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EX-24.1 - EX-24.1 - EMPIRE STATE BUILDING ASSOCIATES L.L.C.d412408dex241.htm

 

 

FORM 10-Q

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission file number 0-827

 

 

EMPIRE STATE BUILDING ASSOCIATES L.L.C.

(Exact name of Registrant as specified in its charter)

 

 

 

A New York Limited Liability Company   13-6084254

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Grand Central Place

60 East 42nd Street

New York, New York 10165

(Address of principal executive offices)

(212) 687-8700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

$33,000,000 of Participations in LLC Member Interests

 

 

Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x.     No  ¨.

Indicate by check mark whether Registrant is a shell company (as defined in Rule 12b-2 of the Act)    Yes  ¨     No  x.

Indicate by check mark whether Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   ¨    Smaller Reporting Company   x

 

 

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Empire State Building Associates L.L.C.

(A Limited Liability Company)

Condensed Consolidated Balance Sheets

 

      September 30, 2012     December 31, 2011  
     (Unaudited)        

Assets

    

Real Estate:

    

Building

   $ 38,933,801      $ 38,933,801   

Less: Accumulated depreciation

     (10,441,268     (9,692,570
  

 

 

   

 

 

 
     28,492,533        29,241,231   
  

 

 

   

 

 

 

Building improvements

     54,921,233        27,676,681   

Less: Accumulated depreciation

     (1,587,795     (792,081
  

 

 

   

 

 

 
     53,333,438        26,884,600   
  

 

 

   

 

 

 

Building improvements in progress

     6,758,950        7,058,098   
  

 

 

   

 

 

 

Tenant Improvements

     43,703,978        22,272,545   

Less: Accumulated depreciation

     (5,428,018     (1,411,398
  

 

 

   

 

 

 
     38,275,960        20,861,147   
  

 

 

   

 

 

 

Land

     21,550,588        21,550,588   
  

 

 

   

 

 

 

Total real estate, net

     148,411,469        105,595,664   

Cash and cash equivalents

     32,979,554        23,236,067   

Restricted cash

     583,463        406,312   

Due from Supervisor, a related party

     324,111        324,111   

Other receivables

     491,572        115,369   

Prepaid insurance

     86,345        —     

Due from Sublessee, a related party

     15,060,562        28,780,449   

Deferred costs

     12,061,561        6,724,673   

Leasing costs, less accumulated amortization of $1,538,648 in 2012 and $474,217 in 2011

     20,391,007        15,900,512   

Mortgage financing costs, less accumulated amortization of $3,218,198 in 2012 and $986,801 in 2011

     6,432,312        6,418,654   
  

 

 

   

 

 

 

Total assets

   $ 236,821,956      $ 187,501,811   
  

 

 

   

 

 

 

 

2


Empire State Building Associates L.L.C.

(A Limited Liability Company)

Condensed Consolidated Balance Sheets

 

     September 30, 2012     December 31, 2011  
     (Unaudited)        

Liabilities and members’ equity (deficiency)

    

Liabilities:

    

Mortgages payable

   $ 219,000,000      $ 159,000,000   

Accrued mortgage interest

     560,760        463,678   

Due to Sublessee, a related party

     24,958,868        6,067,803   

Accrued supervisory fees, a related party

     —          1,107,000   

Accrued expenses

     50,429        109,325   

Due to Supervisor, a related party

     1,665,514        1,306,131   
  

 

 

   

 

 

 

Total liabilities

     246,235,571        168,053,937   

Commitments and contingencies

     —          —     

Members’ equity (deficiency) (at September 30, 2012 and December 31, 2011, there were 3,300 units (at $10,000 per unit) of participation units outstanding)

     (9,413,615     19,447,874   
  

 

 

   

 

 

 

Total liabilities and members’ equity (deficiency)

   $ 236,821,956      $ 187,501,811   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

3


Empire State Building Associates L.L.C.

(A Limited Liability Company)

Condensed Consolidated Statements of Operations

 

     For the Three Months     For the Nine Months  
     Ended September 30,     Ended September 30,  
     2012     2011     2012     2011  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Revenue:

        

Rent income, from a related party

   $ 2,609,019      $ 2,133,978      $ 7,422,540      $ 6,172,254   

Interest and dividend income

     817        1,973        1,817        6,633   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     2,609,836        2,135,951        7,424,357        6,178,887   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Interest on mortgage

     2,449,396        4,445,328        6,399,357        7,785,241   

Supervisory services, to a related party

     205,326        202,680        610,688        594,889   

Depreciation of building, building and tenant improvements

     2,137,275        977,495        5,561,031        1,606,910   

Amortization of leasing costs

     416,663        204,389        1,064,430        204,389   

Formation transaction expenses

     411,834        223,603        742,438        437,738   

Professional fees, including amounts paid to a related party

     1,185,809        143,001        1,613,283        323,950   

Miscellaneous

     14,246        —          34,619        3,025   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     6,820,549        6,196,496        16,025,846        10,956,142   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

   $ (4,210,713   $ (4,060,545   $ (8,601,489   $ (4,777,255
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per $10,000 participation unit, based on 3,300 participation units outstanding during the period

   $ (1,275.97   $ (1,230.47   $ (2,606.51   $ (1,447.65
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions per $10,000 participation unit consisted of the following:

        

Income

   $ 0      $ 0      $ 0      $ 0   

Return of capital

     294.64        294.65        6,139.39        883.93   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions

   $ 294.64      $ 294.65      $ 6,139.39      $ 883.93   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

4


Empire State Building Associates L.L.C.

(A Limited Liability Company)

Condensed Consolidated Statements of Members’ Equity (Deficiency)

 

     For the     For the Year  
     Nine Months Ended     Ended  
     September 30, 2012     December 31, 2011  
     (Unaudited)        

Members’ equity (deficiency):

    

January 1, 2012

   $ 19,447,874     

January 1, 2011

     $ 3,693,267   

Add (deduct) net income (loss):

    

January 1, 2012 through September 30, 2012

     (8,601,489  

January 1, 2011 through December 31, 2011

       19,643,940   
  

 

 

   

 

 

 
     10,846,385        23,337,207   
  

 

 

   

 

 

 

Less distributions:

    

Distributions January 1, 2012 through September 30, 2012

     2,917,000     

Distribution on March 8, 2012

     17,343,000     

Distributions January 1, 2011 through December 31, 2011

       3,889,333   
  

 

 

   

 

 

 

Total distributions

     20,260,000        3,889,333   
  

 

 

   

 

 

 

Members’ equity (deficiency) at the end of the period

   ($ 9,413,615   $ 19,447,874   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

5


Empire State Building Associates L.L.C.

(A Limited Liability Company)

Condensed Consolidated Statements of Cash Flows

 

     For the Nine
Months
   

For the Nine

Months

 
     Ended     Ended  
     September 30, 2012     September 30, 2011  
     (Unaudited)     (Unaudited)  

Cash flows from operating activities:

    

Net loss

   $ (8,601,489   $ (4,777,255

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation of building, building and tenant improvements

     5,561,032        1,606,910   

Amortization of mortgage financing costs

     2,231,397        1,271,287   

Amortization of leasing costs

     1,064,431        204,389   

Changes in operating assets and liabilities:

    

Change in restricted cash

     (177,151     522,881   

Change in other receivables

     (376,203     (40,939

Prepaid insurance

     (86,345     —     

Overage rent due from/to Sublessee, a related party

     28,780,449        (1,888,629

Leasing costs paid

     (1,752,779     —     

Accrued mortgage interest

     97,082        (154,345

Change in due to Supervisor, a related party

     523,695        —     

Accrued supervisory fees, to a related party

     (1,107,000     (312,500

Accrued expenses

     (58,896     (452,342
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     26,098,223        (4,020,543
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of building and tenant improvements

     (33,289,998     (26,499,998

Change in due from Sublessee, a related party

     (15,060,562     —     

Increase in due to Sublessee, a related party

     2,079        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (48,348,481     (26,499,998
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Mortgage proceeds

     60,000,000        159,000,000   

Repayment of mortgages payable

     —          (92,000,000

Deferred costs

     (5,501,200     (1,608,263

Mortgage refinancing costs

     (2,245,055     (6,554,242

Distributions to Participants

     (20,260,000     (2,917,000
  

 

 

   

 

 

 

Net cash provided by financing activities

     31,993,745        55,920,495   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     9,743,487        25,399,954   

Cash and cash equivalents, beginning of period

     23,236,067        25,318,179   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 32,979,554      $ 50,718,133   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 4,070,878      $ 6,668,296   
  

 

 

   

 

 

 

 

6


Net cash used in investing activities excludes an increase of $15,086,839 in payable to Sublessee for building and tenant improvements purchased during the nine months ended September 30, 2012.

