September 13, 2012
VIA FACSIMILE AND OVERNIGHT COURIER
Ms. Louise Dorsey
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549-7010
Re: | Empire State Realty Trust, Inc. Empire State Realty OP, L.P. Amendment No. 3 to Registration Statement on Form S-4 | |
Filed August 13, 2012 | ||
Amendment No. 2 to Registration Statement on Form S-11 | ||
Filed July 3, 2012 File Nos. 333-179486; 333-179486-01 |
Dear Ms. Dorsey:
On behalf of Empire State Realty Trust, Inc., a Maryland corporation (the Company) and Empire State Realty OP, L.P. (the Operating Partnership), we are resubmitting our letter dated September 10, 2012 to reflect the requested clarifications to the September 5, 2012, September 7, 2012 and September 12, 2012 oral requests by the staff of the Division of Corporation Finance of the Commission (the Staff) for supplemental information providing additional analysis related to the accounting costs included in the table under the heading Derivation of Consolidation Expenses, relating to the Companys Registration Statements on Form S-4 (Registration No. 333-179486). The clarifications include additional detail provided in the schedule included as Exhibit A.
We respectively advise the Staff that the work performed by external professional firms related to the consolidation and the initial public offering have been performed simultaneously and much of the same work and analysis is needed for both the consolidation and the initial public offering. As a result, the costs cannot be factually separated between the two activities. Further, we continue to believe that this transaction is one project a capital event and not a business combination followed by a capital event. We note that the planned acquisition of the non-controlled entities and the option property entities are being treated as a business combination and the costs allocated to those entities have been expensed as incurred.
We have provided a detail for the accounting costs as Exhibit A. We have reviewed the work performed by each accounting firm assisting us and separated costs between accounting services (such as journal entries and financial statement preparation) and services performed directly for the S-4 and S-11 filings. From January 1, 2010 through March 31, 2012, we have incurred $19.6 million of accounting costs as described on page 238 of our previous S-4 filing. Of this $19.6 million, we determined that $9.5 million related to accounting services that are to be expensed as incurred and $10.1 million relates to services directly related to the consolidation and initial public offering. The predecessor entities, non-controlled entities, and the option property entities
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expensed a combined $9.0 million, which approximates the $9.5 million expense amount in Exhibit A. It is also noted that the predecessor entities, non-controlled entities, and option property entities have expensed approximately $6.9 million of accounting and auditing costs that are in addition to the $19.6 million disclosed on page 238 of our previous S-4 filing and are included in Marketing, General, and Administrative expense.
We consider the costs incurred by the Company to effectuate the related and simultaneous steps of consolidation, registration, and the initial public offering as costs of the offering and we believe are properly deferred in accordance with SAB Topic 5.
We thank you for your prompt attention and look forward to hearing from you at your earliest convenience. Please direct any questions concerning this response to our counsel Larry Medvinsky, Esq. at (212) 878-8149 or Steven Fishman, Esq. at (212) 969-3025.
Yours truly,
/s/ Andrew Prentice
Andrew Prentice
Chief Accounting Officer
Malkin Holdings LLC
cc: | Jessica Barberich | |
Eric McPhee | ||
Angela McHale | ||
David L. Orlic | ||
Tom Kluck | ||
Anthony E. Malkin David A. Karp | ||
Thomas N. Keltner, Jr. Larry Medvinsky Steven Fishman |
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Exhibit A
The following is total accounting costs related to the Predecessor entities, non-controlled entities, and option properties for the period January 1, 2010 through March 31, 2012:
Service provider |
Total accounting expenses |
Description of services | ||||
Incremental consolidation accounting expenses: |
||||||
Ernst & Young |
$ | 8,612,800 | ||||
Margolin Winer Evens |
4,953,380 | |||||
Mark Paneth & Shron |
2,953,000 | |||||
Anchin Block Anchin |
2,457,921 | |||||
Berdon |
425,626 | |||||
Lewis Braff & Co. |
73,995 | |||||
Rogoff & Company |
57,624 | |||||
Deloitte |
50,000 | |||||
Other |
33,670 | |||||
|
|
|||||
