Week of March 25, 2002
Blockbuster Deal of the Week
from Site Selection's exclusive New Plant database
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$57.5M Price Fraction of Potential Worth
Complex Edifice:By JACK LYNE, Site Selection Executive Editor of Interactive Publishing
Trump, Partners Sell Empire State Building
NEW YORK The Empire State Building, the cinematic backdrop for everyone from King Kong to Cary Grant to Tom Hanks, has changed hands. Donald Trump and his Japanese partners have agreed to sell the fabled 102-story structure.
The sales price is a stunner: US$57.5 million. That represents only a tiny fraction of the $1 billion that many analysts say the building would be worth without its burdensome 114-year master lease.
Drawn up in 1961, that lease provides for payments of only $1.97 million a year on the 2.5 million-sq.-ft. (225,000-sq.-m.) building. And the lease rate actually drops to $1.72 million from 2013 to 2076, when the lease term expires.
That low-ball lease has depressed the storied skyscraper's market value. So much so, in fact, that the $57.5 million purchase price is considered high, yielding an estimated annual return of just 3.4 percent. The buyer, however, is Empire State Building Associates, an investor group led by New York real estate maven Peter Malkin. And that same group also holds that master lease, which runs through 2076.
Therein lies the buy rationale. With leaseholder and owner in the same stable for the first time since 1961, the legendary tower can now be more easily sold with significantly better financing terms.
The sale closes - perhaps - a tumultuous, byzantine chapter for the facility built in 1930-31. Since the early 1990s, Trump, Malkin and real estate heiress Leona Helmsley have slugged it out for control of the Empire State Building.
Security Concerns Prompting
Sept. 11's long shadow was clearly evident in a recent Ernst & Young (E&Y) survey of corporate end-users and real estate investors. Conducted in February, E&Y's survey found significant aversion to locating in high-profile buildings like the World Trade Center. Some 33 percent of responding firms said that they would be less likely to lease space in such high-profile structures "as a direct result of the Sept. 11th attacks."
Many predicted that wariness in Sept. 11's immediate aftermath. Malkin, however, apparently wasn't deterred. On Sept. 14, three days after the attacks, he sent a letter to the investors who comprise Empire State Building Associates, asking for approval to bid as high as $57.5 million for Empire State.
The ownership change will have little impact on the facility's some 950 tenant firms and 20,000 workers. Building management will remain the same.
Some tenants, though, may exit anyway because of post-9/11 security concerns. Two firms are already saying they'll leave, one by breaking its lease, The Wall Street Journal reported.
Attempting to allay tenants' fears, Empire State facility managers have beefed up security. X-ray scanners and metal detectors are now positioned in the lobby. The popular 86th-floor observatory, which regularly drew 3.5 million visitors a year, was also temporarily shut down and is now only open on weekends.
Sky-high Structure, Soaring EgosThe buyout of Trump Empire State Partners is expected to close sometime between mid April and early May.
Even then, though, anything might still happen, given this particular edifice's strikingly complex history. Soaring egos have always been an unseen part of the facility's foundation.
Such egos led to the Empire State Building's creation. The structure grew out of competition between General Motors founder John Jakob Raskob and Chrysler Corp. founder Walter Chrysler over who could build the highest building.
Raskob's group won. Empire State began to take shape on March 17, 1930. One year and 45 days later, the structure rising 1,454 feet (441 meters) was completed in record time. On average, four and a half floors of the building's steel frame were built each week. Factory-made beams, posts, windows and window frames were assembled onsite to gain speed. Barges, trains and trucks brought in 60,000 tons (54,000 metric tons) of steel from Pennsylvania steel mills.
The building alone cost $24.7 million. Without the onset of the Great Depression, however, Empire State would've cost twice as much - only $8 million less, in fact, than 2002's purchase price.
1961 Sale Prototype
In a complex financing setup, the trio bought control of the skyscraper from Henry Crown. Then Malkin, Lawrence Wien and Helmsley leased the facility to Empire State Building Associates. That group of investors then sold the operating sublease that's now controlled by Malkin and Leona Helmsley, Harry Helmsley's widow. Finally, Wien and Harry Helmsley sold the building title to Prudential Insurance Co.
That was certainly complicated enough. But things grew even more convoluted in 1991. That was when Prudential sold the Empire State Building title for $42 million to Oliver Grace Jr.'s E.G. Holding - or so it thought. As it turned out, E.G. Holding was a shell company, and Grace was a very believable front man for Japanese billionaire Hideki Yokoi.
Cognizant of the Empire State Building's powerful symbolism, Prudential had previously rejected Yokoi's offer. The reason: Yokoi was in a Japanese prison, doing time for gross negligence after a 1982 fire gutted a Tokyo hotel he owned, killing 33 guests.
Enter 'The Donald'Yokoi's real estate empire floundered soon after the Empire State buy, as Japan's bubble economy burst. Yokoi turned to Trump. The New York real estate magnate came aboard and created Trump Empire State Partners, which began trying to gain full control of Empire State.
Though perhaps the poster boy for conspicuous wealth, Trump made only a minimal investment of $50,000 in the partnership. He also arranged for an $11.7 million mortgage, as well as funding a series of lawsuits that accused Empire State Building Associates of inadequately maintaining the building.
But Trump's lawsuits went nowhere. So did his plans to build Trump Empire State Building Tower Apartments. Then Yokoi died in 1998.
All that contributed to the partnership's decision to sell the building.
Trump Pockets $6 MillionEven then, the sale wasn't easy.
Malkin and Leona Helmsley sparred in a number of court fights over controlling the famous tower. And Malkin's group couldn't make its buy before defeating a lawsuit by Helmsley-Spear COO and Chairman Irving Schneider. Schneider owned one single share in Empire State Building Associates. Nonetheless, he took a suit to stop the Empire State Building buy all the way to the New York Supreme Court, trying to keep Helmsley-Spear from losing management and rental fees.
As for Trump, he will walk away from the deal with more than $6 million. His partnership agreement with Yokoi specified that he would pocket half of any Empire State sale price above $45 million.
Even now, though, the saga may not be done. Leona Helmsley, who still controls a sublease on the entire building, is threatening yet more legal action.
Said she to The Wall Street Journal, "My husband didn't put his will together for Malkin to get [the Empire State Building]."
Complex indeed, this edifice.
©2002 Conway Data, Inc. All rights reserved. Data is from many sources and is not warranted to be accurate or current.