Net cash provided by financing activities includes a decrease in Due to Supervisor of $164,312 for deferred costs for the nine months ended September 30, 2012.

See notes to condensed consolidated financial statements.

 

7


Notes to Condensed Consolidated Financial Statements (unaudited)

Note A Interim Period Reporting

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Empire State Building Associates L.L.C. (“Registrant”) reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of Registrant as of September 30, 2012, its results of operations for the three and nine months ended September 30, 2012 and 2011 and its cash flows for the nine months ended September 30, 2012 and 2011. The condensed consolidated financial statements include the accounts of Registrant and its wholly-owned limited liability company, Empire State Land Associates L.L.C. All intercompany accounts and transactions have been eliminated in consolidation. Information included in the condensed balance sheet as of December 31, 2011 has been derived from the audited balance sheet included in Registrant’s Form 10-K for the year ended December 31, 2011 (the “10-K”) previously filed with the Securities and Exchange Commission (the “SEC”) except as disclosed in Note H. Pursuant to rules and regulations of the SEC, certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted from these consolidated financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto and the other information contained in the 10-K. The consolidated results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for any interim period or the full year. For purposes of comparison, certain items shown in the 2011 condensed financial statements have been reclassified to conform with the presentation used for 2012.

Note B Organization

Registrant was originally organized on July 11, 1961 as a general partnership. On October 1, 2001, Registrant converted from a general partnership to a limited liability company under New York law and is now known as Empire State Building Associates L.L.C. The conversion did not change any aspect of the assets and operations of Registrant other than to protect its investors from any future liability to a third party.

Registrant’s members (“Members”) are Peter L. Malkin, Anthony E. Malkin and Thomas N. Keltner, Jr. (collectively, the “Agents”), each of whom also acts as an agent for holders of participations (“Participations”) in their respective member interest in Registrant (the “Participants”).

Note C Purchase of Fee Title to The Empire State Building and Land Thereunder, Mortgage Debt, and Related Depreciation and Amortization

On April 17, 2002, Registrant acquired, through a wholly-owned limited liability company (Empire State Land Associates L.L.C.) the fee title to the building known as the Empire State Building at 350 Fifth Avenue in New York (the “Building”), and the land thereunder (the “Land”) (together, the “Real Estate” or “Property”), at a price of $57,500,000, and obtained a $60,500,000 first mortgage with Capital One Bank to finance the acquisition and certain related costs.

 

8


The Real Estate is carried in the Consolidated Financial Statements at its historical cost of $60,484,389, consisting of $57,500,000 for the purchase price paid to the seller, $752,022 for acquisition costs, and $2,232,367 representing the unamortized balance of the cost of the Master Lease on the date the Real Estate was acquired. The cost of the Land was estimated to be 35.63% of the total cost of the Real Estate, and the Building 64.37%. Under the terms of the contract of sale, the deed contains language to avoid the merger of the fee estate and the leasehold, although on a Consolidated Financial Statement basis Registrant incurred no leasehold rent expense after acquiring the Real Estate.

On July 26, 2011, Registrant entered into a three-year term loan (the “Secured Term Loan”) with institutional lenders, including HSBC Bank USA, National Association as agent and HSBC Bank USA, National Association and DekaBank Deutsche Girozentrale as lead arrangers. The Secured Term Loan is secured by a mortgage on the Property. The Secured Term Loan was amended by the First Amendment to Loan Agreement, Ratification of Loan Documents and Omnibus Amendment dated as of November 2, 2011 to provide for additional commitments from Capital One, National Association and Bank of America, N.A. so that, collectively, the loan was increased to $300,000,000. No additional funds were drawn at the time of the modification. The Secured Term Loan was amended on November 23, 2011 clarifying certain terms upon which the Property is permitted to be transferred into a consolidated entity without accelerating the Secured Term Loan. The Secured Term Loan was further amended by the Third Amendment to Loan Agreement, Ratification of Loan Documents and Omnibus Amendment dated as of October 11, 2012 to provide for additional commitments from the lenders so that, collectively, the loan was increased to $500,000,000. A condition to the lenders’ obligation to loan the additional amounts (in addition to the other conditions in the loan agreement) is that the loan-to-value ratio (as defined therein), based on an updated appraisal, does not then exceed 50%. See Note F Subsequent Events.

At the closing of the Secured Term Loan, the lenders provided Registrant with an advance of $159,000,000 (of which $92,000,000 refinanced existing indebtedness). An additional $30,000,000 was drawn on April 5, 2012 (in accordance with the Fourth Modification of Sublease dated April 5, 2012 by and between Registrant and Sublessee) and an additional $30,000,000 was drawn on July 9, 2012 (in accordance with the Fifth Modification of Sublease dated July 9, 2012 by and between Registrant and Sublessee) bringing the total amount advanced through September 30, 2012 to $219,000,000. Based on the terms of the Secured Term Loan (as amended) and subject to the conditions set forth in the Secured Term Loan (as amended), the lenders agreed to provide Registrant with additional advances of up to $281,000,000. Any further advances under the Secured Term Loan are subject to the consent of the Sublessee.

Pursuant to the terms of the Secured Term Loan agreement, Registrant and Sublessee entered into an amendment dated July 26, 2011 to the Sublease (“Third Modification of Sublease”) pursuant to which (i) Sublessee consented to the advance of up to $159,000,000 under the Secured Term Loan and (ii) in accordance with the terms of the existing sublease agreement (which terminates on January 4, 2076) between Sublessee and Registrant, the basic rent payable by Sublessee was increased by an amount equal to the debt service on the portion of the borrowing from the Secured Term Loan associated with improvements (excluding any principal payable upon maturity). In connection with additional advances aggregating $60,000,000, Registrant and Sublessee entered into a Fourth Modification of Sublease and a Fifth Modification of Sublease dated as of April 5, 2012 and July 9, 2012, respectively, under which the basic rent payable by Sublessee was further increased by an amount equal to the debt service on the aggregate additional advance of $60,000,000. The original basic rent payable by Sublessee is more than sufficient to pay the debt service on the portion of the borrowing associated with purchasing the fee position in 2002. The Sublessee and Empire State Realty Observatory TRS, LLC (formerly known as ESB Observatory LLC), a subsidiary of Sublessee, also entered into subordination agreements with the agent on behalf of the lenders pursuant to which the Sublease and the lease of the observatory were subordinated to the mortgage securing the Secured Term Loan. As a result, the Sublease and the observatory lease can be terminated in connection with a foreclosure by Secured Term Loan lenders.

 

9


Subject to the terms and conditions of the Secured Term Loan agreement, the outstanding principal amount of the Secured Term Loan shall bear interest at a rate equal to 2.5% per annum above 30-day LIBOR, unless such rate is not available, in which event the Secured Term Loan would bear interest at 2.5% per annum in excess of (i) HSBC’s prime rate or (ii) the BBA LIBOR Daily Floating Rate. In connection with this loan, Registrant issued promissory notes, a mortgage encumbering the Property in favor of the agent for the lenders, and other customary security and other loan documents. The maturity date of this loan is July 26, 2014, which Registrant may extend to July 26, 2015 and thereafter to July 26, 2016, in each case upon payment of an extension fee of 0.25% of the total availability under the Secured Term Loan agreement at the time of such extension. Such extensions are subject to customary conditions, including the satisfaction of certain loan-to-value and debt yield ratios and the absence of an event of default.

