Item 1. Business.
(a) General
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 does 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. Through April 16, 2002, Registrant owned the tenant's interest in a master operating leasehold (the "Master Lease") on the Empire State Building (the "Building"), located at 350 Fifth Avenue, New York, New York. 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, and the land thereunder (the "Land") (together, the "Real Estate"), at a price of $57,500,000, and obtained a $60,500,000 first mortgage with North Fork Bank (the "Mortgage") to finance the acquisition and certain related costs. The initial term of the Master Lease expired on January 5, 1992. On January 30, 1989, Registrant exercised its first of four 21-year renewal options contained in the Master Lease and extended the Master Lease through January 5, 2013.
Registrant does not operate the Real Estate. It subleases the Real Estate to Empire State Building Company L.L.C. (the "Sublessee") pursuant to a net operating sublease (the "Sublease") with a term and renewal options essentially coextensive with those contained in the Master Lease. On January 30, 1989, Sublessee elected to renew the Sublease for a term commencing January 4, 1992 to January 4, 2013.
Registrant's 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 in his respective member interest in Registrant (the "Participants").
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. All of the members in Registrant hold senior positions at Wien & Malkin LLC (the "Supervisor"), 60 East 42nd Street, New York, New York, which provides supervisory and other services to Registrant and to Sublessee. See Items 10, 11, 12 and 13 hereof for a description of the ongoing services rendered by, and compensation paid to, Supervisor and for a discussion of certain relationships which may pose potential conflicts of interest among Registrant, Sublessee and certain of their respective affiliates.
As of December 31, 2006, the Building was 84% occupied by approximately 695 tenants who engage in various businesses, including the Boy Scouts, the YMCA, the practice of law and accounting, ladies' and men's apparel, and ladies' and men's shoes. Registrant does not maintain a full-time staff. See Item 2
Item 2. Property.
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, and the land thereunder, at a price of $57,500,000, and obtained a $60,500,000 first mortgage with North Fork Bank to finance the acquisition and certain related costs. The Building, erected in 1931 and containing 102 stories, a concourse and a lower lobby, occupies the entire blockfront from 33rd Street to 34th Street on Fifth Avenue. The Building has 72 passenger elevators and 4 freight elevators and is equipped with air conditioning and individual air handling units. The Building is subleased to Sublessee under the Sublease which expires on January 4, 2013 and contains three 21-year renewal options. See Item 1 hereof for a description of the terms of the Lease and Sublease.
The Real Estate was originally carried in the financial statements at a total 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 the Registrant incurred no leasehold rent expense after acquiring the Real Estate.
The mortgage matures on May 1, 2012. Monthly payments under the mortgage are interest only at a fixed annual rate of 6.5% through maturity. Payments commenced on June 1, 2002, except that short-term interest from the closing until April 30, 2002 was due on May 1, 2002. The mortgage may be prepaid at any time after 24 months with the payment of a premium equal to the greater of (a) 1% of the amount prepaid and (b) an amount calculated pursuant to a prepayment formula designed to preserve the bank's yield to maturity. The mortgage loan is secured by a lien on the Real Estate and Registrant's leasehold estate under the Master Lease of the Real Estate.
Restricted cash at December 31, 2006 includes an interest-bearing account held at North Fork Bank pursuant to the terms of the Mortgage, to be used monthly to satisfy a portion ($166,167) of Registrant's mortgage interest obligation. On March 28, 2007, Registrant deposited an additional $2,000,000 into this restricted account under the same conditions and will continue to do so annually hereafter.
The Building is being depreciated on a straight-line basis using an estimated life of 39 years from April 17, 2002. Mortgage financing costs, totaling $1,796,287, are being amortized ratably over the term of the mortgage.
Item 3.
Item 3. Legal Proceedings.
The Property of Registrant was the subject of the following material litigation:
Wien & Malkin 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 Lease to Sublessee. In this connection, certain costs for legal and professional fees and other expenses have been paid and incurred by Wien & Malkin and Mr. Malkin, and certain costs for filings to terminate such proceeding may be incurred in the future. Wien & Malkin 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. Accordingly, Registrant's allocable share of such costs is as yet undetermined, and Registrant has not provided for the expense and related liability with respect to such costs in its consolidated financial statements included in this Form 10-K. As a result of the August 29, 2006 settlement agreement which included termination of this proceeding, Registrant will not recognize any gains or losses from this proceeding other than the possible charges for the aforementioned fees and expenses.
The August 29, 2006 settlement agreement terminated Helmsley-Spear, Inc. as managing and leasing agent at the property as of August 30, 2006. CB Richard Ellis has been engaged as the new leasing agent, and Sublessee self-manages the property. The $1,834,000 portion of the contract settlement payment funded from Sublessee's reserves has been deducted as an expense in computing Additional Rent income for 2006, so that Registrant has effectively borne one-half of Sublessee's contract settlement payment expense, or $917,000.
In January 1998, Irving Schneider, who is one of the controlling principals of Helmsley-Spear, has no record or beneficial interest in Sublessee and was a Participant in Registrant, brought litigation against Sublessee's supervisor, Wien & Malkin, and member, Peter L. Malkin, claiming misconduct and seeking damages and disqualification from performing services for Sublessee. In March 2002, the court dismissed Mr. Schneider's claims. Although Mr. Schneider thereafter appealed the dismissal, the claim was withdrawn prior to 2006 and is no longer pending.
Item 4.
Item 4. Submission of Matters to a Vote of Participants.
No matters were submitted to the Participants during the period covered by this report.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Security Holder Matters.
Registrant was originally organized as a general partnership pursuant to a partnership agreement dated as of July 11, 1961. On October 1, 2001, Registrant converted from a general partnership to a limited liability company under New York law.
Registrant has not issued any common stock. The securities registered by it under the Securities Exchange Act of 1934, as amended, consist of participations in the Members' interests in Registrant (the "Participations") and are not shares of common stock nor their equivalent. The Participations represent each Participant's fractional share in a Member's undivided interest in Registrant and are divided approximately equally among the Members. A full unit of the Participations was offered originally at a purchase price of $10,000; fractional
units were also offered at proportionate purchase prices. Registrant has not repurchased Participations in the past and is not likely to change that policy in the future.
