The Real Deal New York

Empire state of mind

He may not be making friends with fellow moguls or politicians, but Tony Malkin is bringing NYC's most iconic tower back to its glory days

April 01, 2011
By Adam Piore


Tony Malkin in San Francisco last month before heading to New Zealand and Hong Kong on business

The Empire State Building may have been the world’s most famous office building, but in the New York real estate industry, it was becoming famous for the wrong reasons.

Lately, however, that’s begun to change.

In January, Malkin, 48, inked a gargantuan, 483,000-square-foot lease with LF USA, a division of the Hong Kong-based consumer products trading firm Li & Fung. It was the largest deal for New York City office space in two and a half years.

Other new tenants include the German fragrance company Coty Inc.; Skanska, the Swedish construction company; the Federal Deposit Insurance Corporation; Turkish Airlines; Lufthansa; and Air China. More than 300,000 square feet worth of additional deals are “under discussion — serious discussion,” Malkin said.

What’s more, space that was renting for $26.50 a square foot in 2006 is now going for more than twice that in some parts of the building.

It’s all part of a $550 million effort to rehabilitate both the structure and the reputation of the legendary skyscraper, and replace the rabbit warren of mom-and-pop tenants, dentists and cobblers renting space with a roster of less than 200 larger leasees, some of which have already signed multi-floor, long-term deals that should ensure the financial stability of the building for decades.

The ambitious effort at the international icon has, at times, brought unwanted attention to Malkin, the wavy-haired public face of the transformation. Last year, he was attacked for months in the tabloids by City Council members and a Catholic activist as “arrogant” and “stubborn” when he refused to light up the storied skyscraper in honor of the 100th anniversary of Mother Teresa’s birth.

The incident, contends City Council Member Peter Vallone Jr., will “probably be in his obituary.”

Critics, meanwhile, have looked at the relatively small floor plates of the 70-year-old skyscraper, partially obstructed by support pillars, and noted that large trading firms in need of open plans will never opt for the Empire State Building over the gleaming modern edifices of the Plaza District.

Still, Malkin has been undeterred by his critics. Indeed, he has shown a willingness to brawl in court and at City Hall to advance his interests — squaring off in just the last 12 months with some of the city’s biggest fellow moguls, including Vornado chairman Steven Roth, billionaire investor Leon Charney and developer Charles Cohen.

But even Malkin’s critics don’t dismiss the scale or ambition of the transformation taking place inside the Empire State Building. To attract new tenants, Malkin Holdings has already led the completion of a much-publicized $20 million, two-year renovation of the building lobby — restoring its original Art Deco murals.

It’s also shelled out $35 million to redo the observatory, segregating lobbies for tenants and their visitors from tourists.

“We are redoing every bathroom, every hallway, every elevator cab,” Malkin said during a phone interview last month from San Francisco, where he stopped for business meetings en route to deliver a speech in New Zealand, before heading on to Hong Kong for more meetings. “In many ways, we are coming up with a new building.”

Malkin has kept several hundred thousand square feet of outmoded, vacant, small space off the market, so that he can consolidate it and bring it up to modern standards. Doing so requires workers to “rip out all the old wiring, piping, ceilings, and gut the space down to the concrete floors and the steel,” said Ray Quartararo, the Jones Lang LaSalle managing director who is overseeing that project.

Perhaps equally ambitious are Malkin’s outreach and marketing efforts, which include an annual golf game with brokers, efforts to encourage the use of the iconic building in films and television, and a multimillion-dollar window renovation project that aimed at rebranding the tower as an energy-efficient “green” building.

For Malkin, “Empire,” which he’s running on behalf of his company’s thousands of investors, is just one of many commitments. He also oversees a far-flung family portfolio that includes office and residential square footage numbering in the millions, a wide array of preferred equity and mezzanine debt, and a family private equity investment portfolio, in addition to other interests around the globe.

But few buildings or investments are as high-profile as the 102-story skyscraper on 34th Street and Fifth Avenue. And in many ways, it’s a challenge the lanky businessman has been preparing for all his life.

A haunting lease

Tony Malkin’s maternal grandfather Lawrence Wien laid the foundation for the family empire. The Columbia University-educated attorney pioneered the concept of real estate investment syndication in 1931, after pooling $2,000 with three partners to buy a small Harlem apartment building.

Eventually Wien teamed up with Harry Helmsley. Together, the pair would buy up stakes in a wide array of storied buildings across the city, with Helmsley identifying the acquisitions and Wien raising the money. Among their buys: the Fisk Building, the Lincoln Building, the Graybar Building and the Plaza Hotel.

It was in the summer of 1961 that Wien and Helmsley worked out the deal to buy “Empire,” where they had once rented space. Chicago tycoon Henry Crown offered up the building for $65 million — more than Wien believed he could raise, according to “Empire: A Tale of Obsession, Betrayal and the Battle for an American Icon,” written by Wall Street Journal reporter Mitchell Pacelle and released in 2001. So they employed a complex bit of financial engineering that would later come back to haunt their heirs: After buying the building, they agreed to immediately resell the property to Prudential Insurance, which owned the land under the building, for $29 million.