The initial advance was used to pay and discharge the then existing secured mortgage loans relating to the Property and to fund operations and working capital requirements related to the Property (including for improvements), including reimbursements to Sublessee for expenditures relating to improvements previously incurred by Sublessee, and certain other general entity purposes permitted by the Secured Term Loan including costs of the financing. Subsequent advances were or will be used for the foregoing purposes except for the discharge of existing secured mortgage loans which had been discharged from proceeds of the initial advance.

Payment obligations relating to the Secured Term Loan may be accelerated upon the occurrence of an event of default under the Secured Term Loan agreement. Events of default under the Secured Term Loan agreement include, subject in some cases to specified cure periods: payment defaults; failure by Registrant to pay taxes; failure to keep certain insurance policies in effect; breaches of representations and covenants contained in the mortgage; defaults in the observance or performance of covenants; inaccuracy of representations and warranties in any material respect; bankruptcy and insolvency related defaults; and the entry of one or more final judgments for the payment of more than $1,000,000 that are not satisfied within 30 days.

The Secured Term Loan agreement contains affirmative and negative covenants customary for financings of this type. Negative covenants in the Secured Term Loan agreement limit Registrant’s ability, subject to certain exceptions, to transfer all or substantially all of its property; incur indebtedness and liens; dissolve, liquidate or enter into mergers or similar transactions; change its line of business; cancel debt; enter into transactions with affiliates; rezone its property; sell its assets; make certain distributions to investors; and change its organizational documents. The Registrant must also maintain a debt yield ratio as specified in the Secured Term Loan agreement.

Registrant as both the fee owner and the ground lessor of the Empire State Building is mortgagor and each of its estates is therefore mortgaged. Sublessee and the observatory tenant agreed to subordinate their respective leasehold interest to the mortgage. Accordingly, in the event of a foreclosure, their leasehold estates could be terminated.

The estimated fair value of Registrant’s Secured Term Loan debt based on available market information is approximately $219,000,000 at September 30, 2012. The fair value of borrowings is estimated by discounting the future cash flows using current interest rates at which similar borrowings could be made by Registrant.

 

10


Restricted cash at September 30, 2012 represents funds in an account held at HSBC Bank pursuant to the terms of the Secured Term Loan, to be used for Registrant’s monthly loan interest obligation.

The Building and Building improvements are being depreciated on the straight-line basis over their estimated useful lives of 39 years. Tenant improvements are being depreciated and leasing commissions are being amortized over the remaining lease term or the useful life, whichever is shorter. Mortgage financing costs relating to the Secured Term Loan totaling $9,650,510 are being amortized ratably over the life of the loan. As the prior first and second mortgages relating to these loans were repaid on July 26, 2011, the remaining unamortized balance of applicable financing costs were written-off. The unamortized loan costs and the prepayment penalty on early repayment of such mortgages were included in interest expense in 2011.

Note D Sublease

Registrant does not operate the Building. It subleases the Building to Empire State Building Company L.L.C. (“Sublessee”) pursuant to a net operating sublease (the “Sublease”) which included an initial term which expired on January 4, 1992. The Sublease provided four separate options for Sublessee to renew the term, in each case for an additional 21 years, on the terms of the original Sublease. Such renewals have been exercised by Sublessee (a) on January 30, 1989, for the first renewal period from January 5, 1992 through January 4, 2013 and (b) as of February 11, 2010, for the remaining three renewal periods from January 5, 2013 through January 4, 2076 (the last two such renewals being exercised by Sublessee with Registrant’s consent for early exercise).

Sublessee is required to pay annual basic rent (“Basic Rent”) of $6,018,750 from January 1, 1992 through January 4, 2013 and $5,895,625 from January 5, 2013 through the expiration of all renewal terms. Sublessee is also required to pay Registrant overage rent of 50% of Sublessee’s net operating profit, as defined in the Sublease, in excess of $1,000,000 for each lease year ending December 31 (“Overage Rent”). In addition to the above, Sublessee is required to pay for all operating and maintenance expenses, real estate taxes, and necessary repairs and replacements, and keep the Property adequately insured against fire and accident.

In accordance with the second sublease modification dated February 25, 2009, Basic Rent described above had been increased to cover debt service on the $31,500,000 second mortgage that closed on February 25, 2009. In accordance with the third sublease modification dated July 26, 2011, Basic Rent was increased to cover debt service relating to the Secured Term Loan, refinancing that prepaid the first and second mortgages aggregating $92,000,000 (Note C), to the extent the Secured Term Loan debt exceeds the previous first mortgage of $60,500,000. In accordance with the fourth and fifth modifications of the Sublease, basic rent was further increased to cover debt service on additional advances aggregating $60,000,000 ($30,000,000 on each of April 5, 2012 and July 9, 2012). Basic Rent increased by $1,250,286 for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, representing debt service, which consists only of interest, on the balance of the Secured Term Loan in excess of $60,500,000.

Basic Rent will be increased to cover debt service on any refinancing of such debt so long as the aggregate amount refinanced does not exceed the then existing amount of debt plus refinancing costs.

 

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Due to Sublessee at September 30, 2012 and December 31, 2011 represents the payable to Sublessee for building improvements and leasing costs. Due to Sublessee, a related party, are $24,958,868 and $6,067,803 at September 30, 2012 and December 31, 2011, respectively. Due from Sublessee at September 30, 2012 and December 31, 2011 represents funds held in escrow by Sublessee for tenant improvements and overage rent due from Sublessee as of September 30, 2012 and 2011, respectively.

Overage Rent and any interest and dividends accumulated thereon are distributed annually after deduction for any additional payment described in Note E below, other expenses and additions to general contingencies management judges to be suitable under the circumstances. For 2011, Sublessee reported net operating profit of $58,560,898; therefore, Overage Rent of $28,780,449 was earned for the year ended December 31, 2011. Overage Rent income is recognized when earned from the Sublessee, at the close of the year ending December 31. Such income is not determinable until Sublessee, pursuant to the Sublease, provides Registrant with a certified operating report from a certified public accountant on the Sublessee’s operation of the Real Estate. The Sublease requires that this report be delivered to Registrant annually within 60 days after the end of each such fiscal year. Accordingly, all Overage Rent income and the additional payment to Supervisor are reflected in the fourth quarter of each year. The Sublease does not provide for the Sublessee to render interim reports to Registrant.

Sublessee is a New York limited liability company in which Peter L. Malkin is a member and entities for Peter L. Malkin’s family members are beneficial owners.

The Supervisor of the Registrant has filed a registration statement on Form S-4 for the solicitation of consents of the Participants in the Registrant and other public limited liability companies supervised by the Supervisor to the Consolidation (as defined below). In the Consolidation, (x) the property interests of the Registrant, such other public limited liability companies and certain private entities supervised by the Supervisor, and (y) the Supervisor and certain affiliated management companies would be contributed to the operating partnership of Empire State Realty Trust, Inc., a newly organized real estate investment trust.

Consents are required from Participants in the Registrant and such other public limited liability companies for them to contribute their interests in the Consolidation, and the solicitation of such consents will not commence until the SEC declares effective the registration statement on Form S-4. Consents have been obtained from participants in the private entities and the Supervisor and certain affiliated companies and affiliates of the Supervisor for them to make such contributions.

The consideration to be paid to the contributing companies and entities in the Consolidation will be allocated in accordance with exchange values determined based on appraisals by an independent third party. Such method of allocation has been approved by the Sublessee. Based on the exchange values, if the Consolidation proposal is approved by the Registrant’s Participants, the consideration with respect to the Empire State Building will be allocated approximately 50% to the Registrant and 50% to the Sublessee, which the Supervisor believes is in accordance with the historical treatment of the Registrant and the Sublessee.

Note E Supervisory Services

Supervisory and other services are provided to Registrant by its supervisor, Malkin Holdings LLC (“Malkin Holdings” or “Supervisor”), a related party. Beneficial interests in Registrant are held directly or indirectly by one or more persons at Malkin Holdings and/or their family members.

