The Malkins Can’t Take All This Love – A $700 million Bid From Andrew Penson Pops Up for Another Building They Control

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Peter and Tony Malkin

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/By Clive Minchom /     

The Empire State Building  At the end of June this newspaper reported on a bidding war that seemed to be developing for the Empire State Building [LINK], with at least three and possibly a fourth unsolicited bid for the grand old lady of New York now having been received by Peter Malkin and his son Anthony Malkin, who presently control the property as part of a very long standing syndication with some 2, 800 individual shareholders. All the bids received have apparently been at or above the US$2 billion level, and are a little below the property’s appraised value of around US$2.5 billion.

Recently the Malkins filed an update with the Securities And Exchange Commission (SEC), indicating they were currently evaluating all of these unsolicited bids, which of course they must do carefully in accordance with their fiduciary responsibilities as mangers of the property. All of the bids may be considered problematic in relation to the Malkins own strategic objectives, however, as it has been very much in their interest to promote instead the amalgamation of the Empire State Building with eighteen other important properties they control into a newly publicly traded Real Estate Investment Trust (REIT).

We also reported earlier on legal progress they had made in the courts to permit this, against significant current on-going shareholder opposition, and this path would ordinarily now be taking its course towards reality.

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  One Grand Central Place / Malikin’s website                                                                                                                the Empire State Building

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One Grand Central Place However, it now seems from the Malkins’ SEC filings that they have also now received yet another unsolicited offer – this time for a quite different building they control, and the second largest property after the Empire State Building itself, which they have been planning to also include in the proposed new REIT. In a financial filing with the SEC last week, the Malkins reveal that an unnamed party has submitted an offer of US$710 million for One Grand Central Place located at 60 East 42nd Street.

This is a 55-story building located right across the street from Grand Central Terminal, offering 1.3 million sq. feet of space. It was later reported in the Wall Street Journal that this latest offer comes from Andrew Penson, who is the current owner of the Grand Central Terminal – i.e. New York’s Grand Central Station . It seems he is also one of the Empire State Building’s current 2, 800 individual shareholders and, according to the Journal, has been one of the dissident group of shareholders opposing the Malkins plans to establish a REIT all along. So this is a new wrinkle in this on-going battle.

New York’s Real Estate Weekly also reports that Andrew Penson’s offer for One Grand Central Place actually exceeds both the appraised and exchange value of that building, making it harder for the Malkins to ignore their fiduciary duty and could force them to sell it outside of their proposed REIT. And as such an important property in its own right, if they do sell it presumably this would affect the ongoing value of the portfolio then left for the REIT as well which might impact its attraction in its planned Initial Public offering (IPO). In baseball Andrew Penson’s move is known as a “curve ball” – i.e. something which challenges the man up for bat in an unpredictable way. His offer this week has certainly done that.

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 Grand Central Station / Wikipedia

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Grand Central Terminal Andrew Penson is head of an exceptionally private investment firm called Argent Ventures, who seven years ago purchased ownership of one of the most famous train stations in the world, Grand Central Station, and hundreds of miles of track in an around New York, all of which he leased back to the railways for very long term leases. Grand Central Terminal, as it is officially known, owns the unused air rights for development of over 1 million square feet of building rights over the station, which he hopes to eventually make a financial killing with by selling the rights to other developers in the city. He has competition from the city itself however which recently announced its own plans to create new air rights and sell these to developers for just US$250 per square foot of development rights.

The city hopes to then use the proceeds from such sales to pay for public transit and other infrastructure projects in New York. The city’s stated target price of $250 per square foot however is only about half of what Andrew Penson himself wants to achieve for his own Grand Central Terminal air rights. “The air rights are going to be providing space that will be added to the top of the buildings, ” Mr. Penson said in a rare public comment. “If this is going to be the best space in the best new buildings, shouldn’t it be priced accordingly?” For the moment Mr. Penson hope he can keep his battle with City Hall out of court though he is hiring the best lawyer in town, David Boies, to represent him if things go that far.

Andrew Penson’s strategy so far is to tell everyone at City Hall that his interests and those of the city are perfectly aligned: in other words that the city is selling its air rights far too cheap for its own eventual benefit. A higher price would mean, as he put it, “more money available to fund infrastructure and neighborhood improvements.” There are certainly signs that some on the political side of things are starting to listen to him as well as the now-very-public debate develops.

What the disagreement has done, however, is to bring the normally publicity shy Mr. Penson out in front of the media much more than ever before, and probably much more than he would otherwise wish too. His bid for the Malkins’ property next door to the station has also set the stage for a fascinating end-game to the story for control of the Empire State Building as well, and this will doubtless focus even more attention on him as well over the next several months.

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 Andrew Penson

– So Who is Andrew Penson ?

At Grand Central Terminal’s centennial celebrations a few months ago, its owner Andrew Penson was not even there. A very reclusive figure even by the ultra low key standards of New York’s real estate industry he said to the New York Times explaining why he didn’t show “I don’t look for publicity”.

Like many of New York’s favorite sons, Penson grew up on the East Side of Manhattan, the son of a real estate lawyer and entrepreneur who specialized in converting rental apartments to co-ops. After a stint at the law firm of Jones Day, he quietly began building his own real estate business acquiring debt on distressed properties. Within 15 years, or about half way through his 30 year career, he had gone up several levels to buying and selling major properties in the city, including the office tower at 1 Park Avenue and the struggling Manhattan Mall on Herald Square, which he upgraded and sold to Vornado Realty Trust in 2006 for $689 million. Mr. Penson first bought shares in the Empire State Building in the late nineties, which would become the basis for his, so far unsuccessful, opposition to the Malkins’ plans, until his new bid for One Grand Central Place may indeed reopen the game.

In 2006 Penson finally bought the development rights over Grand Central Terminal as well as the land underneath the station – together with the 100 miles of track between the City of New York and Westchester that came with it – from the Lindner family. Technically this therefore makes him the owner of the station as well, although the property is leased long-term by the Metropolitan Transit Authority (MTA).

He made the purchase together with two additional partners outside of his existing Argent Ventures Group through a Delaware-based limited liability company, Midtown Trackage Ventures for about US$80 million. In return he so far collects just US$2.2 million in annual rents from the MTA, so the real cream remains in ultimately selling off the air rights. Such long term development plays, using quiet money that is patient and highly equity-oriented, so that it can wait for the right moments to take a profit, is the hallmark of the best in New York Real Estate “chess-playing” as it sometimes seems to outsiders. Only it take a great deal of wealth just to enter into the game.