PROXY STATEMENT FOR 60 EAST 42ND ST. ASSOCIATES
SCHEDULE 14A INFORMATION
(Rule 14a-101)
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[ ] Definitive Additional Materials
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or Rule 14a-12
.....................................................................
(Name of Registrant as Specified In Its Charter)
60 East 42nd St. Associates
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PRELIMINARY COPY
60 East 42nd St. Associates
c/o Wien, Malkin & Bettex
60 East 42nd Street
New York, New York 10165
60 EAST 42ND ST. ASSOCIATES
STATEMENT ISSUED BY THE AGENTS IN CONNECTION WITH THE
SOLICITATION OF CONSENTS OF THE
PARTICIPANTS
Dated __________, 1996
This Statement is issued in connection with the
solicitation of Consents of the Participants in 60 East 42nd St.
Associates ("Associates") by Peter L. Malkin, Ralph W. Felsten,
Donald A. Bettex, Stanley Katzman, John L. Loehr, Richard A. Shapiro
and Thomas N. Keltner, Jr., as Agents (the "Agents") for the
participants (the "Participants"). Associates was formed to own The
Lincoln Building and underlying land (collectively the "Property")
located at 60 East 42nd Street, New York, New York, subject to a net
lease to Lincoln Building Associates (the "Net Lessee"). The
Property was acquired through a cash investment of $7,000,000 in a
second mortgage on the Property, which was subsequently converted to
an ownership position. The acquisition of ownership also involved
financing provided by a first mortgage (the "Fee Mortgage") in the
original principal amount of $17,200,000. See Section I. -
Background.
The Agents are requesting the consent of the Participants
to each of the following proposals:
A. Governance Issues
(1) The designation of additional successor Agents.
(2) The elimination of the requirement that no person may
serve as Agent for more than one group of Participants.
(3) The granting to the Agents of the right to combine
groups of Participants.
B. Operations Issues
(1) The granting to the Agents other than Peter L. Malkin,
if Peter L. Malkin has ceased to serve as an Agent, of authority to
refinance the Fee Mortgage from time to time on terms determined to
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be beneficial to Associates as long as the new mortgagee is an
institutional lender and the Fee Mortgage balance is not then
increased.
(2) The granting to the Agents of the right, in
consideration of the undertaking by the Net Lessee of certain
improvements to the Property and an increase in the Net Lessee's
Basic Rent (as hereinafter defined) and Primary Additional Rent (as
hereinafter defined), to (a) grant to the Net Lessee two options to
further extend its Net Lease (as hereinafter defined) for 25 years
each and (b) increase the principal balance of, and otherwise modify
certain terms of, the Fee Mortgage.
In implementing those proposals consented to by the Participants, the
Agents will amend the Participating Agreements (as hereinafter
defined) as attorneys-in-fact for the Participants, execute and
deliver with the Net Lessee amendments to the Net Lease, and take
such other actions and execute and deliver with the requisite party
or parties such other documents, agreements and instruments, and do
such other acts and things, as the Agents deem necessary or
appropriate in the circumstances.
It is anticipated that this Statement and the accompanying
form of Consent will be mailed to the Participants on ______, 1997.
The solicitation of Consents will terminate on _______, 1997 unless
extended by the Agents, but in no event later than _________________.
The Agents will advise all Participants of the results of the
solicitation as soon as may be practicable, but in no event later
than 90 days after the termination date noted above or any extension
thereof.
I. BACKGROUND
A. Organization of Associates
Associates, a New York partnership, was organized on
September 25, 1958 for the purpose of acquiring title to the Property
subject to the Net Lease. Associates is comprised of seven partners,
each of whom acts as agent for a group of Participants pursuant to a
participating agreement (a "Participating Agreement") between the
Agent and his investor Participants.
The original partners in Associates were the late
Lawrence A. Wien, Harry B. Helmsley, Alvin S. Lane, the late Henry W.
Klein, the late William F. Purcell, Alvin Silverman and Fred Linden.
Peter L. Malkin, Stanley Katzman, Ralph W. Felsten, Donald A. Bettex,
John L. Loehr, Richard A. Shapiro and Thomas N. Keltner, Jr. are the
current partners in Associates. Messrs. Keltner, Loehr and Shapiro
became partners during 1996.
The terms of each Participating Agreement are identical to
all others. Under each of the Participating Agreements between the
Agents and their respective groups of Participants, Participants have
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the right to approve or disapprove certain proposed actions by their
Agent, including the increase of the Fee Mortgage and amendments to
the Net Lease. Amendments to a Participating Agreement also require
approval of the affected Participants. The percentage of
Participants required to approve each of the proposals of the Agents
in this Statement, and the related Participation Purchase
Arrangement, are described in Section XI. - Terms of Solicitations of
Consents.
B. The Property
The Property is located along the south side of 42nd Street
between Madison Avenue and Park Avenue diagonally across 42nd Street
from Grand Central Terminal. The Property also has entrances on
Madison Avenue and 41st Street. Erected in 1930, the building (the
"Building") has 55 floors, a concourse and lower lobby.
The Building contains retail usage in the concourse and
approximately 500 tenants, who engage principally in the practices of
law, accounting, real estate, engineering and advertising. As of
August 1, 1996, the Building was approximately 90% occupied.
C. The Net Lease
1. Term
On October 1, 1958, Associates entered into an
Agreement of Lease with the Net Lessee for the Property for an
initial term of twenty-five years ending September 30, 1983. The
Agreement of Lease was modified by agreements dated January 1, 1964,
as of January 1, 1977, as of April 1, 1979, as of April 1, 1981, as
of April 1, 1982, and as of October 1, 1987 (the Agreement of Lease,
as so modified, the "Net Lease"). Pursuant to the Net Lease, the Net
Lessee was granted the right to renew the term for two additional
periods of twenty-five years each, provided the Net Lessee was not in
default under the Net Lease and gave adequate notice of renewal to
Associates. As a result of the exercise of the first renewal right,
the term of the Net Lease was extended through September 30, 2008.
If the second renewal right is exercised, the term will be extended
through September 30, 2033.