 

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Registrant pays Supervisor for supervisory services and disbursements. The basic fee (the “Basic Payment”) had been payable at the rate of $100,000 per annum, payable $8,333 per month, since inception in 1961. The Basic Payment was increased, with the approval of the Agents, by an amount equal to the increase in the Consumer Price Index since such date, resulting in an increase in the Basic Payment to $725,000 per annum effective July 1, 2010 to be adjusted annually for any subsequent increase in the Consumer Price Index. The Basic Payment is payable (i) not less than $8,333 per month and (ii) the balance out of available reserves from Overage Rent. If Overage Rent is insufficient to pay such balance, any deficiency shall be payable in the next year in which Overage Rent is sufficient. The Agents also approved payment by Registrant, effective July 1, 2010, of the expenses in connection with regular accounting services related to maintenance of Registrant’s books and records. Such expenses were previously paid by Supervisor.

Registrant pays Supervisor an additional payment (“Additional Payment”) equal to 6% of distributions to Participants in Registrant in excess of 9% per annum on their remaining cash investment in Registrant (which remaining cash investment at September 30, 2012 was equal to the Participants’ original cash investment of $33,000,000). For tax purposes, any additional payment is recognized as a profits interest and the Supervisor is treated as a partner, all without modifying each Participant’s distributive share of reportable income and cash distributions.

The basic supervisory services provided to Registrant by Supervisor include, but are not limited to, maintaining all of its entity and Participant records, performing physical inspections of the Building, providing or coordinating certain counsel services to Registrant, reviewing insurance coverage, conducting annual supervisory review meetings, receipt of monthly rent from Sublessee, payment of monthly and additional distributions to the Participants, payment of all other disbursements, confirmation of the payment of real estate taxes, active review of financial statements submitted to Registrant by Sublessee and financial statements audited by and tax information prepared by Registrant’s independent registered public accounting firm, and distribution of related materials to the Participants. Supervisor also prepares quarterly, annual and other periodic filings with the SEC and applicable state authorities.

Registrant pays Supervisor for other services at hourly rates. Pursuant to the fee arrangements described herein, Registrant incurred supervisory fees of $566,125 and $550,326 for the nine month periods ended September 30, 2012 and 2011, respectively, plus additional fees totaling $44,563 in each period representing 6% of the annual rent and debt service reductions from which Registrant has benefited. No remuneration was paid during the nine-month periods ended September 30, 2012 and 2011 by Registrant to any of the Members. Accrued supervisory fees were $0 and $1,107,000 at September 30, 2012 and December 31, 2011, respectively. Included in professional fees are amounts for services provided by a related party of $370,424 and $690,490 for the three and nine months ended September 30, 2012, respectively, and $81,751 and $221,200 for the three and nine months ended September 30, 2011, respectively.

Distributions are paid from a cash account held by Supervisor. That account is included in the Condensed Consolidated Balance Sheets as “Due from Supervisor.” The funds of $324,111 at September 30, 2012 and December 31, 2011 were paid to Participants on October 1, 2012 and January 1, 2012, respectively.

Reference is made to Note D above for a description of the terms of the Sublease between Registrant and Sublessee. The respective interests of the Members in Registrant and in Sublessee arise solely from ownership of their respective Participations in Registrant and, in the case of Peter L. Malkin, his family entities’ ownership of member interests in Sublessee. The Members as such receive no extra or special benefit not shared on a pro rata basis with all other Participants in Registrant or members in Sublessee. However, all of the Members hold senior positions at Supervisor (which supervises Registrant and Sublessee) and, by reason of their positions at Supervisor, may receive income attributable to supervisory or other remuneration paid by Registrant to Supervisor and Sublessee.

 

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Note F Subsequent Events

On October 11, 2012, the Secured Term Loan was amended to increase the lenders’ respective commitments from an aggregate of $300,000,000 to an aggregate of $500,000,000 and provides that a condition for any advance in respect of such increased amount (in addition to any other conditions in the loan agreement) is the delivery of an updated appraisal to the effect that the Loan-To-Value Ratio (as defined in the loan agreement) does not then exceed 50%. Upon execution of the amendment, Registrant paid the lenders a facility fee of 0.75% of such increase ($1,500,000) and an arrangement fee 0.25% of such increase ($500,000).

Note G Fair Value Measurements

Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, Financial Accounting Standards Board guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within levels one and two of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within level three of the hierarchy).

We use the following methods and assumptions in estimating fair value disclosures for financial instruments.

Cash and cash equivalents, restricted cash, due from Supervisor, a related party, due from Sublessee, a related party, other receivables, accrued mortgage interest, accrued supervisory fees, a related party, due to Sublessee, a related party, due to Supervisor, a related party, accrued expenses. The carrying amount of cash and cash equivalents, restricted cash, due from Supervisor, a related party, due from Sublessee, a related party, other receivables, accrued mortgage interest, accrued supervisory fees, a related party, due to Sublessee, a related party, due to Supervisor, a related party, and accrued expenses reported in our Condensed Consolidated Balance Sheets approximate fair value due to the short term maturity of these instruments.

Mortgages payable: The fair value of borrowings, as disclosed in Note D, is estimated by discounting the future cash flows using current interest rates at which similar borrowings could be made to us.

The methodologies used for valuing financial instruments have been categorized into three broad levels as follows:

Level 1—Quoted prices in active markets for identical instruments.

 

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Level 2—Valuations based principally on other observable market parameters, including:

Quoted prices in active markets for similar instruments;

Quoted prices in less active or inactive markets for identical or similar instruments;

Other observable inputs (such as risk free interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates); and

Market corroborated inputs (derived principally from or corroborated by observable market data).

Level 3—Valuations based significantly on unobservable inputs.

Valuations based on third-party indications (broker quotes or counterparty quotes) which were, in turn, based significantly on unobservable inputs or were otherwise not supportable as Level 2 valuations.

Valuations based on internal models with significant unobservable inputs.

These levels form a hierarchy. We follow this hierarchy for our financial instruments measured at fair value on a recurring and nonrecurring basis and other required fair value disclosures. The classifications are based on the lowest level of input that is significant to the fair value measurement.

Fair Value of Financial Instruments

The following disclosures of estimated fair value were determined by management, using available market information and appropriate valuation methodologies as discussed in Fair Value Measurements. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The mortgages payable had an estimated fair value based on discounted cash flow models, based on Level 3 inputs, of approximately $219,000,000 compared to the book value of the related debt of $219,000,000 at September 30, 2012.

Disclosure about fair value of financial instruments is based on pertinent information available to us as of September 30, 2012. Although we are not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

Note H Offering Costs and Formation Transaction Expenses

In connection with the Consolidation and IPO we have incurred or will incur incremental accounting fees, legal fees and other professional fees. Such costs will be deferred and recorded as a reduction of proceeds of the Consolidation and IPO, or expensed if the Consolidation and IPO is not consummated. Certain costs associated with the Consolidation and IPO not directly attributable to the solicitation of consents and the IPO, but rather related to structuring the formation transaction, are expensed as incurred. Correction of an Immaterial Error in the Financial Statements

Through September 30, 2012, we have incurred external offering costs of $12,061,561, including an adjustment of $330,604 for the six months ended June 30, 2012 as a result of the reclassification discussed below, of which we have incurred $5,336,888 and $1,608,263 for the nine month periods ended September 30, 2012 and 2011, respectively, and are reflected as deferred costs on Registrant’s Condensed Consolidated Balance Sheets. A total of $922,428 and $1,086,740 of these costs are in Due to Supervisor at September 30, 2012 and December 31, 2011, respectively. Additional offering costs for work done by employees of the Supervisor of $690,490 and $221,200 for the nine months ended September 30, 2012 and 2011, respectively, were incurred and advanced by the Supervisor and have been reimbursed to the Supervisor by the Registrant.