In exchange, Prudential agreed to lease the building to Wien and Helmsley for 114 years, at a rate that would guarantee the insurance behemoth a fixed annual return on its investment.

Wien died in 1988, and by 1991, his son-in-law Peter Malkin was heading up the family assets, with the help of his then 28-year-old son Tony. And then, in the midst of a real estate crash, Prudential sold its stake in the building for $39 million. The interest eventually went to the family of a Japanese business tycoon — which quickly sought out ways to increase its profits by breaking the ironclad lease held by the Malkins and Helmsley.

To do so, they worked out a deal with Donald Trump, offering him 50 percent of any profits he could eke out of the building above the $39 million they had paid. Trump then set out, in the press and in the courtroom, to prove that Malkin and Helmsley had broken the terms of their lease.

His argument? The Empire State Building — under the management of Helmsley-Spear — had turned into a dump. Trump did not return calls seeking comment.

It would be almost 10 years before Trump finally abandoned his campaign and the alliances he formed with a handful of tenant activists. By then, stories in the media had ranged from questions about the building’s security to articles about the prevalence of rodents and pieces about the building’s elevator problems — none of which made Tony Malkin’s job any easier when he finally launched his effort to reposition the building.

Keeping it conservative

Tony Malkin first joined the family firm in 1989, in the midst of the downturn, and was immediately “put in charge of all the problems,” he recalled.

But he insisted the headlines generated by Trump and company and the legal sideshow were nothing more than a passing distraction. He said he was busy developing properties and putting out other fires.

A 1985 Harvard graduate, Malkin took a job after college at the private equity arm of Chemical Bank as an analyst, working six-and-a-half-day weeks, writing reports on deal submissions for companies like Oxford Health Care, and scrutinizing “20 different ice cream companies” trying to emulate the performance of a new venture called Ben & Jerry’s.

By the time he arrived at W & H Properties, he had an expertise in “cash flows and where value lies,” and a solid business background to complement his father’s legal pedigree. With a number of buildings overleveraged, partnerships frayed by the financial troubles of some of those involved, and some properties headed toward workouts, Malkin’s marching orders were to get the portfolio in order. In the end, the company gave up just one 60,000-square-foot flex property in Connecticut, but continued to supervise a 15 million-square-foot portfolio on behalf of thousands of investors, according to Malkin.

By the mid-1990s, Malkin said he was “co-running” the business with his father. He took the primary lead on day-to-day matters in the late 1990s, though he noted his father “gets involved in whatever he wants, whenever he wants.” He added: “That’s his prerogative as chairman.”

The Empire State Building, the jewel of Malkin’s portfolio.

Malkin said his experiences during the early-1990s downturn, along with his business background, have shaped his approach ever since. He prefers conservative leverage, anywhere from zero to 65 percent, a strategy that has allowed him to weather downturns and obtain loans for capital improvements with relative ease.

Malkin, said real estate mogul Arthur Zeckendorf, “is very involved in every detail, and much more involved in actually running the real estate than his father.”

“He has kept it very conservative,” Zeckendorf added.

Dale Schlather, executive vice president of Cushman & Wakefield, noted that Malkin is “not going to bet the farm to become the richest guy in the world,” like some who have similar family situations.

“He’s going to make sure he watches his back door. … If he wants to grow, he will do so in a conservative manner,” added Schlather, who has worked with Malkin on a number of deals over the years, the most significant of which was a large block of space he leased in Stamford, Conn., on behalf of the securities firm Jeffries. “He’s not trying to be a hero. He just tries to be smart so he doesn’t make mistakes.”

Malkin sometimes employs unorthodox approaches, Schlather said, to spread out his risk. Malkin will, for instance, push for a seven- or eight-year lease when negotiating with tenants (as opposed to the more standard five- or 10-year period), in an attempt to limit the amount of space rolling over every year.

“He manages his portfolio like a bond,” said Schlather. “So he is very cautious about having any large expiration, or percentage of expirations, come due at the same time.”

Above it all

Malkin has been less reserved when it comes to battling with rival real estate titans. That should come as no surprise, given the tumultuous battles that marked the early years of his time at the family firm. In addition to his father’s battle with Trump, there was an epic battle with the notorious heiress Leona Helmsley, and later against those running her husband’s former leasing and management company.

Last summer Malkin went toe-to-toe with Vornado’s Roth, launching a highly public, unsuccessful campaign to derail the approval of the 1,216-foot-tall 15 Penn Plaza. Malkin complained that the tower, only slightly shorter than the 1,250-foot-tall Empire State Building, would “degrade the quality” of New York’s skyline and block the views from the top of the Empire State Building observatory.

In the end, both the City Council and Mayor Bloomberg sided with Roth, and green-lighted the proposed tower.

In recent months, less-publicized battles have followed. In December, Malkin sued billionaire investor Leon Charney for allegedly reneging on a deal to buy a $22 million mezzanine loan on a Midtown office tower. That lawsuit came as Malkin was embroiled in a legal battle with developer Charles Cohen.