2. Rent
The Net Lease provides for the Net Lessee to pay:
a. annual basic rent ("Basic Rent") equal to the sum
of (i) the annual amount of the monthly payments due from time to
time on the Fee Mortgage (the "Mtge Rent") and (ii) $24,000;
b. for each fiscal year of the Net Lease term
(October 1 through September 30), additional rent ("Additional Rent")
comprised of (i) up to the first $1,053,800 of the Net Lessee's net
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operating income, as defined in the Net Lease ("Primary Additional
Rent"), and (ii) 50% of the Net Lessee's remaining net operating
income ("Secondary Additional Rent").
Basic Rent is currently $1,087,842 per annum, payable
in equal monthly installments of $90,653.50.
Primary Additional Rent for each fiscal year is
advanced monthly based on the net operating income of the Net Lessee
for the prior fiscal year, and then adjusted in the following fiscal
year based upon actual results. Secondary Additional Rent for each
fiscal year is payable annually within sixty (60) days following the
end of such fiscal year. For the past 17 fiscal years, the Net
Lessee has paid the full $1,053,800 of Primary Additional Rent. For
the most recently completed fiscal year (10/1/94-9/30/95), the Net
Lessee paid Secondary Additional Rent of $1,565,928 on November 30,
1995. Although the Net Lessee is permitted to deduct against
advances for Primary Additional Rent accumulated losses from certain
prior fiscal years, there is currently no accumulated loss from past
fiscal years to be deducted against current or future payments of
Primary Additional Rent. See Section I.F. - Financial Information.
In connection with a refinancing of the Fee Mortgage, the
Mtge Rent is modified to reflect the revised annual amount of the
monthly payments of interest, or principal and interest, under the
Fee Mortgage, unless there is an increase in the Fee Mortgage
balance. If there is an increase, then the Mtge Rent will equal the
product of the new debt service percentage rate under the refinanced
Fee Mortgage multiplied by the principal balance of the Fee Mortgage
immediately before the refinancing. As the Mtge Rent is modified,
the Basic Rent is changed in the same dollar amount.
3. Other Material Net Lease Terms
The Net Lease provides that the Net Lessee will pay
all operating and maintenance expenses, will make necessary repairs
and replacements and will keep the Property adequately insured
against fire and accident. The Agents believe the insurance
maintained by the Net Lessee is adequate. The Net Lease does not
require the Net Lessee to make capital improvements to the Property.
The Net Lease also requires that the Net Lessee pay real
estate taxes. The taxes for the 1996/97 tax year (July 1, 1996 -
June 30, 1997) are $5,846,100, based on an assessed value of
$57,024,000 and a rate of $10.252 per $100. Because of delays in
completing the New York City budget, however, the 96/97 real estate
taxes are payable in unequal installments of $2,965,818 on July 1,
1996 and $2,880,282 on January 1, 1997. The Net Lessee also pays
Business Improvement District assessments of $162,762 for the same
1996/97 tax year in two equal installments of $81,381, the first of
which is payable on July 1, 1996 and the second on January 1, 1997.
The July 1, 1996 installments of real estate taxes and BID
assessments have been paid.
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Pursuant to the Net Lease, the Net Lessee has the right to
assign the Net Lease, without Associates' consent, so long as the
assignee assumes in writing all of the obligations of the lessee
under the Net Lease. The Net Lessee also has the right to surrender
its leasehold on sixty (60) days' notice to Associates.
D. Fee Mortgage
The Fee Mortgage, in the original principal amount of
$17,200,000, was initially incurred when Associates acquired the
Property. The Fee Mortgage has been refinanced many times since
then, the last refinancing being on October 6, 1994.
The current mortgagee is Morgan Guaranty Trust Company of
New York, as Trustee. The principal amount of the Fee Mortgage is
$12,020,813.53. The Fee Mortgage provides for monthly payments of
interest only at the annual rate of 8.85%, with the entire principal
balance and unpaid interest being due and payable on October 31,
2004.
E. Competition
Pursuant to tenant space leases at the Building, the
average base rent payable to the Net Lessee is approximately $26.00
per square foot (exclusive of electricity charges and escalation).
Such rate is competitive with the average rental rate charged by
similar office buildings offering comparable space in the immediate
vicinity of the Building. The Agents understand, based on materials
generally available through local leasing brokerage companies and the
New York Real Estate Board and through their general knowledge of the
market, that buildings of comparable age and condition to the
Building charge rental rates within $1.00 - $2.00 per square foot of
the average rental rate at the Building. Rental rates for space are
in the high $30's to low $40's per square foot at the following three
nearby buildings: 101 Park Avenue (a newer office building with
modern facilities and located at 40th Street); Republic National Bank
Building (a modern building on Fifth Avenue and 41st Street); the Met
Life Building (a premier building erected in 1961).
In the overall rental market for commercial space in
Manhattan, rents range from approximately $45 per square foot for
prime office space to approximately $7 per square foot in less
developed industrial and/or secondary commercial areas. Accordingly,
the average rent at the Building may be considered competitive in the
area, given the relative condition of surrounding buildings and the
nature of services, amenities and office space offered by them as
compared to the Building.
The Net Lessee operates the Building free from any federal,
state or local government restrictions involving rent control or
other similar rent regulations which may be imposed upon residential
real estate in New York City. Any increase or decrease in the amount
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of rent payable by a space tenant in the Building is governed by the
provisions of the space tenant's lease, or, if a new space tenant, by
then existing trends in the rental market for office space.
F. Financial Information
For the years 1995, 1994 and 1993, the Participants
received total distributions representing an annual return on their
original cash investment at the rates of approximately 35%, 40% and
49%, respectively. These percentages were calculated by dividing the
cash payments to the Participants in the year in question by the
original cash investment in the Property by the Participants
($7,000,000). Certain current Participants may have purchased their
interests for amounts different from the original cash investment
amount and their rates of return on investment will thus be
different.
Each monthly installment of Basic Rent received by
Associates is applied to pay monthly debt service on the Fee Mortgage
and Basic Supervisory Compensation to Wien, Malkin & Bettex ("WM&B").