 

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Correction of an Immaterial Error in the Financial Statements

Our prior period financial results have been adjusted to reflect an immaterial correction which has no impact to the net change in cash reported on the statement of cash flows. During fiscal year 2012, we determined that certain costs related to the structuring of the formation transaction that were previously included in deferred offering costs should have been expensed in the periods incurred. The correction impacted the 2011 and 2010 periods and had accumulated to an amount of $2,147,898 as of June 30, 2012. Adhering to applicable guidance for accounting changes and error corrections, we concluded that the error was not material to any of our prior period financial statements. The correction resulted in immaterial changes to deferred costs and formation transaction expenses for the years ended December 31, 2011 and 2010. We applied the guidance for accounting changes and error corrections and revised our prior period financial statements presented.

The following tables present the effect this correction had on our prior period reported financial statements. Additionally, financial information included in the notes to the financial statements that is impacted by the adjustment have been revised, as applicable.

 

     As of December 31, 2011  
     As reported     Adjustment     As adjusted  

Deferred costs, net

   $ 8,541,967      $ (1,817,294   $ 6,724,673   

Members’ equity

     21,265,168        (1,817,294     19,447,874   
     For the six months ended June 30, 2012  
     As reported     Adjustment     As adjusted  

Formation transaction expenses

   $ —        $ 330,604      $ 330,604   

Net loss

     (4,060,172     (330,604     (4,390,776

Net cash provided by operating activities

     26,598,243        (330,604     26,267,639   

Net cash provided by financing activities

     5,997,952        330,604        6,328,556   

Net change in cash and cash equivalents

     (15,808,504     —          (15,808,504
     For the nine months ended September 30, 2011  
     As reported     Adjustment     As adjusted  

Formation transaction expenses

   $ —        $ 437,738      $ 437,738   

Net loss

     (4,339,517     (437,738     (4,777,255

Net cash used in operating activities

     (3,582,805     (437,738     (4,020,543

Net cash provided by financing activities

     55,482,757        437,738        55,920,495   

Net change in cash and cash equivalents

     25,399,954        —          25,399,954   
     For the three months ended September 30, 2011  
     As reported     Adjustment     As adjusted  

Formation transaction expenses

   $ —        $ 223,603      $ 223,603   

Net loss

     (3,836,942     (223,603     (4,060,545
      

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Readers of this discussion are advised that the discussion should be read in conjunction with the condensed Consolidated Financial Statements of Registrant (including related notes thereto) appearing elsewhere in this Form 10-Q. Certain statements in this discussion may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect Registrant’s current expectations regarding future results of operations, economic performance, financial condition and achievements of Registrant, and do not relate strictly to historical or current facts. Registrant has tried, wherever possible, to identify these forward-looking statements by using words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or words of similar meaning.

Although Registrant believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties, which may cause the actual results to differ materially from those anticipated in the forward looking statements. Such factors include, but are not limited to, the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents and the availability of financing; adverse changes in Registrant’s real estate market, including, among other things, competition with other real estate owners, risks of real estate development and acquisitions; governmental actions and initiatives; and environmental/safety requirements.

Financial Condition and Results of Operations

At the time of its organization, Registrant acquired the Master Lease of the Property subject to the Sublease. Basic Rent received by Registrant was used to pay annual rent due under the Master Lease and the Basic Payment for supervisory services to Supervisor; the balance of such Basic Rent was distributed to the Participants. Basic Rent received by Registrant is used to pay the Basic Payment and a portion of debt service on the Secured Term Loan; the balance of such Basic Rent is distributed to the Participants. Commencing July 26, 2011, Basic Rent was increased to cover debt service on the refinanced loan balance to the extent the Secured Term Loan debt exceeds $60,500,000 which was the balance of the prior first mortgage fully paid on July 26, 2011.

Overage Rent and any interest and dividends accumulated thereon less any expenses and additions to general contingencies and other reserves are distributed to the Participants after the Additional Payment to Supervisor. See Note D to the condensed Consolidated Financial Statements herein. Pursuant to the Sublease, Sublessee has assumed responsibility for the condition, operation, repair, maintenance and management of the Property. Registrant is not required to maintain liquid assets to defray any operating expenses of the Property.

During the nine-month period ended September 30, 2012, Registrant made regular monthly distributions of $98.22 for each $10,000 Participation ($1,178.59 per annum for each $10,000 Participation). There are no restrictions on Registrant’s present or future ability to make distributions; however, the amount of such distributions, particularly distributions of Overage Rent, depends solely on Sublessee’s ability to make payments of Basic Rent and Overage Rent to Registrant. Registrant expects to make monthly distributions in the future so long as it receives the payments provided for under the Sublease.

 

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On March 8, 2012, Registrant made an additional distribution to Participants of $17,343,000 ($5,255.45 for each $10,000 Participation), representing Overage Rent received of $28,780,449 (on Sublessee’s net operating profit of $58,560,898) for the year ending December 31, 2011 after deducting (i) $10,327,424, mainly for fees relating to the Consolidation and IPO and the increase in the supervisory fee to Supervisor, accounting fees, and general contingencies, (ii) annual New York State filing fees of $3,025, and (iii) the Additional Payment to supervisor of $1,107,000 (representing the Additional Payment of $1,166,417 less $59,417 previously paid). See Notes C and D to the condensed financial statements herein.

Overage Rent for the year 2010 was $4,111,371. $2,020,000 was set-aside for annual debt service on the prior first mortgage (of which $2,000,000 was deposited in a restricted cash account used to satisfy a portion of the first mortgage interest obligation) and the balance of $2,091,371 was added to general contingency and other reserves so that no additional distribution was made to the Participants for the year ended December 31, 2010.

Registrant’s results of operations are affected primarily by the amount of rent payable to it under the Sublease. The amount of Overage Rent payable to Registrant is affected by the New York City economy and real estate rental and tourist attraction markets, which are difficult for management to forecast, and by the amount of unfinanced improvements undertaken at the Property. The following summarizes, with respect to the current period and the corresponding period of the previous year, the material factors regarding Registrant’s results of operations for such periods:

Total revenues increased by $1,245,470 for the nine-month period ended September 30, 2012 as compared with the corresponding period of the prior year, primarily attributable to an increase in Basic Rent income from the Sublessee to cover the increase in debt service on the increased loan balance for the nine-month period ended September 30, 2012 as compared with the corresponding period of the prior year.

Total revenues increased by $473,885 for the three-month period ended September 30, 2012 as compared with the corresponding period of the prior year, primarily attributable to an increase in Basic Rent income from the Sublessee to cover the increase in debt service on the increased loan balance for the three-month period ended September 30, 2012 as compared with the corresponding period of the prior year.

 

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Total expenses increased by $5,069,704 for the nine-month period ended September 30, 2012 as compared with the corresponding period of the prior year, attributable to: (i) an increase in depreciation on building and building and tenant improvements of $3,954,121 attributable to improvements placed in service in the last three months of 2011 and first nine months of 2012; (ii) an increase in amortization of leasing costs of $860,041 due to leasing costs incurred in the last three months of 2011 and first nine months of 2012; (iii) an increase of $15,799 in supervisory fees, (iv) an increase in miscellaneous expenses of $31,594 attributable to filing fees, (v) an increase in professional fees of $1,289,333, including (a) fees to Malkin Holdings of $469,290 for services rendered in connection with a proposed consolidation of Registrant, other public and private entities supervised by the Supervisor and the Supervisor and certain affiliated management companies into Empire State Realty Trust, Inc., a newly formed real estate investment trust (collectively the “Consolidation”) and the initial public offering of Class A common stock of Empire State Realty Trust, Inc. (the “IPO”), and (b) $743,086 for accounting fees in connection with the Consolidation, and consulting fees for the design and implementation of new accounting systems, (vi) an increase in formation transaction expenses of $304,700. The increase in formation transaction expenses is mainly attributable to matters pertaining to the class action litigation including extensive negotiations relating to the settlement (as described in Legal Proceedings). For formation transaction expenses, our prior period financial results have been adjusted to reflect an immaterial correction. During fiscal year 2012, we determined that certain costs related to the structuring of the formation transaction that were previously included in deferred offering costs should have been expensed in the periods incurred. The correction resulted in immaterial changes to deferred costs and formation transaction expenses for the six months ended June 30, 2012 and for the years ended December 31, 2011 and 2010. These increases are offset by a net decrease in interest on the Secured Term Loan of $1,385,884, representing a reduction in interest expense of $2,620 attributable to the net impact of a lower rate of interest on the Secured Term Loan on the higher loan balance as compared with the prior mortgage debt and the effect of a prepayment penalty of $2,343,373 in the third quarter of 2011 related to the repayment of the prior first mortgage on July 26, 2011, offset by an increase of $960,109 in amortization of mortgage refinancing costs capitalized in connection with the July 26, 2011 refinancing and subsequent additional draws in 2012 increasing the mortgage from $159,000,000 to $219,000,000.