The Participations are neither traded on an established securities market nor are readily tradable on a secondary market or the substantial equivalent thereof. Based on Registrant's transfer records, Participations are sold by the holders thereof from time to time in privately negotiated transactions and, in many instances, Registrant is not aware of the prices at which such transactions occur. During the past year there were 179 transfers. In one instance, the indicated purchase price was equal to 10 times the face amount of the Participation transferred. In three instances, the indicated purchase price was equal to 6.97 times the face amount of the Participation transferred, i.e., $34,833 for a $5,000 Participation. In two instances, the indicated purchase price was equal to 5.26 times the face amount of the Participation transferred. In one instance, the indicated purchase price was equal to 4.31 times the face amount of the Participation transferred. In eleven instances, the indicated purchase price was equal to 4 times the face amount of the Participation transferred. In three instances, the indicated purchase price was equal to 3.9 times the face amount of the Participation transferred. In four instances, the indicated purchase price was equal to 2.45 times the face amount of the Participation transferred. In one instance, the indicated purchase price was equal to 1.5 times the face amount of the Participation transferred. In all other cases, no consideration was indicated.
Tender offers for Participations have been commenced by unrelated third parties during 2006 and early 2007 all of which have expired at the date of this filing, in each case at prices ranging from $40,000 to $50,000 for an original $10,000 Participation. A small number of Participation(s) aggregating less than 0.1% of total Participations were reportedly tendered.
As of December 31, 2006, there were 2,764 holders of Participations of record.
Registrant does not pay dividends. During the year ended December 31, 2006, Registrant made regular monthly distributions of $98.21 for each $10,000 Participation. There was Additional Rent of $18,791,329 for the year ended December 31, 2006 which enabled Registrant to make an additional distribution for each $10,000 Participation of $4,589 on March 5, 2007. See Item 1 hereof. There are no restrictions on Registrant's present or future ability to make distributions; however, the amount of such distributions, particularly distributions of Additional Rent, depends solely on Sublessee's ability to make payments of Basic Rent and Additional Rent to Registrant. See Item 1 hereof. Registrant expects to make monthly distributions in the future so long as it receives the payments provided under the Sublease. See Item 7 hereof.
[SELECTED FINANCIAL DATA]
Item 6.
Item 6.
Item 6.
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
SELECTED FINANCIAL DATA
(Unaudited)
The following table presents selected financial data of the Registrant for each of the five years in the period ended December 31, 2006. This information is unaudited and has been derived from the audited consolidated financial statements included in this Annual Report on Form 10-K or from audited consolidated financial statements included in Annual Reports on Form 10-K previously filed by the Registrant. This data should be read together with the consolidated financial statements and the notes thereto included in this Annual Report on Form 10-K.
Basic rent income
$ 6,018,750
$ 6,018,750
$ 6,018,750
$ 6,018,750
$ 6,018,750
Additional rent income
18,791,329
16,324,979
9,469,543
6,802,295
14,476,008
Dividend and interest income
339,334
158,209
61,322
70,481
152,081
Miscellaneous
-
-
-
-
Total revenues
$25,150,391
$22,501,938
$15,549,615
$12,891,526
$20,646,839
Net income
$18,813,909
$16,308,881
$ 9,761,227
$7,247,765
$15,397,298
Earnings per $10,000
participation unit,
based on 3,300
participation units
outstanding during the year
$5,701
$ 4,942
$ 2,958
$ 2,196
$ 4,666
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
Item 6a.
The following table presents the Registrant's unaudited operating results for each of the eight fiscal quarters in the period ended December 31, 2006. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements included in this Annual Report on Form 10-K. In the opinion of management, all necessary adjustments, which consist only of normal and recurring accruals, have been included to present fairly the unaudited quarterly results. This data should be read together with the consolidated financial statements and the notes thereto of the Registrant included in this Annual Report on Form 10-K.
Three Months Ended
March 31,
June 30,
September 30,
December 31,
Consolidated Income Data:
Basic rent income
$1,504,687
$1,504,688
$1,504,687
$ 1,504,687
Additional rent income
-
-
-
18,791,329
Dividend and interest income
143,681
64,465
64,433
66,755
Miscellaneous income
-
-
-
Total revenues
1,648,368
1,569,153
1,570,098
20,362,771
Interest on mortgage
983,125
994,049
1,004,973
1,004,971
Supervisory services
39,854
39,854
39,855
1,006,494
Depreciation of building
249,566
249,566
249,565
249,565
Amortization of financing costs
44,907
44,907
44,907
44,908
Professional fees and miscellaneous
(81)
44,605
Total expenses
1,318,067
1,328,295
1,383,905
2,306,213
Net income
$ 330,301
$ 240,858
$ 186,193
$ 18,056,558
Earnings per $10,000 participation unit, based on 3,300 participation units outstanding during each period
$ 100
$ 73
$ 56
$ 5,472
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
Item 6a.
Three Months Ended
March 31,
June 30,
September 30,
December 31,
Consolidated Income Data:
Basic rent income
$1,504,687
$1,504,688
$1,504,688
$1,504,687
Additional rent income
-
-
-
16,324,979
Dividend and interest income
52,695
28,920
33,506
43,088
Total revenues
1,557,382
1,533,608
1,538,194
17,872,754
Interest on mortgage
983,125
994,048
1,004,973
1,004,971
Supervisory services
39,854
39,854
39,855
907,645
Depreciation of building
249,566
249,566
249,566
249,564
Amortization of financing costs
44,907
44,907
44,907
44,908
Professional fees and miscellaneous
(360)
Total expenses
1,318,112
1,328,721
1,338,941
2,207,283
Net income
$ 239,270
$ 204,887
$ 199,253
$15,665,471
Earnings per $10,000 participation unit, based on 3,300 participation units outstanding during each period
$ 73
$ 62
$ 60
$ 4,747
Item 7.