Monthly advances in respect of Primary Additional Rent are used by
Associates to make monthly distributions to the Participants and pay
Additional Supervisory Compensation to WM&B. Secondary Additional
Rent is used by Associates when received to pay Additional
Supervisory Compensation to WM&B and make additional distributions to
the Participants. See Section I.G. - Supervisory Services.
Attached are audited balance sheets of Associates as of
December 31, 1995 and December 31, 1994 and the related statements of
income, partners' capital deficit and cash flows for each of the
three years in the period ended December 31, 1995, and a Schedule of
Real Estate and Accumulated Depreciation as of December 31, 1995.
Also attached is a table showing selected financial data for the five
most recent completed fiscal years of Associates ("Financial
Statements"). In addition, unaudited condensed balance sheets as of
June 30, 1996 and December 31, 1995 and the related condensed
statements of income for the three month and six month periods ended
June 30, 1996 and June 30, 1995, and cash flows for the six month
periods ended June 30, 1996 and June 30, 1995 are also enclosed
("Quarterly Financial Statements"). See Section VIII. - Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
Jacobs Evall & Blumenfeld ("JEB") has for more than 20
years served as Associates' independent public accountants in
connection with Securities and Exchange Commission ("SEC") filings.
JEB also handles certain other financial accounting work for
Associates, including tax returns.
G. Supervisory Services to Associates
No Agent receives any remuneration from Associates for
serving as Agent. However, each of the current Agents other than
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Donald A. Bettex (who has recently retired from WM&B) is a member of
Wien, Malkin & Bettex, which firm receives compensation from
Associates for supervisory services.
WM&B has acted as supervisor and legal counsel for both
Associates and the Net Lessee since the inception of these entities.
In addition to serving as counsel to Associates, WM&B maintains
Associates' partnership and Participant records, performs physical
inspections of the Property, reviews violation searches and
insurance coverage and conducts annual partnership meetings. WM&B
also provides financial services to Associates, including monthly
receipt of rent from the Net Lessee, payment of monthly Fee Mortgage
obligations, payment of monthly and additional distributions to the
Participants, confirmation of the payment of real estate taxes and
BID assessments, review of financial statements submitted to
Associates by the Net Lessee and financial statements audited by and
tax information prepared by Associates' independent certified public
accountants, and distribution of such materials to the Participants.
WM&B also prepares quarterly, annual and other periodic filings with
the Securities and Exchange Commission and applicable state
authorities.
In consideration for its various services to Associates,
WM&B receives payment of $24,000 a year ("Basic Supervisory
Compensation") and an additional payment of 10% of cash available for
distributions to Participants in excess of 14% on the original cash
investment of Associates ("Additional Supervisory Compensation").
From Associates' payments to it, WM&B pays all disbursements of
Associates relating to WM&B's services to Associates, including
accounting and other professional fees, filing and search fees, and
document preparation and mailing costs. During the fiscal year ended
December 31, 1995, Associates paid WM&B $187,973.00 (consisting of
Basic Supervisory Compensation of $24,000.00 and $163,973.00 in
Additional Supervisory Compensation).
II. GOVERNANCE ISSUES
A. Designation of Successors to the Agents
Paragraph Sixth of each Participating Agreement provides
that, in the event of the resignation, removal, death, incompetency
or other disability of an Agent, he shall be succeeded by certain
persons in the order listed therein or by any other person of full
age designated in writing by the holders of at least 75% of the
Participations in that group. The individuals designated as
successors in each Participating Agreement are the same in all
Participating Agreements.
No successor named in the Participating Agreements is
available to serve at this time, and it is now necessary to designate
new successors for each Agent. The Agents recommend that each group
of Participants approves the following as successor Agents for that
group: (a) any individual who is at the time of his or her
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designation as Agent a partner in WM&B; (b) any entity controlled by
WM&B; (c) Anthony E. Malkin; and (d) Scott D. Malkin. The order of
succession shall be determined by Peter L. Malkin, or failing such
determination, by the Executive Committee of WM&B.
Anthony E. Malkin and Scott D. Malkin are sons of Peter L.
Malkin and each is a graduate of Harvard College and experienced in
real estate. After receiving law and business degrees from Harvard
University, Scott D. Malkin has been involved with real estate
ownership and development in the United States and Europe for the
past twelve (12) years. Anthony E. Malkin has served for the past
eight (8) years as President of W&M Properties, Inc., the real estate
management firm owned by him and Peter L. Malkin. During his tenure
at W&M, Anthony E. Malkin has been involved in over $180,000,000 in
property structurings, including acquisitions, and $230,000,000 in
property-related financing transactions, as well as day-to-day
management and operation of office, residential and industrial
properties located throughout the Eastern United States.
B. Permitting an Agent to Serve as the Agent
For More Than One Group of Participants
Each of the seven Agents represents a separate group of
Participants. Paragraph Sixth of each Participating Agreement
provides that no Agent shall serve as the Agent for more than one
group of Participants. Each group of Participants is requested to
consent to an amendment to its Participating Agreement to permit an
Agent to represent more than one group of Participants.
This amendment to the Participating Agreements will
eliminate the need for seven different agents at all times and will
simplify administration. This change will not affect the voting
power of each Participant under the Participating group in which he
or she is a member.
If 100% consent is received from Participants in two or
more groups permitting an Agent to represent more than one group, one
Agent thereafter will represent those groups. Peter L. Malkin (or,
if he fails to act, the Executive Committee of WM&B) will decide
which Agent will represent consenting groups of Participants. If
100% consent is not received as to any group, the non-consenting
group will continue to be represented by a separate Agent. However,
no individual will be able to act as Agent for all groups of
Participants. Accordingly, there will always be no fewer than two
different Agents among all the Participating groups.
C. Permitting the Agents to Combine Groups of Participants
The initial organization of Associates into seven groups
was viewed at the time as a conservative way to assure that
Associates would not be taxed as a corporation, but would instead be
treated as a partnership for income tax purposes. Other investment
groups subsequently organized by WM&B, including some for larger
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investments, typically had many fewer groups of participants once it
was determined that, even with fewer groups of participants, the same
tax treatment as a partnership would be accorded those investments.
The Agents, therefore, request each Participant's consent to an
amendment to each group's Participating Agreement to allow the
combining of groups of Participants.
