Empire strikes back as icon gets a facelift

Developer Peter Malkin is seeking to finance a $660US million ($839 million) renovation of the Empire State Building to lure large firms to New York City's tallest skyscraper, a haven for small businesses for decades.

Wien & Malkin, a New York-based real estate company, is asking investors in Empire State Building Associates to approve borrowing to pay for modernising the iconic 1930s office tower.

The project will exponentially increase the building's current debt - a $61US million first mortgage - at a time when many lenders are reluctant to finance commercial real estate projects. Raising the financing shouldn't be a problem, industry analysts said, as the total borrowings would still be less than half of the building's value, estimated at more than $2US billion.

"When you get a trophy property like that with a very low loan-to-value ratio, there would be a lot of lenders that would be comfortable" providing the cash, said Cedrik Lachance, a senior analyst at Green Street Advisors, a Newport Beach, California, firm that researches real estate investment trusts.

The new loan would leave the property with debt ranging from $660US million to almost $825US million, according to calculations based on documents filed with the US Securities and Exchange Commission and interviews with real estate analysts.

The building, though famous, had fallen on hard times, in part because of poor management and in part because it was in a section of midtown Manhattan that was a less desirable market for office space, said Robert Sammons, research director at Colliers ABR, a New York-based real estate broker. Now the area is more in demand.

"It just hasn't been on the radar screen for most tenants," Sammons said. Now "that whole area of midtown south has a strong appeal to a number of tenants because it is a mixed use neighbourhood" with shops and residential buildings as well as offices.

Thomas Keltner, general counsel at Wien & Malkin, declined to comment. Peter Malkin, the firm's chairman, also heads the Associates partnership, which controls the building until 2076.

Malkin is improving the Empire State Building's infrastructure and amenities, creating larger office spaces, and raising rents as part of a new leasing strategy for the landmark, located at 350 Fifth Ave, between 33rd and 34th streets in Manhattan.

The goal is to bring in larger, more creditworthy tenants to the 102-storey building, which was occupied by almost 700 businesses and firms at the end of 2006, according to SEC filings.

"Historically, this was known as a small tenant building," said Stephen Eynon, a first vice-president at CB Richard Ellis Group, the brokerage that is marketing the property's office space. "We are looking to attract larger corporate users."

The building's occupancy rate had fallen to 79 per cent as of April 7, according to the filing, in part because management is warehousing space to create larger offices for tenants, Eynon said. The building's rental rates on new office leases are now about $52US to $63US a square foot ($170US to $206US per sq m), up from $32US to $42US a year ago.

The total cost of the overhaul will be about $660US million, including $442US million for renovations to common areas and upgrades to electrical, heating, security and other systems, the April SEC filing shows. A further $218US million will be spent to improve office spaces for tenants and to pay leasing commissions and finance closing costs.

"To spend that much just on a renovation is very unusual," said Woody Heller, executive managing director at Studley, a New York-based real estate brokerage.

"But there are very few buildings as large as this one, so by definition all the numbers are going to be very big."

The property may be worth about $1000US a square foot, said Heller, which would equal almost $2US.8 billion based on the 2.75 million rentable square feet listed in the SEC filing.

The Empire State Building cost $40US.9 million when it was built in 1930-31, including the purchase of the land, according to the tower's website. The building alone cost $24.7 million, the site says, adding that the onset of the Depression halved the anticipated cost of construction.

According to the April 24 filing, the additional borrowing will raise projected debt after 10 years to about $300US a square foot. That would equal about $824US million, based on the building's 2.75 million square feet of rental office and retail space, as listed in the filing. The documents didn't say whether the projected debt figure includes the existing $61US million mortgage.

The projected debt would be as much as 20 per cent lower, or closer to $660US million, were it based on usable square footage as opposed to rentable square footage, said Dan Fasulo, managing director of Manhattan-based Real Capital Analytics.

"It's more common for older buildings to have a bigger difference between usable and rentable space," said Fasulo, whose firm provides research and consulting services on the commercial real estate industry. "There is a lot more wasted space" in common areas such as corridors, he said.

The Empire State Building's ownership structure is complex. The building itself is owned by W&H Properties, a partnership between the Malkin family and the late Leona Helmsley, according to Eynon.

Empire State Building Associates, which has some 2764 investors, holds a master lease on the building until 2076 and also owns the underlying land, purchased in 2002 through the $61US million first mortgage.

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The Empire State Building was completed in 1931.

It cost $41US million.

It is 102 storeys high.

The Empire State was conceived by former General Motors executive John Jakob Raskob to be the highest in New York, topping Walter Chrysler's Art Deco tower on 42nd Street.

It became the highest again when the World Trade Centre was destroyed in 2001.

- BLOOMBERG