Empire State Building stakes worth 25% less than projections

Malkin Holdings pegged long-time investments at about $324,000

From left: Richard Edelman, Robert Machleder, the Empire State Building and Peter Malkin
From left: Richard Edelman, Robert Machleder, the Empire State Building and Peter Malkin

The base investment unit that thousands of individual investors used to measure their stakes in the Empire State Building are worth about $82,000 less than Malkin Holdings’ oft-cited projections, a month after the Empire State Realty Trust, a real estate investment trust that includes the building, went public, sources told The Real Deal.

At today’s opening price for ESRT at $14.05 per share, the base unit for the approximately 2,800 investors who bought into the building in 1961 is valued at just under $242,000. That’s a far cry from the $323,800 figure that Malkin Holdings repeatedly cited in regulatory filings and public statements as a rough guide to what each $10,000 investment would be worth following the public offering.

(When the Empire State Building Associates partnership acquired the master lease on the tower in 1961, a base investment unit cost $10,000. At the time of the IPO, each $10,000 unit was given 17,206 shares or a convertible equivalent security in the ESBA, three investors told TRD.)

A spokesperson for Malkin Holdings and the REIT did not respond to a request for comment.

The stock debuted on the New York Stock Exchange on Oct. 2 and has generally traded between $13 and $14.50 per share — a lackluster run that effectively valued the Empire State Building at $300 million less than private bidders were willing to pay. However, the impact on individual investors had not been clear.

While Malkin Holdings, the firm that oversees the Empire State Building, was careful to underscore that the so-called exchange value was based on an appraisal and was not a guaranteed amount, it was a touchstone of its campaign to create the REIT.

Malkin Holdings used the full exchange value frequently. For example, in a conference call on Feb. 6, filed with the U.S. Securities and Exchange Commission, Peter Malkin read out an investor question, “What is my interest worth?”

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In response, he said, “For each $10,000 of original investment held by you, the exchange value is now $323,800.”

He qualified the statement, noting it could be slightly higher depending on who the investor was, and he added that it did not necessarily represent the fair market value, which would be unknown until the IPO.

The proposal to fold the 102-story Empire State Building into an 18-building REIT has been controversial since it was first announced. And the controversy has not abated since the IPO.

The investors who independently provided TRD with the individual share figures included long-time critics of the plan, Richard Edelman of California and Robert Machleder, a former law partner of Lawrence Wien. Wien structured the 1961 purchase of control of the building.

Machleder has written letters to Empire State Building investors, critical of aspects of the REIT proposal in the past, but Malkin Holdings answered those with its own letters to investors – later filed with the SEC — with point-by-point rebuttals, noting, “Mr. Machleder is wrong on the facts and wrong on the law.”

In his most recent letter, sent on Oct. 21 to the SEC, Machleder accused Malkin Holdings of making “a series of … knowingly false material representations to ESBA participants,” including ignoring the fact that the value of the Empire State Building at its anticipated price of $13 to $15 per share was below the $1.4 billion bid Thor Equities made for a stake in ESBA.

“The proposed REIT consolidation was fundamentally misunderstood by many investors,” said Jason Meister, vice president at brokerage firm Avison Young, who represented Thor in the bidding process. “This misunderstanding was cemented into place, by the proposed ‘exchange values’ [which do] not represent what the REIT securities will trade for on the open market.”