If two or more groups of Participants are combined, the
acting Agent for the combined groups shall be selected from among the
Agents for the combining groups by Peter L. Malkin or, failing such
selection, by the Executive Committee of WM&B, and the other Agent(s)
shall resign. If two or more groups of Participants consent to the
combining of groups, those groups shall be combined. However, at no
time shall there be fewer than two groups of Participants. If all
groups consent to the combining of groups, then three groups will be
combined into one remaining group and four groups will be combined as
a second remaining group. Peter L. Malkin (or failing action by him,
the Executive Committee of WM&B) shall determine which groups will be
combined with which other groups if all groups consent to the
combining of groups.
The effect of combining groups is to dilute the voting
power of Participants in those groups which are combined. For
example, in certain instances when consent of the Participants is
called for under the Participating Agreements, the agreement of 90%
of the Participants in each Participating group is required. As a
result, if more than 10% of the Participants in one Participating
group reject a proposal when 90% Participant consent is called for,
then the proposal will be rejected even if all other groups consent.
Since each group of Participants holds $1,000,000 of the original
investment, negatives votes by Participants in one group aggregating
$101,000 -- or approximately 1.44% of the total $7,000,000
investment -- can effectively block a proposal approved by 90% of all
other Participants. If groups of Participants are combined, then the
effect of such a negative vote would be diluted. For example, if
three groups of Participants are combined, then negative votes
aggregating $101,000 would not be sufficient to block approval by the
combined three groups, as those negative votes would represent only
3.367% of the participating interests in the combined $3,000,000
group.
If some groups vote to combine and other groups do not vote
to combine, then the voting power of Participants in the combined
groups will be reduced vis-a-vis the voting power of Participants in
original groups which elect not to combine. A Participant holding a
$10,000 original unit now has a vote equal to 1% of his group's
$1,000,000 of participating interests. If that Participant's group
is combined with two others, forming a group holding $3,000,000 of
participating interests, then the affected Participant would hold a
.33% voting percentage ($10,000 out of $3,000,000) in the combined
groups, whereas the holder of a $10,000 unit in an uncombined group
would continue to hold a 1% interest in his or her group.
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III. OPERATIONS ISSUES
A. Discretionary Authority of the Agents
In 1981, the Participants approved discretionary authority
to Lawrence A. Wien and, once Mr. Wien ceased to serve as an Agent,
to Peter L. Malkin to enter into future extensions and modifications
of the Fee Mortgage, or replacements thereof (such extensions,
modifications or replacements, a "Refinancing"), on terms felt to be
beneficial to Associates, provided the Refinancing is with an
institutional lender and there is no increase in the principal amount
of the Fee Mortgage loan. The consent of each group of Participants
is requested to authorize each present and successor Agent to succeed
to Peter L. Malkin's discretionary authority to consummate future
Refinancings if Peter L. Malkin shall no longer be an Agent. If
Peter L. Malkin shall no longer be an Agent, then the Agents then
serving shall decide by majority vote, one vote for each group of
Participants, which Agent shall then exercise the discretionary
authority to consummate Refinancings.
If discretionary authority to Refinance the Fee Mortgage
from time to time had not been granted to Mr. Wien and Mr. Malkin,
then consent of each Participating group, based on a 90% vote of each
group, would have been required for each past Refinancing. This
process would have been time-consuming and cumbersome, and might have
resulted in the loss of what were then perceived to be beneficial
opportunities for Refinancings. By approving this extension of
authority to the other Agents when Mr. Malkin is no longer serving as
an Agent, the Participants will assure that this beneficial
arrangement will be continued.
B. Proposed Improvement Program, Lease
Modifications and Fee Mortgage Increase
The Net Lessee has proposed that significant capital
improvements be undertaken at the Property (the "Improvement
Program"). The Net Lessee has also proposed that a portion of the
cost of the Improvements Program be paid through funds provided by an
increase in the Fee Mortgage (the "Fee Mortgage Increase"), with the
balance of the cost to be paid by the Net Lessee, either directly as
incurred from Building cash flow or through financings arranged and
payable by it. The Net Lessee has offered that debt service charges
on the Fee Mortgage Increase be covered by an increase in Basic Rent.
As a result, because Basic Rent and the other costs of the
Improvement Program to be paid by the Net Lessee are deducted in
computing Secondary Additional Rent, the Net Lessee is effectively
offering to pay one-half of the cost of the Improvement Program. The
Net Lessee has indicated, however, that it is not economically
justifiable for it to pay one-half of the costs of the Improvement
Program unless two additional 25 year extension options for the Net
Lease are provided. As a further inducement to the Participants to
approve the proposed Net Lease extension options, the Net Lessee has
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also offered an increase in Primary Additional Rent to increase the
yield to the Participants during the current term and all extensions.
The consent of the Participants is requested to the Fee
Mortgage Increase and to the modifications to the Net Lease required
to implement (a) the change in Basic Rent to include debt service
charges on the Fee Mortgage Increase, (b) the increase in Primary
Additional Rent and (c) the granting of the additional extensions
(the "Lease Extension Options"). This program is referred to
together as the "Lease Modification and Financing Program." The
Agents have obtained an independent opinion of Brown Harris Stevens
Appraisal and Consulting L.L.C. ("Brown Harris") regarding the
present value of the costs and benefits to Associates and the Net
Lessee of the various components of the Lease Modification and
Financing Program. In the view of Brown Harris, the total present
value of costs and benefits to the Net Lessee is almost equal, but
the present value of benefits to Associates outweighs the present
value of its costs. If the requisite consent of Participants is not
obtained for the Lease Modification and Financing Program, the Net
Lessee may elect to do some or none of the Improvement Program, but
the Net Lessee will not pay Basic Rent and Primary Additional Rent at
the proposed increased rates.