Total incremental consolidation accounting expenses |
19,618,016 | See additional detail below | ||||
MG&A accounting expenses: |
||||||
Ernst & Young |
1,208,246 | Audits of existing registrants | ||||
Other accounting firms and internal costs |
5,669,256 | Accounting services provided by local accounting firms and internal personnel | ||||
|
|
|||||
Total MG&A accounting expenses |
6,877,502 | |||||
|
|
|||||
Total accounting and auditing costs |
$ | 26,495,518 | ||||
|
|
|||||
The following are incremental accounting costs related to the Company's S-4 and S-11 filings for the period January 1, 2010 through March 31, 2012: | ||||||
Service provider |
Consolidation accounting expenses |
Description of services | ||||
Consolidation accounting servicesexpensed |
||||||
Margolin Winer Evens |
$ | 3,467,366 | Financial statement compilation, tax to GAAP conversion | |||
Mark Paneth & Shron |
2,362,400 | Combined financial statements preparation and journal entries | ||||
Ernst & Young |
1,750,000 | Financial statement audit for Predecessor | ||||
Anchin Block Anchin |
1,720,545 | Financial statement compilation, tax to GAAP conversion | ||||
Lewis Braff & Co. |
73,995 | Accounting preparation work | ||||
Rogoff & Company |
57,624 | Accounting preparation work | ||||
Deloitte |
50,000 | Financial systems consulting | ||||
Other |
33,670 | |||||
|
|
|||||
Total consolidated accounting servicesexpensed |
9,515,600 | |||||
S-4 and S-11 servicesdeferred |
||||||
Ernst & Young |
$ | 6,862,800 | S-4/S-11 assistance and tax advisory services in connection with IPO | |||
Margolin Winer Evens |
1,486,014 | 3-14 financial statements, assistance with individual private MD&As, pro forma, and straight line rent projections for pro forma | ||||
Anchin Block Anchin |
737,376 | 3-14 financial statements, assistance with individual private MD&As, pro forma, and straight line rent projections for pro forma | ||||
Mark Paneth & Shron |
590,600 | Assistance with writing and analyzing MD&A | ||||
Berdon |
425,626 | Preparation of initial individual and predecessor MD&As and analyses to include in the S-4 and S-11 | ||||
|
|
|||||
Total S-4 and S-11 servicesdeferred |
10,102,416 | |||||
|
|
|||||
Total consolidation expenses |
$ | 19,618,016 | ||||
|
|
3
September 13, 2012
VIA FACSIMILE AND OVERNIGHT COURIER
Ms. Louise Dorsey
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549-7010
Re: | Empire State Realty Trust, Inc. |
Empire State Realty OP, L.P. |
Amendment No. 3 to Registration Statement on Form S-4 |
Filed August 13, 2012 |
Amendment No. 2 to Registration Statement on Form S-11 |
Filed July 3, 2012 File |
Nos. 333-179486; 333-179486-01 |
Dear Ms. Dorsey:
On behalf of Empire State Realty Trust, Inc., a Maryland corporation (the Company) and Empire State Realty OP, L.P. (the Operating Partnership), we are resubmitting our letter dated September 10, 2012 to reflect the requested clarifications to the September 7, 2012 and September 12, 2012 oral requests by the staff of the Division of Corporation Finance of the Commission (the Staff) for supplemental information providing additional analysis related to the determination by Duff & Phelps, LLC, our independent appraiser, of the value of goodwill attributed to the acquisition of the controlling interests in Empire State Building Company, L.LC. (ESBC), which is the operating lessee of the Empire State Building, relating to the Companys Registration Statements on Form S-4 (Registration No. 333-179486) and S-11 (Registration Statement No. 333-179485). These clarifications include a quantification of the movements in the identified intangible and goodwill accounts.
The acquisition by the Company of the controlling interest in ESBC will be accounted for as an acquisition under the acquisition method of accounting in accordance with Accounting Standards Codification 805-10, Business Combinations (ASC 805). The Company will recognize the estimated fair value of the assets and liabilities of ESBC acquired at the time of the consummation of the formation transactions. When the Company acquires such controlling interest, the operating lease will be cancelled as the operations of ESBC will be consolidated into the Companys operations and the Company will recognize a gain on the cancellation of the lease. The purchase price will be allocated to any identified tangible or intangible assets the Company acquires. Since the operating lessee is an operating company and has no interest in the land and base building of the Empire State Building, the excess of the purchase price over any identified tangible and intangible asset for ESBC will be recognized as goodwill on the Companys balance sheet.
