Initial Public Offerings Cost Empire State Building Investors $410 Million in Profits

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Managers at The Empire State Building are being sued because early investors are believed to have been denied as much as $410 million in profit as a part of a group of properties. The managers, Peter Malkin and son turned down higher offers making the building a real estate investment trust, or REIT. The offer would have upped the value of other buildings in the group, according to a class action lawsuit filed December 24th in state court.

  

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“The Malkins knew or had reasons to know that these cash offers, if accepted, would derail the proposed REIT and eviscerate their opportunity to enjoy hundreds of millions of dollars of benefits for themselves,” Marc Postelnek, an investor in the lease-holder, said in the complaint.

71.5 million shares were sold for $13 each on October 1st by Empire State Realty Trust Inc. (ESRT). The Malkins wanted to take New York area properties public and this angered some investors of the Empire State building. $13 a share would put the Empire State Buildings value at $1.89 billion. In the complaint, that value is $410 million less than an offer for the building.

“These claims are wholly without merit and we will respond to them in court,”  Brandy Bergman, a spokeswoman for the Malkins, said during a phone interview. According to the complaint, six different real estate developers made offers for the Empire State Building, some more than $2.3 billion. An “override” interest of $150 million was gained by the Malkins through the IPO by liquidating properties included in the REIT.

” By rejecting these offers and proceeding with the public REIT, the Malkins unjustly enriched themselves at the expense of the participants, whose interests they were required by fiduciary duty to safeguard and promote, without the prized Empire State Building serving as the anchor, the REIT would not be as financially attractive to investors, and there would not be sufficient demand for a public offering of the Malkins’ other properties,”  Postelnek said in the complaint.

Anthony Malkin, who is Peters’ son, is chief executive officer of the new public trading company owns six more office properties in Manhattan. According to one of the class action lawyers, John J. Rizio-Hamilton, the ownership structure, previously, was to raise money from “working class New York families,” and sell shares of the tower for $10,000 each and half shares for $5,000 each, that was in 1961.

“They went out and raised that money from these small time investors because they were the types of folks who were interested in owning a small piece of something so iconic,” Rizio-Hamilton said in a phone interview today. “Bigger investors would have created control problems.”

The building, as of June 30th, 2012, was valued more than $2.5 billion according to the complaint. 80 percent of the investors were happy that the Malkins told them their shares in the REIT would be worth $300,000 each.

Legacy unit holders challenged the REIT proposal, opting on keeping a steady income and bragging rights on owning a slice of the landmark property. Lawsuits by the holders say IPO will violate states rules for limited liability partnerships. They feel they won’t get a fair value for their assets. A judge in a New York State court denied a request to intervene in the case. This allowed the IPO to continue. The case was settled for $55 million.

Image Credit: Aviewoncities.com