Item 7. 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 consolidated financial statements of Registrant (including related notes thereto) appearing elsewhere in this Form 10-K. 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 projected. 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.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The Securities and Exchange Commission ("SEC") issued disclosure guidance for "Critical Accounting Policies." The SEC defines Critical Accounting guidance for Critical Accounting Policies as those that require the application of management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
Registrant's discussion and analysis of its financial condition and results of operations are based upon Registrant's consolidated financial statements, the preparation of which takes into account estimates based on judgments and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from these estimates. The accounting policies and estimates used and outlined in Note 2 to Registrant's consolidated financial statements, which are presented elsewhere in this annual report, have been applied consistently as at December 31, 2006 and 2005, and for the years ended December 31, 2006, 2005 and 2004. Registrant believes that the following accounting policies or estimates require the application of management's most difficult, subjective, or complex judgments:
Valuation of Long-Lived Assets: Registrant periodically assesses the carrying value of long-lived assets whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. When Registrant determines that the carrying value of long-lived assets may be impaired, the measurement of any impairment is based on a projected discounted cash flows method determined by Registrant's management. While Resistrant believes its discounted cash flow methods are reasonable, different assumptions regarding such cash flows may significantly affect the measurement of impairment.
Revenue Recognition: Basic Rent and Additional Rent, which is based on the Sublessee's annual net income as defined in the Sublease, are recognized when earned. Before Registrant can recognize revenue, it is required to assess, among other things, its collectibility. If Registrant incorrectly determines the collectability of revenue, its net income and assets could be overstated.
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 and a portion of the additional payment to Supervisor; and the balance of such Basic Rent was distributed to the Participants. Currently, Basic Rent received by Registrant is used to pay the Basic Payment and a portion of the additional payment to Supervisor and a portion of debt service on the new mortgage; and the balance of such Basic Rent is distributed to the Participants. Additional Rent and any interest and dividends accumulated thereon are distributed to the Participants after the additional payment to Supervisor. 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.
The supervisory services provided to Registrant by Supervisor include, but are not limited to, providing or coordinating counsel services to Registrant, maintaining all of its entity and Participant records, performing physical inspections of the Building, 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.
Registrant's results of operations are affected primarily by the amount of rent payable to it under the Sublease. The amount of Additional 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.
As compared with the prior year, a decrease in Additional Rent earned in any year reduces the distributions made to the Participants in the following year and the expenditure for supervisory services. Reductions in the amount of Additional Rent paid to Registrant in the future will not have any other impact on Registrant. See paragraph 1 of Item 7 hereof and Notes 2 and 3 of the Notes to the consolidated financial statements.
The following summarizes the material factors affecting Registrant's results of operations for the three preceding years:
(a) Total revenues increased for the year ended December 31, 2006 as compared with the year ended December 31, 2005. Such increase was the result of an increase in Additional Rent received by Registrant in 2006 and an increase in dividend and interest income earned as compared with the year ended December 31, 2005. Total revenues increased for the year ended December 31, 2005 as compared with the year ended December 31, 2004. Such increase was the result of an increase in Additional Rent in the year 2005 and an increase in dividend and interest income earned as compared with the year ended December 31, 2004. See Note 3 of the Notes to the Consolidated Financial Statements.
(b) Total expenses increased for the year ended December 31, 2006 as compared with the year ended December 31, 2005. Such increase is the result of an increase in the additional payment to Supervisor and an increase in professional fees and miscellaneous expenses as compared with the year ended December 31, 2005. Total expenses increased for the year ended December 31, 2005 as compared with the year ended December 31, 2004. Such increase is the net result of a decrease in interest expense on the mortgage and a decrease in professional fees and an increase in the additional payment to Supervisor as compared with the year ended December 31, 2004.
Liquidity and Capital Resources
Registrant's liquidity has not significantly changed for the year ended December 31, 2006 as compared with the year ended December 31, 2005. Registrant may from time to time set aside cash for contingent liabilities.
No amortization payments are due under the Mortgage to reduce the outstanding
principal balance prior to maturity. Furthermore, Registrant does not maintain any reserve to cover the principal payment of such Mortgage indebtedness at maturity. Therefore, repayment of the Mortgage will depend on Registrant's ability to arrange a refinancing. If the Real Estate continues to generate an annual net profit in future years comparable to that in past years, and if current real estate trends continue in the geographic area in which the Real Estate is located, Registrant anticipates that the value of the Real Estate would be sufficient to cover the Mortgage balance at maturity.
Registrant anticipates that funds for working capital for the Real Estate will be provided from rental payments received by Sublessee, which entity is required to make payments of Basic Rent and Additional Rent under the Sublease and, to the extent necessary, from additional capital investment by the Members of the Sublessee and/or external financing. Registrant has no requirement to maintain substantial reserves to defray any operating expenses of the Real Estate.
Inflation
Inflationary trends in the economy do not directly impact Registrant's operations. As noted above, Registrant does not actively engage in the operation of the Real Estate. Inflation may impact the operations of the Sublessee. The Sublessee is required to pay the Basic Rent regardless of the results of its operations. Inflation and other operating factors affect the amount of Additional Rent payable by the Sublessee, which is based on the Sublessee's net operating profit.
Other Information
The Sublessee is to maintain the Building as a high-class office building as required by the terms of the Sublease.
Based on Sublessee's review of the need for upgrades and improvements to the Real Estate, Sublessee had incurred improvement costs of approximately $6,235,000 during 2006. Sublessee is currently reviewing the cost of all projects budgeted in 2007 and thereafter.
The Sublessee anticipates that the costs of improvements or debt service on funds borrowed for improvements will reduce Additional Rent during the year 2007 but should have no effect on the payment of Basic Rent.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Registrant as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006 and the financial statements of the Sublessee as of and for the year ended December 31, 2006 are included in this annual report immediately following Exhibit 32.2 or will be included by amendment.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure.
Not applicable.
Item 9a.
Item 9a. Controls and Procedures.
Evaluation of disclosure controls and procedures. The person who functions in the capacity of Registrant's chief executive officer and Registrant's chief financial officer, 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 December 31, 2006, 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 him by others within those entities on a timely basis.
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, the Registrant's internal controls over financial reporting.
PART III
Item 10.
Item 10. Directors and Executive Officers of Registrant.