Total expenses increased by $624,053 for the three-month period ended September 30, 2012 as compared with the corresponding period of the prior year, attributable to: (i) an increase in depreciation on building and building and tenant improvements of $1,159,780 attributable to improvements placed in service in the last three months of 2011 and first nine months of 2012; (ii) an increase in amortization of leasing costs of $212,274 due to leasing costs incurred in the last three months of 2011 and first nine months of 2012; (iii) an increase of $2,646 in supervisory fees, (iv) an increase in miscellaneous expenses of $14,246 including filing fees of $8,548, (v) an increase in professional fees of $1,042,808, including (a) fees to Malkin Holdings of $288,673 for services rendered in connection with the Consolidation and IPO, and (b) $743,086 for accounting fees in connection with the Consolidation, and consulting fees for the design and implementation of new accounting systems, and (vi) an increase in formation transaction expenses of $188,231. The increase in formation transaction expenses is mainly attributable to matters pertaining to the class action litigation including extensive negotiations relating to the settlement (as described in Legal Proceedings). For formation transaction expenses, our prior period financial results have been adjusted to reflect an immaterial correction. During fiscal year 2012, we determined that certain costs related to the structuring of the formation transaction that were previously included in deferred offering costs should have been expensed in the periods incurred. The correction resulted in immaterial changes to deferred costs and formation transaction expenses for the six months ended June 30, 2012 and for the years ended December 31, 2011 and 2010. There was also a net decrease in interest on the Secured Term Loan of $1,995,932, representing an increase in interest expense of $413,988 attributable to an increased loan balance on the Secured Term Loan as compared with the prior mortgage debt, offset by the effect of a prepayment penalty of $2,343,373 in the third quarter of 2011 pertaining to the repayment of the prior first mortgage in such quarter, plus a decrease of $66,547 in amortization of mortgage refinancing costs due to the net effect of financing costs incurred in connection with the July 26, 2011 refinancing, the write off of the then unamortized costs and costs associated with subsequent additional draws increasing the mortgage from $159,000,000 to $219,000,000.

 

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Liquidity, Capital Resources and Distributions

Registrant’s liquidity has decreased as of September 30, 2012, as compared with September 30, 2011 primarily attributable to (i) costs incurred in connection with the Consolidation and IPO, and (ii) commitments to the Sublessee for building improvements and tenanting costs. Adverse developments in economic, credit and investment markets over the last several years impaired general liquidity (although some improvement in such markets has arisen recently) and the developments may negatively impact Registrant and/or space tenants at the Building. Any such impact should be ameliorated by the fact that (a) each of Registrant and its Sublessee has very low debt in relation to asset value, (b) the Building’s rental revenue is derived from a substantial number of tenants in diverse businesses with lease termination dates spread over numerous years.

On July 26, 2011, Registrant entered into a three-year term loan (the “Secured Term Loan”) with institutional lenders, including HSBC Bank USA, National Association as agent and HSBC Bank USA, National Association and DekaBank Deutsche Girozentrale as lead arrangers. The Secured Term Loan is secured by a mortgage on the Property. The Secured Term Loan was amended by the First Amendment to Loan Agreement, Ratification of Loan Documents and Omnibus Amendment dated as of November 2, 2011 to provide for additional commitments from Capital One, National Association and Bank of America, N.A. so that, collectively, the loan was increased to $300,000,000. No additional funds were drawn at the time of the modification. The Secured Term Loan was amended on November 23, 2011 clarifying certain terms upon which the Property is permitted to be transferred into a consolidated entity without accelerating the Secured Term Loan. The Secured Term Loan was further amended by the Third Amendment to Loan Agreement, Ratification of Loan Documents and Omnibus Amendment dated as of October 11, 2012 to provide for additional commitments from the lenders so that, collectively, the loan was increased to $500,000,000. A condition to the lenders’ obligation to loan the additional amounts (in addition to the other conditions in the loan agreement) is that the loan-to-value ratio (as defined therein), based on an updated appraisal, does not then exceed 50%. See Note F Subsequent Events.

At the closing of the Secured Term Loan, the lenders provided Registrant with an advance of $159,000,000 (of which $92,000,000 refinanced existing indebtedness). An additional $30,000,000 was drawn on April 5, 2012 (in accordance with the Fourth Modification of Sublease dated April 5, 2012 by and between Registrant and Sublessee) and an additional $30,000,000 was drawn on July 9, 2012 (in accordance with the Fifth Modification of Sublease dated July 9, 2012 by and between Registrant and Sublessee) bringing the total amount advanced through September 30, 2012 to $219,000,000. Based on the terms of the Secured Term Loan (as amended) and subject to the conditions set forth in the Secured Term Loan (as amended), the lenders agreed to provide Registrant with additional advances of up to $281,000,000. Any further advances under the Secured Term Loan are subject to the consent of the Sublessee.

 

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Pursuant to the terms of the Secured Term Loan agreement, Registrant and Sublessee entered into an amendment dated July 26, 2011 to the Sublease (“Third Modification of Sublease”) pursuant to which (i) Sublessee consented to the advance of up to $159,000,000 under the Secured Term Loan and (ii) in accordance with the terms of the existing sublease agreement (which terminates on January 4, 2076) between Sublessee and Registrant, the basic rent payable by Sublessee was increased by an amount equal to the debt service on the portion of the borrowing from the Secured Term Loan associated with improvements (excluding any principal payable upon maturity). In connection with additional advances aggregating $60,000,000, Registrant and Sublessee entered into a Fourth Modification of Sublease and a Fifth Modification of Sublease dated as of April 5, 2012 and July 9, 2012, respectively, under which the basic rent payable by Sublessee was further increased by an amount equal to the debt service on the aggregate additional advance of $60,000,000. The original basic rent payable by Sublessee is more than sufficient to pay the debt service on the portion of the borrowing associated with purchasing the fee position in 2002. The Sublessee and Empire State Realty Observatory TRS, LLC (formerly known as ESB Observatory LLC), a subsidiary of Sublessee, also entered into subordination agreements with the agent on behalf of the lenders pursuant to which the Sublease and the lease of the observatory were subordinated to the mortgage securing the Secured Term Loan. As a result, the Sublease and the observatory lease can be terminated in connection with a foreclosure by Secured Term Loan lenders.

Subject to the terms and conditions of the Secured Term Loan agreement, the outstanding principal amount of the Secured Term Loan shall bear interest at a rate equal to 2.5% per annum above 30-day LIBOR, unless such rate is not available, in which event the Secured Term Loan would bear interest at 2.5% per annum in excess of (i) HSBC’s prime rate or (ii) the BBA LIBOR Daily Floating Rate. In connection with this loan, Registrant issued promissory notes, a mortgage encumbering the Property in favor of the agent for the lenders, and other customary security and other loan documents. The maturity date of this loan is July 26, 2014, which Registrant may extend to July 26, 2015 and thereafter to July 26, 2016, in each case upon payment of an extension fee of 0.25% of the total availability under the Secured Term Loan agreement at the time of such extension. Such extensions are subject to customary conditions, including the satisfaction of certain loan-to-value and debt yield ratios and the absence of an event of default.