The Lease Extension Options and the Fee Mortgage Increase
are considered together for Participant approval as the "Lease
Modification and Financing Program" because, as the Net Lessee has
advised the Agents, the Net Lessee will only commit to the
Improvement Program and the proposed increases in Basic Rent and
Primary Additional Rent if both the Lease Extension Options and the
Fee Mortgage Increase are approved. Thus there is no benefit to
Associates if only the Lease Extension Options or the Financing
Program were approved by the Participants. The Net Lessee has
approved the Lease Modification and Financing Program, and has
committed to undertake the Improvement Program, if the Participants
approve the Lease Modification and Financing Program.
1. Proposed Improvement Program
The Net Lessee has advised that, in order for the
Property to remain competitive in the twenty-first century and to
protect profitability and the return to the Participants, the
Building requires substantial capital improvement and upgrading.
Although the Building is well-maintained, it was constructed over 65
years ago and some of its systems and components are out-dated.
The Net Lessee proposes to implement the Improvement
Program at a total cost of at least $8,000,000, including some or all
of the following: replacement of the Building's approximately 4,900
windows with new, energy efficient, Thermopane windows; refurbishing
and renovation of elevators, resulting in increased operating speed,
computerized dispatch, and compliance with the Americans with
Disabilities Act, and installation of new intercom and cabs;
automation of two freight elevators; installation of a lobby
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concierge desk with television monitors; and the refurnishing and
upgrading of other common areas such as upper floor corridors and
elevator lobbies. The Improvement Program would be undertaken during
the years 1997 through 2004. Because the specific components of the
Improvement Program are still being developed, it is not now possible
to provide a detailed budget for the various elements of the proposed
Program.
The costs of the Improvement Program are to be paid in
part from the Fee Mortgage Increase, and the balance of the costs is
to be paid by the Net Lessee. The Net Lessee is considering
financing the costs for the elevator work through deferred payment of
the contract price for the elevator work plus interest. The
contemplated elevator financing does not require approval of the
Participants because this type of financing by the Net Lessee is
already permitted under the Net Lease. The Net Lessee's payments
pursuant to the elevator financing, including interest, and the
balance of the costs paid by the Net Lessee for the Improvement
Program and not funded by the Fee Mortgage Increase are deductible in
the computation of Additional Rent as provided in the Net Lease.
2. Lease Modifications
The Net Lease would be modified (a) to increase
Primary Additional Rent to benefit the Participants, (b) to confirm
that debt service payments on the Fee Mortgage Increase will be paid
by the Net Lessee through an increase in Basic Rent and (c) to grant
to the Net Lessee two 25-year extension options.
a. Increase in Primary Additional Rent
Primary Additional Rent, in the maximum amount of
$1,053,800 per fiscal year, is advanced monthly to Associates based
on the net operating profit of the Net Lessee for the previous fiscal
year. From each monthly advance of Primary Additional Rent,
Associates pays Additional Supervisory Compensation to WM&B and
distributes the balance to the Participants. Assuming the maximum
Primary Additional Rent is advanced monthly by the Net Lessee to
Associates (as has been the case for each of the past 17 years),
regular monthly distributions are made to Participants from Primary
Additional Rent at the rate of about 14.95% per annum on the original
cash investment of Associates. (This percentage is computed by
dividing (a) the amount distributed to Participants each year from
Primary Additional Rent ($1,046,420) by (b) the original cash
investment of Associates ($7,000,000). Certain current Participants
may have purchased their interest for amounts different from the
original investment amount and their rates of return on investment
will thus be different.)
The Net Lessee proposes to increase the amount of
Primary Additional Rent by $78,000 a year, by increasing the monthly
advances of Primary Additional Rent by $6,500 each. These increases
would be permanent for the balance of the Net Lease term, including
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the existing and proposed extensions. The increase of $78,000 in
Primary Additional Rent will be allocated, pursuant to existing
arrangements, 90% to the Participants and 10% to WM&B as Additional
Supervisory Compensation. As a result of the increase in Primary
Additional Rent, monthly distributions to the Participants in years
when net operating profit of the Net Lessee is sufficient will
increase from approximately 14.95% per year to approximately 15.95%
per year on the original cash investment. (The percentage return on
original investment is computed as described in the preceding
paragraph.) The increased amount of Primary Additional Rent is
deductible by the Net Lessee in the computation of Secondary
Additional Rent.
b. Increase in Basic Rent
The Basic Rent under the Lease is equal to the
sum of Mtge Rent and $24,000. The Basic Rent received by Associates
is applied to pay its monthly Fee Mortgage charges and its Basic
Supervisory Compensation to WM&B. See Section I.G. - Supervisory
Services.
If the Lease Modification and Financing Program
is approved by the Participants, the Net Lessee has agreed to
increase the monthly installments of Basic Rent to service the Fee
Mortgage Increase until the Fee Mortgage Increase is repaid in full.
This proposed increase in Basic Rent is deductible by the Net Lessee
in the computation of Additional Rent.
c. Lease Extension Options
In consideration of the Net Lessee's undertaking,
and contributing half the cost of, the Improvement Program and
increasing the Basic Rent and Primary Additional Rent under the Net
Lease, the Participants are requested to approve two additional
options in favor of the Net Lessee to extend the Net Lease term for
25 years each, the first from October 1, 2033 through September 30,
2058 and the second from October 1, 2058 to September 30, 2083. The
terms of the Net Lease during the additional extensions will be the
same as now provided in the Net Lease, except for the increases in
Basic Rent and Primary Additional Rent described in paragraphs a. and
b. above.
The granting of the Lease Extension Options will
trigger a New York State Transfer Tax of approximately $240,000,
representing a tax of .4% of the net present value of the estimated
rent to be received by Associates over the balance of the term of the
Net Lease including the Lease Extension Options (the "Transfer
Taxes"). These Transfer Taxes are typically paid by the transferror.
The Net Lessee has proposed funding the Transfer Taxes through the
Fee Mortgage Increase. New York State Transfer Taxes were not
imposed on the granting of lease extensions prior to July 1, 1989.