Registrant has no directors or officers or any other centralization of management. There is no specific term of office for any Agent. The table below sets forth as to each Member as of December 31, 2006 the following: name, age, nature of any family relationship with any other Agent, business experience during the past five years and principal occupation and employment during such period, including the name and principal business of any corporation or any organization in which such occupation and employment was carried on and the date such individual became an Agent:
Name
Age
Nature of Family Relationship
Business Experience
Principal Occupation and Employment
Date Individual became an agent
Peter L. Malkin
Father of Anthony E. Malkin
Real Estate Supervision
Senior Member and Chairman, Wien & Malkin LLC
Anthony E. Malkin
Son of Peter L. Malkin
Real Estate Supervision and Management
President,
Wien & Malkin LLC, and W&M Properties, L.L.C.
Thomas N. Keltner, Jr.
None
Real Estate Supervision
Member,
Wien & Malkin LLC
As stated above, all three Members who are acting as Agents for Participants hold senior positions at Supervisor. See Items 1, 11, 12 and 13 hereof for a description of the services rendered by, and the compensation paid to, Supervisor and for a discussion of certain relationships which may pose actual or potential conflicts of interest among Registrant, Sublessee and certain of their respective affiliates.
The names of entities which have a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or are subject to the requirements of Section 15(d) of that Act and in which any Member is a director, member or general partner are as follows:
Peter L. Malkin is a member in 250 West 57th St. Associates L.L.C. and 60 East 42nd St. Associates L.L.C.
Anthony E. Malkin is a member in 250 West 57th St. Associates L.L.C. and 60 East 42nd St. Associates L.L.C.
Thomas N. Keltner, Jr. is a member in 60 East 42nd St. Associates L.L.C.
Item 11.
Item 11. Executive Compensation.
As stated in Item 10 hereof, Registrant has no directors or officers or any other centralization of management.
Registrant's organizational documents do not provide for a board of directors or officers. As described in the Report, Registrant is a limited liability company which is supervised by Wien & Malkin LLC. No remuneration was paid during the current fiscal year ended December 31, 2006 by Registrant to any of the Agents as such. Registrant pays Supervisor, for supervisory services and disbursements, fees of $159,417 per annum. Supervisor also receives an additional payment equal to 6% of Additional Rent and dividend income distributed by Registrant to the Participants. Pursuant to such arrangements described herein, Registrant incurred supervisory fees during 2006 totaling $1,126,057 (consisting of $159,417 as an annual basic fee for supervisory services and $966,640 as an additional payment). For tax purposes, such 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. See Item 7 hereof. As noted in Items 1 and 10 of this report, all of the Agents hold senior positions at Supervisor.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
Registrant has no voting securities. See Item 5 hereof. At December 31, 2006, no person owned of record or was known by Registrant to own beneficially more than 5% of the outstanding Participations.
At December 31, 2006, the Members (see Item 10 hereof) beneficially owned, directly or indirectly, the following Participations:
Title of Class
Name & Address of Benefical Owners
Amount of Beneficial Ownership
Percent of Class
Participations in Member Interest
Anthony E. Malkin
60 East 42nd Street
New York, N.Y. 10165
$23,333
.07071%
Thomas N. Keltner, Jr.
60 East 42nd Street
New York, N.Y. 10165
$6,667
.02020%
At such date, certain of the Members (or their respective spouses) held additional Participations as follows:
Peter L. Malkin owned of record as trustee or co-trustee but not beneficially, $516,667 of Participations. Mr. Malkin disclaims any beneficial ownership of such Participations.
Entities for the benefit of members of Peter L. Malkin's family owned of record and beneficially $675,691 of Participations. Peter L. Malkin disclaims any beneficial ownership of such Participations, except that related family trusts and entities are required to complete scheduled payments to Peter L. Malkin.
Anthony E. Malkin owned of record as trustee or co-trustee but not beneficially, $35,833 of Participations. Anthony E. Malkin disclaims any beneficial ownership of such Participations.
Not applicable.
Item 13.
Item 13. Certain Relationships and Related Transactions.
(a) As stated in Item 1 hereof, Mr. Peter L. Malkin, Mr. Anthony E. Malkin and Mr. Keltner are the three Members in Registrant and also act as agents for the Participants in their respective member interests. Peter L. Malkin is also a member in Sublessee. As a consequence of one of the three Members being a member in Sublessee, and all of the Members holding senior positions at Supervisor (which supervises Registrant and Sublessee), certain actual and potential conflicts of interest may arise with respect to the management and administration of the business of Registrant. However, under the respective participating agreements pursuant to which the Members act as agents for the Participants, certain transactions require the prior consent from Participants owning a specified interest under the agreement in order for the Agents to act on their behalf. Such transactions, among others, include modifications and extensions of the Sublease or Mortgage, or a sale or other disposition of the Property or substantially all of Registrant's assets.
Reference is made to Items 1 and 2 hereof 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 position at Supervisor, may receive income attributable to supervisory or other remuneration paid by Registrant to Supervisor and Sublessee. See Item 11 hereof for a description of the remuneration arrangements between Registrant and Supervisor relating to supervisory services provided by Supervisor.
Reference is also made to Items 1 and 10 hereof for a description of the relationship between Registrant and Supervisor, of which all of the Agents are among the Members. The respective interest of the Members in any remuneration paid by Registrant to Supervisor arise solely from such member's interest in Supervisor. See Item 11 hereof for a description of the remuneration arrangements between Registrant and Supervisor relating to supervisory services provided by Supervisor.
(b) Reference is made to Paragraph (a) above.
(c) Not applicable.
(d) Not applicable.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The fees paid by Registrant and Wien & Malkin LLC, the Supervisor of Registrant, to J.H. Cohn LLP for professional services for the years ended December 31, 2006 and December 31, 2005 were as follows:
Fee Category
Audit Fees
$50,800
$46,250
Audit-Related Fees
4,200
9,500
Tax Fees
6,000
6,000
All Other Fees
Total Fees
$61,000
$61,750
Audit Fees. Consist of fees billed for professional services rendered for the audit of Registrant's consolidated financial statements and review of the interim financial statements included in quarterly 10-Q reports.
Audit-Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of Registrant's consolidated financial statements and are not reported under "Audit Fees." In 2006, these services include accounting consultation, review of Sarbanes-Oxley requirements as they pertain to Registrant, and other audit-related services.
Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and preparation of tax returns.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT SERVICES
AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
Registrant has no audit committee as such. Registrant's policy is to pre-approve all audit and permissible non-audit services performed by the independent public accountants. These services may include audit services, audit related services, tax services and other services. For audit services, the independent auditor provides an engagement letter in advance of the services outlining the scope of the audit and related audit fees. If agreed by Registrant, this engagement letter is formally accepted by Registrant.
For all services, Registrant's supervisory management staff submits from time to time to the Agents of Registrant for approval services that it recommends the Registrant engage the independent auditor to provide. In addition, the Agents of Registrant pre-approve specific non-audit services that the independent auditor is authorized to provide. All fee proposals for those non-audit services must be pre-approved in writing by a senior executive of the Supervisor. The Agents of Registrant are informed routinely by the independent auditor pursuant to this pre-approved process.
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements (2) Financial Statement Schedules
The consolidated financial statements and the financial statement schedule of the Registrant and the financial statements of the Sublessee required in this annual report are listed in the respective indexes to those financial statements and financial statement schedule of the Registrant and the Sublessee included immediately following Exhibit 32.2 or to be included by amendment.
(3) Exhibits: See Exhibit Index.
SIGNATURE
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 13, 2003 (collectively, the "Power").
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(Registrant)
By /s/ Mark Labell
Mark Labell, Attorney-in-Fact
Date: May 17, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person as Attorney-in-Fact for each of the Members in Registrant, pursuant to the Power, on behalf of Registrant and as a Member in Registrant on the date indicated.
By /s/ Mark Labell
Mark Labell, Attorney-in-Fact*
Date: May 17, 2007
_________________________________
* Mr. Labell supervises accounting functions for Registrant.
EXHIBIT INDEX
Number Document Page*
3 (a)
Registrant's Partnership Agreement dated July 11, 1961, filed as Exhibit No. 1 to Registrant's Registration Statement on Form S-1 as amended (the "Registration Statement") by letter dated August 8, 1962 and assigned File No. 2-18741, is incorporated by reference as an exhibit hereto.
3 (b)
Amended Business Certificate of Registrant Filed with the Clerk of New York County on August 7, 1998 reflecting a change in the Partners of Registrant which was filed as Exhibit 3(b) to Registrant's 10-Q-A for the quarter ended September 30, 1998 and is incorporated by reference as an exhibit hereto.
3 (c)
Registrant's Consent and Operating
Agreement dated as of September 30,
3 (d)
Certificate of Conversion of Registrant
to a limited liability company dated October 1, 2001 filed with the New York Secretary of State on October 3, 2001.
Registrant's form of Participating Agreement, filed as Exhibit No. 6 to the Registration Statement by letter dated August 8, 1962 and assigned File No. 2-18741, is incorporated by reference as an exhibit hereto.
Powers of Attorney dated October 13, 2003 between the Partners of Registrant and Mark Labell which was filed as Exhibit 24 to Registrant's 10-Q for the quarter ended September 30, 2003 and is incorporated herein by reference.
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
* Page references are based on sequential numbering system.
Exhibit 31.1
CERTIFICATIONS
I, Mark Labell, certify that:
I have reviewed this annual report on Form 10-K of Empire State Building Associates L.L.C.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: May 17, 2007
By /s/ Mark Labell
Name: Mark Labell
Title: Senior Vice President, Finance Wien & Malkin LLC, Supervisor of Empire State Building Associates L.L.C.
Exhibit 31.2
CERTIFICATIONS
I, Mark Labell, certify that:
I have reviewed this annual report on Form 10-K of Empire State Building Associates L.L.C.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: May 17, 2007
By /s/ Mark Labell
Name: Mark Labell
Title: Senior Member of Financial/Accounting Staff of Wien & Malkin LLC, Supervisor of Empire State Building Associates L.L.C.
Exhibit 32.1
Empire State Building Associates L.L.C.
Certification Pursuant to 18 U.S.C., Section 1350 as adopted
Pursuant to Section 906
of Sarbanes - Oxley Act of 2002
The undersigned, Mark Labell, is signing this Chief Executive Officer certification as Senior Vice President, Finance of Wien & Malkin LLC, the Supervisor * of Empire State Building Associates L.L.C. ("Registrant") to certify that:
the Annual Report on Form 10-K of Registrant for the period ended December 31, 2006 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.78m or 78o(d)); and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant.
Dated: May 17, 2007
By /s/ Mark Labell
Mark Labell
Senior Vice President, Finance
Wien & Malkin LLC, Supervisor
*Registrant's organizational documents do not provide for a Chief Executive Officer or other officer with equivalent rights and duties. As described in the Report, Registrant is a limited liability company which is supervised by Wien & Malkin LLC. Accordingly, this Chief Executive Officer certification is being signed by a senior executive of Registrant's supervisor.
Exhibit 32.2
Empire State Building Associates L.L.C.
Certification Pursuant to 18 U.S.C., Section 1350 as adopted
Pursuant to Section 906
of Sarbanes - Oxley Act of 2002
The undersigned, Mark Labell, is signing this Chief Financial Officer certification as a senior member of the financial/accounting staff of Wien & Malkin LLC, the Supervisor* of Empire State Building Associates L.L.C. ("Registrant"), to certify that:
the Annual Report on Form 10-K of Registrant for the period ended December 31, 2006 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.78m or 78o(d)); and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant.
Dated: May 17, 2007
By /s/ Mark Labell
Mark Labell
Senior Vice President, Finance
Wien & Malkin LLC, Supervisor
*Registrant's organizational documents do not provide for a Chief Financial Officer or other officer with equivalent rights and duties. As described in the Report, Registrant is a limited liability company which is supervised by Wien & Malkin LLC. Accordingly, this Chief Financial Officer certification is being signed by a senior member of the financial/accounting staff of Registrant's supervisor.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
Report of J.H. Cohn LLP -- Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and
Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
SCHEDULE III - Real Estate and Accumulated Depreciation as of December 31, 2006
All other schedules are omitted as the information is not required, is not material or is otherwise provided.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Participants in Empire State Building Associates L.L.C.