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The amount of goodwill that will be recognized by the Company with respect to its acquisition of the controlling interest of ESBC on the Companys pro forma financial statements was calculated utilizing the exchange value of EBSC calculated by the Companys independent appraiser. In the Companys forthcoming amendments to its registration statements the Company is updating the exchange value information presented from the preliminary exchange values determined as of July 1, 2011 to the final exchange values calculated as of June 30, 2012, in each case by our independent appraiser. In addition, the Company is updating its pro forma financial statements to reflect financial information as of, and for the six months ended June 30, 2012. As a result of these updates, (a) the amount of goodwill the Company recognizes in its pro forma financial statements has decreased from approximately $893 million to $592 million and (b) the gain on cancellation of the operating lease has decreased from approximately $140 million to $35 million. There are two primary reasons for this decrease: (i) changes in the market assumptions used to calculate the purchase price allocations and (ii) an increase in the tangible assets of ESBC resulting from increased leasing activity. The values of identified intangibles and goodwill for ESBC are as follows:
Market rate estimate as of | ||||||||||||
June 30, 2011 | June 30, 2012 | Increase (Decrease) | ||||||||||
Above-market leases |
$ | 27,587 | $ | 52,927 | $ | 25,340 | ||||||
Lease in-place |
76,003 | 93,309 | 17,306 | |||||||||
Lease commissions and costs |
27,246 | 69,282 | 42,036 | |||||||||
|
|
|
|
|
|
|||||||
Deferred costs, net |
130,836 | 215,518 | 84,682 | |||||||||
Goodwillobservatory |
228,999 | 256,023 | 27,024 | |||||||||
Goodwillpurchase price excess |
893,403 | 592,205 | (301,198 | ) | ||||||||
|
|
|
|
|
|
|||||||
Goodwill |
1,122,402 | 848,228 | (274,174 | ) | ||||||||
Below-market leases |
128,774 | 136,302 | 7,528 |
The exchange value for ESBC decreased but did not decrease materially, from approximately $1.19 billion to $1.17 billion. However, many of the elements used to calculate this exchange value did change. First, projected cash flow for ESBC was lowered as compared to the cash flows underlying the preliminary exchange value. These cash flows are based on the terms of the operating lease between ESBC, the operating lessee, and Empire State Building Associates, L.L.C. (ESBA), the lessor. Overage rent constitutes the material portion of rent paid by ESBC to ESBA. Overage rent payable by ESBC is reduced by leasing commissions, tenant improvement costs and other costs associated with leasing activities. As a result of significant leasing activities at the Empire State Building during the past year and a slower projected cash flow from property operations, projected cash flows declined and therefore caused a reduction in the net present value of the operating lease as calculated by the independent appraiser. These cash flow projections have been filed for all of the properties as Exhibit C to the Form S-4. However, market conditions improved over the past year which resulted in lower discount rates and market capitalization rates utilized by the independent appraiser which offset much of the
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impact of the lower projected cash flows. Therefore, there was not a material change between the preliminary and final exchange values for ESBC.
The independent appraiser then compared the value of the operating lease to an estimated market value. The value of the operating lease was determined by the independent appraiser to be higher than the market value resulting in an above-market lease. The estimated market value stayed relatively constant in the calculation of the preliminary and final exchange values. These rates are as follows:
Market rate estimate as of | ||||||||
June 30, 2011 | June 30, 2012 | |||||||
Capitalization rate |
6.00 | % | 5.75 | % | ||||
Discount rate |
7.25 | 7.00 | % |
Therefore, since the value of the operating lease declined, the amount of the above-market lease liability declined as well resulting in less goodwill recognized.
In addition, as a result of the increased dollars spent in connection with the Companys leasing activities and capital expenditures over the past year, the tangible and intangible assets (tenant improvements, leasing commissions, leases in-place and leasehold improvements) of ESBC increased. Therefore, more of the purchase price for EBSC was allocated to tangible and intangible assets resulting in less goodwill.
We thank you for your prompt attention and look forward to hearing from you at your earliest convenience. Please direct any questions concerning this response to our counsel Larry Medvinsky, Esq. at (212) 878-8149 or Steven Fishman, Esq. at (212) 969-3025.
Yours truly,
/s/ Andrew Prentice
Andrew Prentice
Chief Accounting Officer
Malkin Holdings LLC
cc: | Jessica Barberich |
Eric McPhee |
Angela McHale |
David L. Orlic |
Tom Kluck |
Anthony E. Malkin |
Thomas N. Keltner, Jr. |
David A. Karp |
Larry Medvinsky |
Steven Fishman |
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