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3. Fee Mortgage Increase
The Participants are requested to approve an increase
of up to $6,250,000 in the principal amount of the Fee Mortgage. The
proceeds of the Fee Mortgage Increase will be used by the Net Lessee
as agent for Associates to pay costs of the Improvement Program and
to pay the Transfer Taxes. If the Lease Modification and Financing
Program is approved by the Participants, the Net Lessee will pay, and
will deduct as an operating expense for the year incurred, all
expenses of closing the Fee Mortgage Increase, such as points,
mortgage recording taxes, mortgage title insurance, fees of lenders'
and borrower's counsel, mortgage brokerage commissions, and fees of
Lenders' appraisers and engineers. Alternatively, proceeds from the
Fee Mortgage Increase will be used to pay closing expenses, as the
Net Lessee may elect, and the Net Lessee would pay from operating
revenues (and thus deduct in the year paid) the costs of the
Improvement Program not covered by such proceeds used for expenses.
The current mortgagee has indicated a willingness to
fund the Fee Mortgage Increase. The existing principal of the Fee
Mortgage is $12,020,814 (the "Existing Principal"). The current
interest rate is 8.85% per annum. The increased Fee Mortgage,
totalling up to $18,270,814, will bear interest at a blended fixed
rate based upon a formula related to Treasury Bond rates and now
estimated at approximately ____% per annum. The new Fee Mortgage,
including both the Existing Principal and the Fee Mortgage Increase,
will not be amortized during its term, and will mature on October 31,
2004, the existing maturity date under the current terms of the Fee
Mortgage. Neither Associates nor the Participants will be personally
liable for the debt. To minimize interest charges on the Fee
Mortgage Increase, the Net Lessee may arrange with the current fee
mortgagee for the advance of the Fee Mortgage Increase in
installments. If amortization payments are required in connection
with future Refinancings of the increased Fee Mortgage, those
payments will be applied to reduce the Fee Mortgage Increase until
repaid in full.
The Fee Mortgage Increase, as advanced, will be held
by Associates and applied to the Improvement Program as expended by
the Net Lessee. For purposes of determining Additional Rent, the
interest earned on the temporary investment of the Fee Mortgage
Increase until expended in connection with the Improvement Program
shall be treated as income of the Net Lessee.
IV. CERTAIN EFFECTS OF THE LEASE MODIFICATION AND FINANCING PROGRAM
A. Generally
If the Lease Modification and Financing Program is approved
by the Participants, Primary Additional Rent, and thus monthly
distributions to the Participants, will be increased. The Agents are
of the opinion, based on the results of operations of the Property as
reflected in the annual statements provided by the Net Lessee in
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computing Additional Rent and based on the Agents' knowledge of the
Building and of the market generally, that the Net Lessee will be
able to pay the increase in Basic Rent to cover debt service charges
on the Fee Mortgage Increase and the increased Primary Additional
Rent. Assuming the Agents' expectations are realized, as to which no
assurance can be given, Associates and the Net Lessee will each bear
(a) one-half of the debt service charges on the Fee Mortgage
Increase, and (b) one-half of the increase in Primary Additional
Rent. As a consequence, if operating results do not change there
would be a decrease in Secondary Additional Rent. Because the actual
increase in Basic Rent attributable to debt service charges on the
Fee Mortgage Increase cannot now be ascertained, it is not possible
to estimate the decrease in Secondary Additional Rent which would
result if operating results do not change.
The Agents also assume that, because payment for the
Improvement Program (whether in the form of deferred payment of the
cost of the elevator work, repayment of the Fee Mortgage Increase
through an increase in Basic Rent or direct payment for services and
materials) is deductible in computing Secondary Additional Rent, each
of Associates and the Net Lessee will ultimately bear one-half of the
cost of the Improvement Program. Stated differently, the value of
the Property and of Associates' interest in it will be enhanced, and
the Net Lessee will have contributed half the cost. Reflecting this
sharing of the costs of the Improvement Program, if Associates and
the Net Lessee join in a sale of the Property prior to repayment of
the Fee Mortgage Increase, the Net Lessee shall be required to pay
one-half of the Fee Mortgage Increase then outstanding (together with
one-half of the balance of any elevator financing then outstanding),
and the remainder of those obligations shall be paid from the
proceeds of sale allocable to Associates. Sale of the Property is
not currently contemplated.
The effect of the Lease Modification and Financing Program
on the Net Lessee is that it will be able to continue to operate the
Property for up to an additional 50 years and share in its operating
profit or loss, regardless of whether Associates may hereafter decide
to retain or sell its interest in the Property. The Lease
Modification and Financing Program will have no direct effect on the
Agents as such since they have no beneficial ownership interest as
Agents or as joint venturers in Associates. There is no change in
the Basic Supervisory Fee or the formula under which WM&B receives
Additional Supervisory Compensation but, as a result of the increase
in Primary Additional Rent, the amount of Additional Supervisory
Compensation payable to WM&B in any year may be slightly increased.
See Section IV. -- Potential Conflicts of Interest.
B. Tax Consequences
The improvements paid for through the Fee Mortgage Increase
shall be installed by the Net Lessee as agent for Associates and
shall be deemed to be the property of Associates. The applicable
income tax deductions for depreciation shall benefit the
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Participants. To the extent the Improvement Program is funded from
the Fee Mortgage Increase, non-deductible amortization payments by
Associates under the Fee Mortgage will ultimately equal the tax
benefits of the depreciation. Because the proposed terms for the Fee
Mortgage as increased do not require current amortization payments
however, the Participants will receive a timing benefit in that the
depreciation deductions will be available currently while the non-
deductible amortization payments are not now required. Accordingly,
there is no material, adverse tax consequence to the Participants as
a result of the Lease Modification and Financing Program.
The New York State Transfer Tax payable in connection with
the granting of the Lease Extension Options is proposed by the Net
Lessee to be funded by the Fee Mortgage Increase. The tax
consequences parallel those described in the preceding paragraph
regarding the Improvement Program.
V. RECOMMENDATIONS; INDEPENDENT OPINION
A. Recommendations
1. Governance Issues
The Agents recommend that the Participants approve
each of the three Governance Issues described in Section II. above:
a. The designation of additional successor Agents.
b. The elimination of the requirement that no person
may serve as Agent for more than one group of Participants.
c. The granting to the Agents of the right to
combine groups of Participants.