The initial advance was used to pay and discharge the then existing secured mortgage loans relating to the Property and to fund operations and working capital requirements related to the Property (including for improvements), including reimbursements to Sublessee for expenditures relating to improvements previously incurred by Sublessee, and certain other general entity purposes permitted in the Secured Term Loan including costs of the financing. Subsequent advances were or will be used for the foregoing purposes except for the discharge of existing secured mortgage loans which had been discharged from proceeds of the initial advance.

Payment obligations relating to the Secured Term Loan may be accelerated upon the occurrence of an event of default under the Secured Term Loan agreement. Events of default under the Secured Term Loan agreement include, subject in some cases to specified cure periods: payment defaults; failure by Registrant to pay taxes; failure to keep certain insurance policies in effect; breaches of representations and covenants contained in the mortgage; defaults in the observance or performance of covenants; inaccuracy of representations and warranties in any material respect; bankruptcy and insolvency related defaults; and the entry of one or more final judgments for the payment of more than $1,000,000 that are not satisfied within 30 days.

The Secured Term Loan agreement contains affirmative and negative covenants customary for financings of this type. Negative covenants in the Secured Term Loan agreement limit Registrant’s ability, subject to certain exceptions, to transfer all or substantially all of its Property; incur indebtedness and liens; dissolve, liquidate or enter into mergers or similar transactions; change its line of business; cancel debt; enter into transactions with affiliates; rezone its property; sell its assets; make certain distributions to investors; and change its organizational documents. The Registrant must also maintain a debt yield ratio as specified in the Secured Term Loan agreement.

 

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Registrant as both the fee owner and the ground lessor of the Empire State Building is mortgagor and each of its estates is therefore mortgaged. Sublessee and the observatory tenant agreed to subordinate their respective leasehold interest to the mortgage. Accordingly, in the event of a foreclosure, their leasehold estates could be terminated.

Registrant anticipates that funds for short-term working capital requirements for the Real Estate will be provided by cash on hand, rental payments received from the Sublessee (which entity is required under the Sublease to make payments of Basic Rent and, subject to cash flow, Overage Rent) and from additional advances of up to $281,000,000 available with respect to the July 26, 2011 refinancing and subsequent amendment on November 2, 2011. Long-term sources of working capital will be provided by a combination of rental payments from the Sublessee and borrowings.

Sublessee is to maintain the Building as a high-class office building as required by the terms of the Sublease.

In connection with the July 2011 refinancing of the mortgage on the fee position of the Empire State Building with the Secured Term Loan, it is now intended that the Registrant generally will incur all capital improvement and tenanting costs commencing with expenditures incurred January 1, 2011 and thereafter. Registrant has incurred fixed asset additions of $48,376,837 and leasing costs of $5,554,926 during the nine months ended September 30, 2012 and reimbursed Sublessee $35,042,777, resulting in a payable to Sublessee of $24,958,868 (including unpaid building improvements and leasing costs) at September 30, 2012.

Since the Supervisor gained day-to-day management of the Empire State Building in August 2006, a total of approximately $157,900,000 has been invested through September 30, 2012 in connection with the restoration and renovation program at the Property. The Registrant currently estimates that between $185,000,000 and $225,000,000 of additional capital is needed to complete this renovation program, which the Registrant expects to complete substantially in 2016. These estimates are based on the Supervisor’s current budgets (which do not include tenant improvement and leasing commission costs) and are subject to change. The Registrant’s renovation program at the Property has taken substantial time to design and implement due to many factors, including the overall scale of the program, the market timing of re-leasing upgraded spaces to existing and prospective tenants, the Registrant’s desire to minimize existing tenant disruptions, and the need to obtain consents of investors to complete financings.

Due to Sublessee at September 30, 2012 represents the payable to Sublessee for purchased building improvements and tenanting costs. The costs of the Program will be financed through a combination of borrowings and operating cash flow.

The Sublessee is advancing costs of the Program and is reimbursed by Registrant from available financing. The Program (1) grants the ownership of the improvements to Registrant to the extent of its reimbursements to Sublessee and (2) allows for the increased mortgage charges to be paid by Registrant from an equivalent increase in the basic rent paid by the Sublessee to Registrant. Since any Overage Rent will be decreased by one-half of that amount, the net effect of the lease modification is to have Registrant and the Sublessee share the costs of the Program equally, assuming Overage Rent continues to be earned.

 

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The Supervisor of the Registrant has filed a registration statement on Form S-4 for the solicitation of consents of the Participants in the Registrant and other public limited liability companies supervised by the Supervisor to the Consolidation. In the Consolidation, (x) the property interests of the Registrant, such other public limited liability companies and certain private entities supervised by the Supervisor, and (y) the Supervisor and certain affiliated management companies would be contributed to the operating partnership of Empire State Realty Trust, Inc., a newly organized real estate investment trust.

Consents are required from Participants in the Registrant and such other public limited liability companies for them to contribute their interests in the Consolidation, and the solicitation of such consents will not commence until the SEC declares effective the registration statement on Form S-4. Consents have been obtained from participants in the private entities and the Supervisor and certain affiliated companies and affiliates of the Supervisor for them to make such contributions.

The consideration to be paid to the contributing companies and entities in the Consolidation will be allocated in accordance with exchange values determined based on appraisals by an independent third party. Such method of allocation has been approved by the Sublessee. Based on the exchange values, if the Consolidation proposal is approved by the Registrant’s Participants, the consideration with respect to the Empire State Building will be allocated approximately 50% to the Registrant and 50% to the Sublessee, which the Supervisor believes is in accordance with the historical treatment of the Registrant and the Sublessee.

Inflation

Registrant believes that there has been no material change in the impact of inflation on its operations since the filing of the 10-K for the year ended December 31, 2011.

Security Ownership

As of September 30, 2012, the Members of Registrant owned of record and beneficially an aggregate of $41,042 of Participations in Registrant, representing less than 0.124% of the currently outstanding Participations therein totaling $33,000,000.

As of September 30, 2012, certain of the Members of Registrant held additional Participations as follows:

Entities for the benefit of members of Peter L. Malkin’s family owned of record and beneficially $1,064,583 of Participations. Peter L. Malkin disclaims any beneficial ownership of such Participations, except that related trusts are required to complete scheduled payments to Peter L. Malkin.

Peter L. Malkin owned of record as trustee or co-trustee, but not beneficially, $171,667 of Participations. Peter L. Malkin disclaims any beneficial ownership of such Participations.

Anthony E. Malkin owned of record as trustee or co-trustee, but not beneficially, $79,584 of Participations. Anthony E. Malkin disclaims any beneficial ownership of such Participations.

 

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Trusts for the benefit of members of Anthony E. Malkin’s family owned of record and beneficially $50,000 of Participations. Anthony E. Malkin disclaims any beneficial ownership of such Participations.

Members of Thomas N. Keltner, Jr.’s family owned of record and beneficially $6,667 of Participations.

 

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. The Supervisor after evaluating the effectiveness of Registrant’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of September 30, 2012, the end of the period covered by this report, has concluded that as of that date that Registrant’s disclosure controls and procedures were effective and designed to ensure that material information relating to Registrant would be made known to it by others within those entities on a timely basis.

(b) Changes in internal controls over financial reporting. There were no changes in Registrant’s internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to affect, Registrant’s internal controls over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

The Property of Registrant was the subject of the following material litigation:

(a) Malkin Holdings LLC and Peter L. Malkin, a member in Registrant, were engaged in a proceeding with Sublessee’s former managing agent, Helmsley-Spear, Inc. commenced in 1997, concerning the management, leasing and supervision of the Property that is subject to the Sublease to Sublessee. In this connection, certain costs for legal and professional fees and other expenses were paid by Malkin Holdings and Mr. Malkin. Malkin Holdings and Mr. Malkin have represented that such costs will be recovered only to the extent that (a) a competent tribunal authorizes payment or (b) an investor voluntarily agrees that his or her proportionate share be paid. On behalf of himself and Malkin Holdings, Mr. Malkin has requested, or intends to request, such voluntary agreement from all investors, which may include renewing such request in the future for any investor who previously received such request and failed to confirm agreement at that time. Because any related payment has been, or will be, made only by consenting investors, Registrant has not provided for the expense and related liability with respect to such costs in these financial statements.