(a Limited Liability Company)
We have audited the accompanying consolidated balance sheets of Empire State Building Associates L.L.C. ("Associates") as of December 31, 2006 and 2005, and the related consolidated statements of income, members' equity and cash flows for each of the three years in the period ended December 31, 2006, and the supporting financial statement schedule, Schedule III- real estate and accumulated depreciation, also included in this Form 10-K. These consolidated financial statements and the schedule are the responsibility of Associates' management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Empire State Building Associates L.L.C. as of December 31, 2006 and 2005, and its results of operations and cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America, and the related financial statement schedule, when considered in relation to the basic financial statements, presents fairly, in all material respects, the information set forth therein.
/s/J.H.Cohn LLP
New York, N. Y.
March 7, 2007
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
CONSOLIDATED BALANCE SHEETS
A S S E T S
LIABILITIES AND MEMBERS' EQUITY
Commitments and contingencies
See accompanying notes to consolidated financial statements.
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
Total expenses
6,336,482
6,193,057
5,788,388
NET INCOME
$18,813,909
$16,308,881
$9,761,227
Earnings per $10,000 participation unit, based
on 3,300 participation units outstanding
during each year
$5,701
$4,942
$2,958
See accompanying notes to consolidated financial statements.
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
Members'
Share of
Members'
Equity'
Net Income
Equity
January 1,
For Year
Distributions
December 31,
Year Ended December 31, 2004:
Anthony E. Malkin Group
$3,687,900
3,253,742
2,776,247
4,165,395
Thomas N. Keltner, Jr. Group
3,687,899
3,253,742
2,776,247
4,165,394
Peter L. Malkin Group
3,687,897
3,253,743
2,776,248
4,165,392
TOTALS
$11,063,696
$ 9,761,227
$8,328,742
$12,496,181
Year Ended December 31, 2005:
Anthony E. Malkin Group
$ 4,165,395
5,436,293
3,649,849
$5,951,839
Thomas N. Keltner, Jr. Group
4,165,394
5,436,294
3,649,849
5,951,839
Peter L. Malkin Group
4,165,392
5,436,294
3,649,848
5,951,838
TOTALS
$12,496,181
16,308,881
10,949,546
$17,855,516
Year Ended December 31, 2006:
Anthony E. Malkin Group
$5,951,839
$6,271,303
$5,828,243
$6,394,899
Thomas N. Keltner, Jr. Group
5,951,839
6,271,303
5,828,243
6,394,899
Peter L. Malkin Group
5,951,838
6,271,303
5,828,244
6,394,897
TOTALS
$17,855,516
$18,813,909
$17,484,730
$19,184,695
See accompanying notes to consolidated financial statements.
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash and cash equivalents, beginning of year
19,883,845
13,065,275
9,992,424
See accompanying notes to consolidated financial statements.
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Activity and Purchase of Real Estate
Through April 16, 2002, Empire State Building Associates L.L.C. ("Associates") owned the tenant's interest in a master operating leasehold (the "Master Lease") on the Empire State Building (the "Building"), located at 350 Fifth Avenue, New York, New York. On April 17, 2002 Associates acquired, through a wholly-owned limited liability company, the fee title to the Building and to the land thereunder (the "Land"), (together, the "Real Estate"). Associates subleases the property to Empire State Building Company L.L.C. ("Sublessee"). The consolidated financial statements include the accounts of Empire State Building Associates L.L.C. and, effective April 17, 2002, its wholly-owned limited liability company, Empire State Land Associates L.L.C. All intercompany accounts and transactions have been eliminated in consolidation.
Associates operated as a general partnership, Empire State Building Associates, until October 1, 2001, when it converted to a limited liability company and changed to its current name. Ownership percentages in Associates were unchanged by the conversion. Associates continues to be treated as a partnership for tax purposes, and the partnership's income tax basis of its assets and liabilities carried over to the limited liability company.
2. Summary of Significant Accounting Policies
a. Cash and Cash Equivalents
Cash and cash equivalents include investments in money market funds and all highly liquid debt instruments purchased with a maturity of three months or less when acquired.
b. Restricted cash Restricted cash at December 31, 2006 includes a money market account held at North Fork Bank pursuant to the terms of the mortgage, to be used monthly to satisfy a portion of the mortgage interest obligation.
c. Real Estate and depreciation
The Real Estate was originally carried in the financial statements at a total cost of $60,484,389, consisting of $57,500,000 for the purchase price, $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, Associates incurred no leasehold rent expense after acquiring the Real Estate.
The Building is being depreciated on a straight-line basis using an estimated life of 39 years from April 17, 2002.
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Mortgage Financing Costs and Amortization
Mortgage financing costs, totaling $1,796,287, are being amortized ratably over the life of the mortgage.
Amortization expense amounts to $179,628 for each of the next five years subsequent to December 31, 2006.
Valuation of Long-Lived Assets
Associates periodically assesses the carrying value of long-lived assets whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. When Associates determines that the carrying value of long-lived assets may be impaired, the measurement of any impairment is based on a projected cash flows method.
Revenue Recognition
Basic rental income, as defined in a long-term lease, is a fixed minimum annual amount that Associates records ratably over the year. Additional rent is based on 50% of the net operating profit of the Sublessee, as defined, in excess of $1,000,000 for each lease year ending December 31st and is recorded by Associates when such amounts become determinable, at the end of each calendar year.
Use of Estimates:
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Related Party Transactions - Rent Income
Associates does not operate the Building (See Note 1). It subleases the Building to the Sublessee, a related party (See Note 4), pursuant to a net operating sublease dated December 27, 1961, as modified February 15, 1965. The sublease provides for the same initial term and renewal options as the leasehold, less one day. In January 1989, the Sublessee exercised its option to renew the sublease for the first renewal period from January 4, 1992 to January 4, 2013. The annual minimum basic rent during the remainder of the Sublessee's first renewal term is $6,018,750. The sublease provides for three successive renewal options of twenty-one years each, at an annual basic rent of $5,895,625 throughout all subsequent renewal terms.