The Agents believe that the approval of each of these issues will
make the administration of Associates less cumbersome. Although
voting power will be diluted under the third proposal listed above,
the Agents nevertheless feel that the use of so many groups of
Participants was an historical anomaly that should not be continued
because it allows a very small number of Participations in one group
to block an approval from the vast majority of Participants.
2. Operations Issues
The Agents recommend the Participants approve each of
the two Operations Issues described in Section III. above.
Regarding the Discretionary Authority of the Agents to
enter into future Refinancings, the ease of acting without the need
for a Participant vote for past Refinancings has been a time-saving
convenience allowing for beneficial results for Associates.
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As to the Lease Modification and Financing Program,
involving the extension and modification of the Net Lease and the Fee
Mortgage Increase, the Agents recommend approval by the Participants
for the following reasons:
-- The Property should be improved to remain as
competitive in the market as reasonably can be
achieved. Failure to upgrade the Property could
adversely affect profit, Additional Rent and
distributions to the Participants.
-- The value of the Property will be enhanced.
-- The increase in Primary Additional Rent will permit
regular monthly distributions at the rate of
approximately 15.95% per annum on the original cash
investment of $7,000,000, assuming operating profit
remains sufficient for such payments. If the Lease
Modification and Financing Program is not approved,
the monthly distributions will remain at approximately
14.95% per annum (assuming sufficient operating
profit).
-- If the Lease Modification and Financing Program is not
approved, the Agents believe that the Net Lessee will
not likely undertake all of the Improvement Program
and the Agents believe that the opportunity to improve
operating results and Secondary Additional Rent
distributions to the Participants will be diminished.
B. Independent Opinion relating to the
Lease Modification and Financing Program
The Agents commissioned Brown Harris Stevens Appraisal &
Consulting, LLC ("Brown Harris") to render an independent opinion
comparing the present values of the respective benefits and costs to
each of Associates and the Net Lessee of the Lease Modification and
Financing Program. The benefits to the Net Lessee are (i) the
present value of the two Lease Extension Options and (ii) the present
value of the anticipated additional income to the Net Lessee which
would result from capital improvements to the Building resulting from
the Improvement Program. The costs to the Net Lessee are (iii) the
present value of one-half of the cost of the Improvement Program and
(iv) the present value of the proposed increase in Primary Additional
Rent. The benefits to Associates are (v) the present value of the
anticipated additional income to Associates which would result from
capital improvements to the Building resulting from the Improvement
Program and (vi) the present value of the proposed increase in
Primary Additional Rent. The cost to Associates is (vii) the present
value of the additional net income Associates could have obtained if
the Net Lease had expired pursuant to its original terms instead of
at the end of the new extension terms. For purposes of analyzing
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these various costs and benefits, Brown Harris assumed that the Net
Lease would be extended by the Net Lessee for all extensions
including the two proposed extensions.
In the view of Brown Harris, the Lease Extension Options
(item (i) above) have a discounted present value to the Net Lessee in
the range of $435,000 to $760,000 (or an average present value of
$600,000) and the discounted present value to the Net Lessee of its
share of enhanced income from Property operations (item (ii) above)
is $3,000,000. Accordingly, the total current value benefitting the
Net Lessee is $3,600,000. The discounted present cost to the Net
Lessee of its share of the Improvement Program (item (iii) above) is
$3,100,000, and the discounted present cost to the Net Lessee of the
proposed increase in Primary Additional Rent is $390,000.
Accordingly, the total present cost to the Net Lessee of the Lease
Modification and Financing Program is $3,490,000, which is
approximately equal to the total present value benefitting the Net
Lessee.
The discounted present value to Associates of its share of
enhanced income from Property operations (item (v) above) is
$2,000,000, and the discounted present value of the proposed increase
in Primary Additional Rent (item (vi) above) is $390,000, for a total
current benefit to Associates of $2,390,000. The discounted present
cost to Associates of the two additional 25 year extensions of the
term of the Net lease is $1,100,000, which is substantially less than
the present value benefit to Associates of the Lease Modification and
Financing Program.
Brown Harris was selected by the Agents to render the
independent opinion described above because Brown Harris has a well
known, highly-regarded appraisal group with significant experience in
the Manhattan office market. The Agents described to representatives
of Brown Harris the proposals comprising the Lease Modification and
Financing Program and requested an independent evaluation of the
present value of the respective benefits and costs to the Net Lessee
and Associates of the various elements of the Program. There were no
other conditions or limits placed on their activities.
In reaching their conclusions, Brown Harris determined that
the Income Capitalization Approach to derive value estimates based on
anticipated net income was the appropriate approach to utilize. It
was their assessment that the other traditional approaches to
determining values -- the Cost Approach (relating to replacement of
the Building) and the Sales Comparison Approach -- would not be
applicable as they were not valuing the entire Property but rather
cash streams resulting from increases in rent, costs for work, etc.
For purposes of computing future values, they determined that (a) the
cash outlays for the Improvement Program and the income stream to the
Net Lessee from the Extension Options should be discounted at an
annual rate of 13%, (b) the cost to Associates of lost income
resulting from the granting of the Extension Options should be
discounted at 12%, (c) in comparing the effect of the Improvement
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Program on income growth, the growth rate for income at the Property
would be 2% if the Improvement Program is not undertaken and 4% if it
is undertaken and (d) the resulting cash streams of income should be
discounted at an annual rate of 13%. Finally, they determined that
the discount rate for determining the present cost to the Net Lessee
and the present benefit to Associates of the proposed increase in
Primary Additional Rent should be 10%, a rate determined to be
appropriate in light of required returns on similar investments.
They also assumed certain inflation factors for income reflecting a
conservative assessment based on previous recent inflationary trends.
A Report of their conclusions, calculations and supporting
data is on file in the office of WM&B and is available for review by
Participants during business hours upon reasonable notice.
Appointments to inspect and copy the report may be made by contacting
Stanley Katzman, Esq. at (212) 687-8700.