An August 29, 2006 settlement agreement terminated Helmsley-Spear, Inc. as managing and leasing agent at the Property, subject to the supervision of Malkin Holdings LLC, as its supervisor, while engaging third party leasing agents, CB Richard Ellis for retail space since August 30, 2006 and Newmark Knight Frank for non-retail space since October 21, 2009.

 

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(b) In March 2012, five putative class actions (the “Class Actions”) were filed in New York State Supreme Court, New York County by participants in Empire State Building Associates L.L.C. and several other entities supervised by Malkin Holdings that own fee or leasehold interests in various properties located in New York City (on March 1, 2012, March 7, 2012, March 12, 2012, March 14, 2012 and March 19, 2012). The plaintiffs assert claims against Malkin Holdings, Malkin Properties, L.L.C., Malkin Properties of New York, L.L.C., Malkin Properties of Connecticut, Inc., Malkin Construction Corp., Anthony E. Malkin, Peter L. Malkin, Estate of Leona M. Helmsley, Empire State Realty OP, L.P., and Empire State Realty Trust, Inc. (“Defendants”) for breach of fiduciary duty, unjust enrichment, and/or aiding and abetting breach of fiduciary duty. They allege, among other things, that the terms of the transaction and the process in which it was structured (including the valuation that was employed) are unfair to the investors in the existing entities, the consolidation provides excessive benefits to Malkin Holdings and its affiliates and the then-draft prospectus/consent solicitation statement which is part of the registration statement on Form S-4 filed with the SEC relating to the consolidation failed to make adequate disclosure to permit a fully-informed decision about the proposed transaction. The complaints seek money damages and injunctive relief preventing the consolidation. The actions were consolidated and co-lead plaintiffs’ counsel were appointed by the New York State Supreme Court by order dated June 26, 2012.

The parties entered into a Stipulation of Settlement dated September 28, 2012, resolving the Class Actions. The Stipulation of Settlement recites that the consolidation was approved by overwhelming consent of the private entity participants. The Stipulation of Settlement states that counsel for the plaintiff class satisfied themselves that they have received adequate access to relevant information, including the independent valuer’s valuation process and methodology, that the disclosures in the registration statement on Form S-4, as amended, are appropriate, that the transaction presents potential benefits, including the opportunity for liquidity and capital appreciation, that merit the participants’ serious consideration and that each of the named class representatives intends to support the transaction as modified. The Stipulation of Settlement further states that counsel for the plaintiff class are satisfied that the claims regarding tax implications, enhanced disclosures, appraisals and exchange values of the properties that would be consolidated into the company, and the interests of the participants in the public entities and the private entities have been addressed adequately, and they have concluded that the settlement pursuant to the Stipulation of Settlement and opportunity to consider the proposed transaction on the basis of revised consent solicitations are fair, reasonable, adequate and in the best interests of the plaintiff class.

Defendants in the Stipulation of Settlement denied that they committed any violation of law or breached any of their duties and did not admit that they had any liability to the plaintiffs.

 

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The terms of the settlement include, among other things (i) a payment of $55 million, with a minimum of 80% in cash and maximum of 20% in freely-tradable shares of common stock and/or freely-tradable operating partnership units (all of which will be paid by affiliates of Malkin Holdings (provided that no affiliate of Malkin Holdings that would become a direct or indirect subsidiary of Empire State Realty Trust, Inc. in the consolidation will have any liability for such payment) and the Estate of Leona M. Helmsley and certain participants in the private entities who agree to contribute) to be distributed, after reimbursement of plaintiffs’ counsel’s court-approved expenses and payment of plaintiffs’ counsel’s court-approved attorneys’ fees, and, in the case of the shares of common stock and/or operating partnership units, after the termination of specified lock-ups periods, to participants in the public entities and the private entities pursuant to a plan of allocation to be prepared by counsel for plaintiffs; (ii) Defendants’ agreement that (a) the initial public offering will be on the basis of a firm commitment underwriting; (b) if, during the solicitation period of the public entities, any of the three public entities’ percentage of total exchange value is lower than what is stated in the final prospectus/consent solicitation by 10% or more, such decrease will be promptly disclosed by Defendants to participants in the public entities; and (c) unless total gross proceeds of $600,000,000 are raised in the initial public offering, Defendants will not proceed with the transaction without further approval of the public entities, and (iii) Defendants’ agreement to make additional disclosures in the prospectus/consent solicitation which is part of the registration statement on From S-4 regarding certain matters (which are included therein). Participants in the public entities and private entities will not be required to bear any portion of the settlement payment. The payment in settlement of the claim will be made by the Estate of Leona M. Helmsley and affiliates of Malkin Holdings (provided that no affiliate of Malkin Holdings that would become a direct or indirect subsidiary of Empire State Realty Trust, Inc. in the consolidation will have any liability for such payment) and certain participants in the private entities who agree to participate. Empire State Realty Trust, Inc. and Empire State Realty OP, L.P. will not bear any of the settlement payment.

The settlement further provides for the certification of a class of participants in the three public entities and all of the private entities, other than Defendants and other related persons and entities, and a release of any claims of the members of the class against Defendants and related persons and entities, as well as underwriters in the initial public offering and other advisors. The release in the settlement excludes certain claims, including but not limited to, claims arising from or related to any supplement to the registration statement on Form S-4 that is declared effective to which the plaintiffs’ counsel objects in writing, which objection will not be unreasonably made or delayed, so long as plaintiffs’ counsel has had adequate opportunity to review such supplement. Members of the putative class have the right to opt out of the monetary portion of the settlement, but not the portion providing for equitable relief. The settlement is subject to court approval. It is not effective until such court approval is final, including the resolution of any appeal. Defendants continue to deny any wrongdoing or liability in connection with the allegations in the Class Actions.

There is a risk that other third parties will assert claims against the Defendants, including, without limitation, that the Defendants breached their fiduciary duties to participants or that the consolidation violates the relevant operating agreements, and third parties may commence litigation against the Defendants.

 

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EXHIBIT INDEX

 

Number    Document
10.1    Fifth Modification of Sublease dated July 9, 2012, between Empire State Building Company L.L.C. and Registrant.
10.2    Third Amendment of the Loan Agreement, Ratification of Loan Documents and Omnibus Amendment dated October 11, 2012, between the Registrant, Empire Land Associates L.L.C. and HSBC Bank, USA, National Association, as Agent and the lender named therein and HSBC Bank USA, National Association and Dekabank Deutsche Girozentrale, as Lead Arrangers.
24.1    Power of Attorney dated October 11, 2012 between the Members in Registrant and Mark Labell which is being filed as Exhibit 24.1 to Registrant’s 10-Q for the period ended September 30, 2012.
31.1    Certification of Mark Labell, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Mark Labell, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Mark Labell, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Mark Labell, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

The individual signing this report on behalf of Registrant is Attorney-in-Fact for Registrant and each of the Members in Registrant, pursuant to Powers of Attorney, dated October 11, 2012 (the “Power”) and as supervisor of the accounting functions.

 

EMPIRE STATE BUILDING ASSOCIATES L.L.C.

(Registrant)

By:   /s/ Mark Labell

Mark Labell as Senior Vice President, Finance of Malkin Holdings LLC,

Supervisor of Empire State Building Associates L.L.C.* and as Attorney-in-Fact on behalf of:

Peter L. Malkin, Member

Anthony E. Malkin, Member

Thomas N. Keltner, Jr., Member

Date: November 13, 2012

 

* Registrant’s organizational documents do not provide for a Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer or other officer with equivalent rights and duties. As described in the Report, Registrant is a limited liability company which is supervised by Malkin Holdings LLC. Accordingly, this Form 10-Q is being signed by a senior executive and a senior member of the financial/accounting staff of Registrant’s Supervisor in such capacities.

 

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