Additional rent through all renewal terms under the sublease is payable in an amount equal to 50% of the Sublessee's annual net income, as defined, in excess of $1,000,000. For 2006, 2005 and 2004, Sublessee reported net operating profit of $38,582,657; $33,649,958 and $19,939,086, respectively. Therefore, rent income was comprised as follows:
Minimum net basic rent
$ 6,018,750
$ 6,018,750
$ 6,018,750
Additional rent earned
18,791,329
16,324,979
9,469,543
$24,810,079
$22,343,729
$15,488,293
Related Party Transactions - Supervisory and Other Services
Supervisory and other services are provided to Associates by its supervisor, Wien & Malkin LLC ("Wien & Malkin" or the "Supervisor"), a related party. Beneficial interests in Associates are held directly or indirectly by one or more persons at Wien & Malkin and/or their family members.
Wien & Malkin LLC, a limited liability company, succeeded Wien & Malkin LLP, a limited liability partnership, on November 30, 2006 without any change in duties, responsibilities, staffing, operation, rights or compensation to it as Supervisor. Basic fees for supervisory services are $159,417 per annum. Wien & Malkin receives an additional payment equal to 6% of additional rent income received by Associates. Fees for supervisory services (including disbursements and cost of regular accounting services) during the years ended December 31, 2006, 2005 and 2004, totaled $1,126,057, $1,027,208 and $610,069, respectively. For tax purposes, such 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. Distributions in respect of Wien & Malkin's profits interest totaled $966,640, $867,791 and $450,652 for 2006, 2005 and 2004, respectively.
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
First Mortgage Payable
To finance the acquisition of the fee title to the Real Estate (Note 1) and certain related costs, Associates obtained a $60,500,000 first mortgage with North Fork Bank.
The mortgage matures on May 1, 2012. Monthly payments under the mortgage are interest only at a fixed annual rate of 6.5% through maturity. Payments commenced on June 1, 2002, except that short-term interest from the closing until April 30, 2002 was due on May 1, 2002. The mortgage may be prepaid at any time after 24 months with the payment of a premium equal to the greater of (a) 1% of the amount prepaid and (b) an amount calculated pursuant to a prepayment formula designed to preserve the bank's yield to maturity. The mortgage is secured by a lien on the Real Estate and Associates' leasehold estate under the Master Lease of the Real Estate.
The estimated fair value of Associates' mortgage debt, based on available market information or other appropriate valuation methodologies was the carrying value at December 31, 2006 and was estimated to be $61,282,000 at December 31, 2005.
Number of Participants
There were approximately 2,764, 2,759 and 2,675 participants in the participating groups at December 31, 2006, December 31, 2005 and 2004, respectively.
Determination of Distributions to Participants
Distributions to participants during each year generally reflect the excess of the current year's minimum annual rent income, plus additional rent income and dividend income earned in the prior year, over the cash expenses and mortgage requirements of the current year, adjusted for those cash reserves management judges to be suitable under the circumstances.
Distributions and Amount of Income per $10,000 Participation Unit
Distributions per $10,000 participation unit during the years ended December 31, 2006, 2005 and 2004, based on 3,300 participation units outstanding during each year, consisted of the following:
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Distributions and Amount of Income per $10,000 Participation Unit (continued)
Net income is computed without regard to income tax expense since Associates does not itself pay a tax on its income; instead, any such taxes are paid by the participants in their individual capacities.
Related Party Transactions - Fees
The accompanying statements of income reflect fees paid or owed to Wien & Malkin, a related party (See Note 4), as follows:
Payments made or accrued
$ -
$ -
$ 1,696
Contingencies
Wien & Malkin and Peter L. Malkin, a member in Associates, 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 Lease to Sublessee. In this connection, certain costs for legal and professional fees and other expenses have been paid and incurred by Wien & Malkin and Mr. Malkin, and certain costs for filings to terminate such proceeding may be incurred in the future. Wien & Malkin 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. Accordingly, Associates' allocable share of such costs is as yet undetermined, and Associates has not provided for the expense and related liability with respect to such costs in these consolidated financial statements. As a result of the August 29, 2006 settlement agreement which included termination of this proceeding, Associates will not recognize any gains or losses from this proceeding other than the possible charges for the aforementioned fees and expenses.
The August 29, 2006 settlement agreement terminated Helmsley-Spear, Inc. as managing and leasing agent at the property as of August 30, 2006. CB Richard Ellis has been engaged as the new leasing agent, and Sublessee will self-manage the property. The $1,834,000 portion of the contract settlement payment funded from Sublessee's reserves has been deducted as an expense in computing additional rent income for 2006, so that Associates has effectively borne one-half of Sublessee's contract settlement payment expense, or $917,000.
In January 1998, Irving Schneider, who is one of the controlling principals of Helmsley-Spear, has no record or beneficial interest in Sublessee and was a participant in Associates, brought litigation against Sublessee's supervisor, Wien & Malkin, and member, Peter L. Malkin, claiming misconduct and seeking
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Contingencies (concluded)
damages and disqualification from performing services for Sublessee. In March 2002, the court dismissed Mr. Schneider's claims. Although Mr. Schneider thereafter appealed the dismissal, the claim was withdrawn prior to 2006 and is no longer pending.
Concentration of Credit Risk
Associates maintains cash balances in two banks and in two money market funds (Fidelity U.S. Treasury Income Portfolio and North Fork Bank) and a distribution account held by Wien & Malkin. The balance in each bank is insured by the Federal Deposit Insurance Corporation up to $100,000, and at December 31, 2006 there was an uninsured balance of approximately $1,225,927. The cash balances in the Fidelity U.S. Treasury Income Portfolio and the distribution account held by Wien & Malkin are not insured. The funds held in the distribution account were paid to the participants on January 1, 2007.
SCHEDULE III
EMPIRE STATE BUILDING ASSOCIATES L.L.C.
(A Limited Liability Company)
Real Estate and Accumulated Depreciation
December 31, 2006
Column
A Description Land and building situated
at 350 Fifth Avenue, New York, New York.
