Malkin Group's plans to make the Empire State Building the centerpiece of a real estate investment trust have hit another snag -- long-time investors in the building could be vulnerable to huge tax hits, according to filings with the U.S. Security and Exchange Commission.
The tax bills could be triggered by differences in the type of shares investors would receive compared with the type of shares the Malkin family would receive.
Under the plans, much of the Malkin Group's contribution, including the operating companies owned by another Malkin family company, the Wein Group, would be paid in B shares and operating, or OP, units. Such units are often granted to owners who contribute their property into a REIT and are granted the same dividends and often the same voting power as shares.
OP units are used in estate planning because they do not trigger U.S. taxes until they are converted to shares. That is usually done after the original contributor's death, whose heirs then face much lower taxes.
Under plans for the REIT's IPO, the long-time investors and their heirs are given no such OP units. Their shares face a 180-day lock-up in which they cannot be sold but can be taxed.
The Helmsley Trust, which stands to make the biggest windfall, has negotiated a deal to take its shares in cash. As a charity, it pays no taxes. Small investors' cash portion cannot exceed 15 percent of the offering, according to one of the SEC documents.
An initial public offering in the REIT also would give the Malkins super-charged Class B shares worth 50 votes, while the Class A shares given to the original investors who own the building have only one vote per share.
A spokeswoman for the Malkin Group declined to comment.
Fighting between the Malkins and some of the nearly 3,000 investors who bought into the partnership in 1961 has so far ignited five lawsuits. Investors want class-action status and the removal of Malkin Group President Anthony Malkin as supervisor, according to the lawsuits.
The lawsuits say that plans for the REIT, to be called Empire State Realty Trust Inc, are skewed in favor of Malkin Group. Investors have accused the Malkin Group and the Helmsley Trust of incorrectly claiming half the ownership of the building and two other properties, the lawsuits show.
The same family company and the trust own less than 10 percent of the three properties, including the Empire State Building, according to the lawsuits.
"The partners are caught in a bind here because most of them would like the opportunity to free up their shares. But they would like a fair deal presented to them," said Lawrence Sucharow, an attorney for one of the investors.
The Malkin family's shares and operating units would be valued at about $642.2 million, according to the SEC filings.
They would also receive $328.5 million in "override interests," which the plaintiffs have called "excess management fees," according to the lawsuits.
The SEC is reviewing the IPO filing, and the company expects to submit several preliminary filings to address any SEC comments, according to a letter recently sent by the Malkin Group to investors.
In the letter, the group said it expected several months to pass before the SEC would allow it to present an IPO plan to investors, who would then have to vote on it.
In 1961, Anthony Malkin's father, Peter Malkin, and others created the Empire State Building Associates partnership, which sold 3,000 units at $10,000 each to buy the lease on the building. The partnership was later converted into a limited liability company. In 2002 Empire State Associates, run by the Malkin Group, bought the land and the building.
Late last year the Malkin Group filed to combine 18 properties and create Empire State Realty Trust. It filed for an IPO for the REIT in February.
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