In a gambit much like Trump’s past effort at the Empire State Building, Cohen, who owns a 26-story building at 112 West 34th Street, is attempting to invalidate a lease held by the Malkins that runs at a below-market rate until 2077.

Cohen claims the Malkins violated the lease terms by failing to obtain permission to do an $81 million renovation. “I don’t think that they have shown the appropriate respect to the landlord or in following the terms of the lease,” Cohen’s lawyer, Warren Estis, said.

Malkin declined to comment, saying only: “We think the case is entirely without merit, and we are confident in prevailing.”
Most real estate insiders chalk these battles up to the street fighting necessary to successfully conduct business in a highly competitive marketplace. When they do offer a criticism of Malkin, it’s similar to the one heard about his father — that perhaps the family is a little remote from other industry leaders and a little too unconcerned with the city’s political realities — a bit “above it all.”

One longtime industry insider noted that the Malkins have always been a “little bit standoffish from the main group involved with the Real Estate Board of New York.”

Though members of REBNY, “they never made an effort to be part of the inner circle; they go their own way,” the source said. “And they certainly have a right to be in the inner circle. I can’t think of any other big family that takes their approach.”

Certainly Tony Malkin’s willingness to dismiss the entreaties of the numerous City Council members who attempted to intervene during last year’s Mother Teresa dispute did not win him good will with the New York political establishment. Malkin maintained that honoring individual religious figures violated Empire State Building policy, but some politicians weren’t satisfied.

Though it’s hard to pinpoint any definitive evidence that the fracas has hurt Malkin’s clout, Malkin’s efforts to enlist support from the City Council in his battle against 15 Penn Plaza came just after the dispute and proved to be unsuccessful.

“I believe the decision [to approve 15 Penn Plaza] was made solely on its merits,” Vallone said. “But I was just ecstatic the merits happened to not be on the side of the Empire State Building.”

Rebuilding from the inside

Early on, Malkin determined that one of the keys to increasing the value of his family’s New York City portfolio was to upgrade its existing assets and improve an unwieldy roster of tenants that had grown haphazardly over the decades.

All told, said Malkin, he has spent, or committed to spend, more than $1.25 billion on upgrades across his firm’s 8 million square feet of New York office space. As with the Empire State Building, the firm has restored lobbies, windows and hallways, and added new elevators in a number of buildings. At 1333 Broadway, they even moved two stairwells and cut two new elevator shafts.

“Throughout the portfolio, we have had the exact same issue,” Malkin said. “We have a hodgepodge of tenants at low rents, or a hodgepodge of tenants at low rents and huge vacancies.

“Basically we started taking a lot of older buildings, where people had said, ‘These are old-fashioned, obsolescent properties,’ and in many ways came up with new buildings,” he said.

To restore the buildings, however, Malkin and his father first had to win the right to do so — in court. For years, Helmsley-Spear held the exclusive right to manage the buildings in question.

In 1997, Peter Malkin filed a lawsuit accusing Helmsley-Spear of mismanaging dozens of buildings (in part due to the “irrational and illegal acts” of Leona Helmsley).

Even after Leona Helmsley sold the firm and smoothed out her difficulties with the Malkins, the lawsuit continued, and Malkin fought aggressively to remove Helmsley-Spear as managing agent of some 11 buildings, including the Empire State Building.

It wasn’t until the early 2000s that W & H Properties started winning back control of some of the buildings, and it wasn’t until 2006 that W & H finally won control of the Empire State Building. (The Malkins and their partners finally purchased it from its Japanese owners and Donald Trump in March 2002 for $57.5 million.) The price was a mere fraction of the billion-plus dollars the building would likely have fetched had it not been encumbered with long-term leases that dramatically limited the amount of income any owner could hope to generate there.

Once they began the renovation process, convincing brokers to tour the new buildings became the priority, said Malkin. To do so, Malkin has worked hard to cultivate relationships with brokers — cooking up incentive schemes with commissions (100 percent on signing), sending out representatives to broker offices to make presentations, and even joining tours of the building when asked.

It was his willingness to join a tour more than seven years ago, in fact, that eventually led to one of the biggest leases of his career.

One morning in 2004, Malkin was sitting in a meeting on the 48th floor of One Grand Central Place, surrounded by his building team, when his cell phone rang and he learned that an “important tenant” was touring 1359 Broadway. At the time, 1359 was undergoing a gut renovation, and was just 45 percent leased. So Malkin left the meeting and headed to 1359 Broadway.

His presence, said Mitch Konsker, who recently left Cushman & Wakefield for Jones Lang LaSalle, helped clinch the deal for Li & Fung in Malkin’s most prized building six years later. When the firm grew and needed more elevator space a couple years later, Malkin agreed to reconfigure the elevators, recalled Konsker, who represented Li & Fung in brokering the Empire State Building deal.

Malkin’s personal involvement, said Konsker, is what helped sell the firm on their 490,000-square-foot lease.

“He is very hands-on with his tenants,” said Konsker, who with his partner Alex Chudnoff has done more than 1.5 million square feet of deals with Malkin over the last five years alone. “And that is not always the case with owners. Tony is known for being very proactive. He aggressively pursues deals in the marketplace.”

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