B Encumbrances - North Fork Bank
Balance at December 31, $60,500,000
C Initial cost to company
Land and building $60,484,389
D Cost capitalized subsequent to acquisition None
E Gross amount at which carried at
close of period (See Note 2 of Notes to Consolidated Financials Statements)
Land $21,550,588
Building 38,933,801
Total $60,484,389 (a)
F Accumulated depreciation $ 4,701,257 (b)
G Date of construction
H Date acquired April 17, 2002
I Life on which depreciation of building in
latest income statements is computed 39 years
Gross amount of real estate
Balance at January 1, 2006 $60,484,389
Purchase of real estate:
F/Y/E 12/31/06 -
Balance at December 31, 2006 $60,484,389
The costs for federal income tax purposes are the same
as for financial statement purposes.
(b) Accumulated depreciation
Balance at January 1, $3,702,995
Depreciation:
F/Y/E 12/31/06 998,262
Balance at December 31, $4,701,257
EMPIRE STATE BUILDING AND OBSERVATORY
COMPARATIVE COMBINED STATEMENT OF INCOME
YEARS ENDED
DECEMBER 31, 2006
AND
DECEMBER 31, 2005
Dated:
New York, NY
March 20, 2007
Empire State Building Company L.L.C.
60 East 42nd Street
New York, NY 10165
We have audited the accompanying Comparative Combined Statement of Income of Empire State Building and Observatory for the years ended December 31, 2006 and 2005 for the purpose of determining "Net Operating Profit" and "Overage Rent" as those terms are defined in Section 2.05 of Agreement of Sublease dated December 27, 1961. During the years ended December 31, 2006 and 2005, the entire building, with the exception of the Observatory, was operated by Empire State Building Company L.L.C. and the Observatory was operated by Empire State Building, Inc. The Combined Statement of Income is the responsibility of the management of Empire State Building Company L.L.C. and Empire State Building, Inc. Our responsibility is to express an opinion on the Combined Statement of Income based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Combined Statement of Income is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Combined Statement of Income. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the accompanying Comparative Combined Statement of Income of Empire State Building and Observatory presents fairly, in all material respects, the Net Operating Profit and Overage Rent for the years ended December 31, 2006 and 2005, in conformity with Section 2.05 of the aforementioned Agreement dated December 27, 1961.
/s/ McGrath Doyle & Phair, CPA
New York, NY
March 20, 2007
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
1. Professional fees in 2006 and 2005 include payments to Wien & Malkin LLC aggregating $584,259 and $551,436, respectively, including supervisory fees of $270,000 in each year. A member in Wien & Malkin LLC is a member in Company.
2. Litigation
(a) Company, and numerous other New York City Building owners, are defendants in an action entitled Stanislawa Staniszek v. A.C.&S. Inc., et al., which is part of the New York City Asbestos Litigation pending before the New York State Supreme Court.
It is alleged that plaintiff, now deceased, suffered from mesothelioma and other related conditions as a result of being exposed to asbestos and asbestos-related products while employed as a project supervisor at various locations, including the Empire State Building.
While a Note of Issue was filed in this matter over three years ago, placing the case on the Court's trial calendar, the matter has since been removed from any trial cluster assigned by the Court and no new trial date has been set.
Company is awaiting further activity in the case by plaintiff's counsel.
3. Contingent Liabilities
Wien & Malkin LLC and Peter L. Malkin, a member in Company, have been engaged in a proceeding with Helmsley-Spear, Inc. commenced in 1997, concerning the management, leasing and supervision of Company's property in which Wien & Malkin and Mr. Malkin have sought an order removing Helmsley-Spear. In this connection, certain costs for legal and professional fees and other expenses have been paid and incurred by Wien & Malkin and Mr. Malkin and certain costs for filings to terminate such proceedings may be incurred in the future. Wien & Malkin and Mr. Malkin have represented that such costs will be recovered only to the extent that ( a ) a competent tribunal authorizes payment by Company or ( b ) an investor voluntarily agrees that his or her proportionate share be paid. Accordingly, Company's allocable share of such costs is as yet undetermined and Company has not provided for the expense and related liability with respect to such costs in these financial statements.
The original action was commenced in June 1997 and was referred to arbitration. The March 30, 2001 decision of the Arbitrators, which was confirmed by the court, (i) reaffirmed the right of the investors to vote to terminate Helmsley-Spear without cause, (ii) dismissed Helmsley-Spear's claims against Wien & Malkin and Peter L. Malkin, and (iii) rejected the termination of Helmsley-Spear for cause. The parts of the decision under appeal were initially affirmed by the Appellate Division, and the New York Court of Appeals declined to review such ruling. On October 6, 2003, the United States Supreme Court granted Wien & Malkin's petition, vacated the judgment of the Appellate Division and remanded the case to the New York court for further consideration of the issues raised by Wien & Malkin's appeal.
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
3. Contingent Liabilities (Continued)
On October 14, 2004, the Appellate Division issued a unanimous decision reversing the Arbitrators. The Appellate Division decided (i) that there was a covert assignment without Company's knowledge or consent and (ii) that the corporation controlled by Irving Schneider and now named "Helmsley-Spear," which has represented itself to be Company's managing agent since September 1997, in fact never received a valid assignment to become Company's managing agent. Company's previously authorized managing agent, the original corporation named "Helmsley-Spear," was owned by Harry B. Helmsley and is no longer active. On February 21, 2006, the Court of Appeals reversed the decision of the Appellate Division and reinstated the decision of the Arbitrators, including items (i), (ii) and (iii) in the preceding paragraph. On July 21, 2006, Wien & Malkin filed a certiorari petition seeking review by the U.S. Supreme Court, which it later withdrew as part of an August 29, 2006 settlement agreement terminating claims broadly by exchange of general releases between Helmsley-Spear, Irving Schneider, and their related parties on the one hand, and Leona M. Helmsley, Peter L. Malkin, Wien & Malkin, various property owners supervised by Wien & Malkin, and their related parties, on the other.
In January 1998, Irving Schneider, who is one of the controlling principals of Helmsley-Spear and has no record or beneficial interest in Company, brought litigation against Company's supervisor, Wien & Malkin, and member, Peter L. Malkin, claiming misconduct and seeking damages and disqualification from performing services for Company. In March 2002, the court dismissed Mr. Schneider's claims. Although Mr. Schneider thereafter appealed this dismissal, the claim was withdrawn prior to 2006 and is no longer pending.