party owns the land, and a subsidiary of the private entity is the lessee of the land and the owner of the building, until ground lease expiration when building ownership reverts back to the ground lessor. The private entity that is the ground lessee makes contractual ground rent payments to the third-party land owner for these properties.
As some of the properties owned by the subject LLCs and private entities are subject to operating leases, the independent valuer determined the value for the private entity or subject LLC that is the property owner or ground lessee with a third-party and the private entity that is the operating lessee. In order to determine the market value of the land and building, the independent valuer used the same discounted cash flow technique highlighted above to estimate the value of the unencumbered property. Secondly, the independent valuer deducted the present value of the fixed rent payments. Lastly, the independent valuer split the adjusted value evenly between the private entity or subject LLC that is the property owner or ground lessee with a third-party and the private entity that is the operating lessee.
The allocated exchange value was allocated 50% to the property owner and 50% to the operating lessee in a two tier entity instead of being allocated in accordance with discounted cash flow based on representations of the supervisor as to the original intent to treat the two tier entities as equivalent to a joint venture and the historical treatment of the two tier entities in this manner. The supervisor has represented that historically, agreements have been entered into to share capital expenditure and financing costs and the operating leases have been extended in connection therewith. As a result, the allocated exchange value has been allocated equally to the property owner and operating lessee, rather than in proportion to discounted cash flow, which would have resulted in a higher allocation to the property owner, which, in the case of Empire State Building Associates L.L.C. would have been significantly higher.
For the property subject to a third-party ground lease, the independent valuer estimated the value of the private entity that is the ground lessee by calculating the present value of the future cash flows through the contractual term including all potential extensions noting that the reversion of the building would flow to the third-party ground lessor.
In applying the discounted cash flow technique, the independent valuer estimated the operating results over a hypothetical 10-year holding period and assumed the properties owned by the subject LLCs and private entities would be sold at the end of the final year for a price calculated by capitalizing the following year’s projected net operating income. The independent valuer averaged the 11th, 12th and 13th years to account for any inconsistencies in cash flow. The independent valuer then discounted the cash flows at a rate reflective of market conditions, bearing in mind the investment characteristics of the properties owned by the subject LLCs and private entities. Lastly, the independent valuer selected a terminal capitalization rate reflective of anticipated market conditions, the likely future condition of the properties owned by the subject LLCs and private entities, and the uncertainty associated with estimates of future income and value.
154
Too see page at SEC.gov click here and go to page 154
----------------------------------------------------------------------------------------------------------------------------------------------------
Table of Contents
Ground Lease and Operating Lease Methodology
The following table shows the individual properties that are subject to ground leases or operating leases:
Property Ground Lease Type
The Empire State Building Operating Lease with Private Entity
One Grand Central Place Operating Lease with Private Entity
250 W 57th Street Operating Lease with Private Entity
1350 Broadway Third-Party
501 Seventh Avenue Operating Lease with Private Entity
Four of the properties owned by the subject LLCs and private entities listed above are subject to operating leases with a private entity. A subsidiary of Malkin Holdings LLC is supervisor to both the property owner or ground lessee with a third-party and the operating lessee.
One of the properties (which is owned by a private entity) listed above is subject to a “third-party” ground lease, which is a standard ground lease in which a third-party owns the land, and a subsidiary of the private entity is the lessee of the land and the owner of the building, until ground lease expiration when building ownership reverts back to the ground lessor. The private entity that is the ground lessee makes contractual ground rent payments to the third-party land owner for these properties.
As some of the properties owned by the subject LLCs and private entities are subject to operating leases, the independent valuer determined the value for the private entity or subject LLC that is the property owner or ground lessee with a third-party and the private entity that is the operating lessee. In order to determine the market value of the land and building, the independent valuer used the same discounted cash flow technique highlighted above to estimate the value of the unencumbered property. Secondly, the independent valuer deducted the present value of the fixed rent payments. Lastly, the independent valuer split the adjusted value evenly between the private entity or subject LLC that is the property owner or ground lessee with a third-party and the private entity that is the operating lessee.
The allocated exchange value was allocated 50% to the property owner and 50% to the operating lessee in a two tier entity instead of being allocated in accordance with discounted cash flow based on representations of the supervisor as to the original intent to treat the two tier entities as equivalent to a joint venture and the historical treatment of the two tier entities in this manner. The supervisor has represented that historically, agreements have been entered into to share capital expenditure and financing costs and the operating leases have been extended in connection therewith. As a result, the allocated exchange value has been allocated equally to the property owner and operating lessee, rather than in proportion to discounted cash flow, which would have resulted in a higher allocation to the property owner, which, in the case of Empire State Building Associates L.L.C. would have been significantly higher.
For the property subject to a third-party ground lease, the independent valuer estimated the value of the private entity that is the ground lessee by calculating the present value of the future cash flows through the contractual term including all potential extensions noting that the reversion of the building would flow to the third-party ground lessor.
In applying the discounted cash flow technique, the independent valuer estimated the operating results over a hypothetical 10-year holding period and assumed the properties owned by the subject LLCs and private entities would be sold at the end of the final year for a price calculated by capitalizing the following year’s projected net operating income. The independent valuer averaged the 11th, 12th and 13th years to account for any inconsistencies in cash flow. The independent valuer then discounted the cash flows at a rate reflective of market conditions, bearing in mind the investment characteristics of the properties owned by the subject LLCs and private entities. Lastly, the independent valuer selected a terminal capitalization rate reflective of anticipated market conditions, the likely future condition of the properties owned by the subject LLCs and private entities, and the uncertainty associated with estimates of future income and value.
154