VI. POTENTIAL CONFLICTS OF INTEREST
A. Certain Ownership of Participations
As of June 30, 1996, the Agents beneficially owned,
directly or indirectly, the following Participations:
Name & Address Amount of
of Beneficial Beneficial Percent
Title of Class Owner Ownership of Class
Participations Donald A. Bettex $10,000.00 .143%
in Partnership 700 Park Avenue
Interests New York, N.Y. 10021
Thomas N. Keltner, Jr. $ 2,500.00 .036%
1111 Park Avenue
New York, N.Y. 10128
John L. Loehr $ 5,000.00 .071%
286 Alpine Circle
River Vale, N.J. 07675
Peter L. Malkin $33,333.34 .476%
21 Bobolink Lane
Greenwich, CT 06830
Richard A. Shapiro $ 2,500.00 .036%
38 Flint Avenue
Larchmont, N.Y. 10538
At such date, Peter L. Malkin owned of record, as trustee
or co-trustee but not beneficially, $55,714 of Participations and his
wife owned $35,000 of Participations. Mr. Malkin disclaims any
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beneficial ownership of such Participations. Richard A. Shapiro owns
as custodian a $5,000 Participation but he disclaims any beneficial
ownership of such Participation.
Other members of Wien, Malkin & Bettex, their wives and
minor children or trusts and estates in which they have beneficial
interests own an aggregate of $10,000 of Participations, or
approximately .143% of the outstanding Participations.
B. Relationships with the Net Lessee
Peter L. Malkin owns of record and beneficially 5% of the
Net Lessee. Peter L. Malkin owns of record, as co-trustee and agent,
but not beneficially, approximately 12.079%, and his wife 2.5%, of
the Net Lessee. Mr. Malkin disclaims any beneficial ownership of the
interests in the Net Lessee owned by him as trustee or owned by his
wife.
All major actions by the Net Lessee require approval of no
less than 75% of the partnership interests in the Net Lessee. The
Agents have been advised that all partners in the Net Lessee have
approved the undertaking of the Net Lessee's obligations in respect
of the Lease Modification and Financing Program and in respect of the
Improvement Program if the Lease Modification and Financing Program
is approved by the Participants.
WM&B receives $180,000 annually from the Net Lessee for
acting as supervisor of the Net Lessee's partnership agreement and
additional compensation of 10% of distribution of cash profit of Net
Lessee in excess of $400,000 per annum. If the Lease Extension
Options are granted to the Net Lessee, WM&B will receive its annual
fee and additional compensation (if earned) during each year of the
extended terms.
The Agents, WM&B and Helmsley-Spear, Inc. have been
indemnified by the Net Lessee in connection with Lease Extension and
Financing Program.
C. Third Parties
Brown Harris is independent of and not affiliated with
Associates, the Agents, the Net Lessee, or WM&B. Brown Harris has
not received any compensation from Associates or the Net Lessee for
the past three years. W&M Properties, Inc. has been retained by the
Agents as a financial consultant and will receive a fee of $______ if
the Lease Extension and Financing Program is approved and the Fee
Mortgage Increase is consummated. W&M Properties, Inc. is owned by
Peter L. Malkin and his son, Anthony E. Malkin.
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VII. FEES AND EXPENSES
All fees and expenses relating to the solicitation of Consents
hereunder and of Brown Harris will be paid by the Net Lessee and
deducted in determining Additional Rent.
VIII. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Associates was organized solely for the purpose of acquiring
the Property subject to the Net Lease. Associates pays Fee Mortgage
charges and $24,000 a year for Basic Supervisory Compensation and
disbursements to WM&B from Basic Rent paid to Associates by the Net
Lessee under the Net Lease. From Primary Additional Rent and
Secondary Additional Rent, Associates pays Additional Supervisory
Compensation to WM&B and distributes the balance to the Participants.
Under the Net Lease, the Net Lessee has assumed sole responsibility
for the operation, repair, maintenance and management of the
Property. Associates need not maintain substantial reserves or
otherwise maintain liquid assets to defray operating expenses of the
Property. In fact, if Associates accumulated cash reserves by
withholding or reducing distributions to the Participants from
Additional Rent, the Participants would suffer adverse tax
consequences because the amounts held back by Associates would
nevertheless be taxable to the Participants.
During the twelve months ended December 31, 1995, and in the
first six months of 1996, Associates made regular monthly
distributions from Primary Additional Rent of $124.57 for each
original $10,000 participation (or $1,494.89 per annum for each
original $10,000 participation). On November 30, 1995, Associates
made a distribution of $2,013.34 in respect of each original $10,000
participation from Secondary Additional Rent. See Section I.C.2. -
The Net Lease - Rent and Section I.F. - Financial Information.
The following summarizes the material factors affecting
Associates' results of operations for the three years ended
December 31, 1995 and the three and six month periods ended June 30,
1996 and June 30, 1995:
a. Total income has decreased for the last two
years. Such decrease is attributable to
decreased Secondary Additional Rent. The amount
of Secondary Additional Rent reflects the
downturn in the New York City economy and the
local real estate market and increased
expenditures by the Net Lessee to enhance the
Property. It is difficult to forecast whether
the New York City real estate market will improve
over the next few years.
b. Total expenses have decreased for the last two
years. Such decreases reflect a decrease in
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Additional Supervisory Compensation more than
offsetting an increase in interest expense on the
Fee Mortgage. In addition, there was a decrease
in amortization of Fee Mortgage Refinancing
Costs.
c. Total income remained the same for the three and
six month periods ended June 30, 1996, as
compared with the three and six month periods
ended June 30, 1995. Total expenses remained the
same for the three and six month periods ended
June 30, 1996, as compared with the three and six
month periods ended June 30, 1995.
IX. LIQUIDITY AND CAPITAL RESOURCES
There has been no significant change in Associates' liquidity
for the twelve-month period ended December 31, 1995, as compared with
the twelve-month period ended December 31, 1994, or for the six month
period ended June 30, 1996 as compared to the same period in 1995.
X. INFLATION
Inflationary trends in the economy may impact the operations
of the Net Lessee, and therefore, Additional Rent. Historically,
inflation generally has resulted in an increase in Additional Rent.
XI. TERMS OF SOLICITATIONS OF CONSENTS
Each Agent acts as agent for a group of Participants owning a
one-seventh interest in Associates and representing $1,000,000 in
interests of the original $7,000,000 investment in Associates. At
December 31, 1995, no person held participations aggregating more
than 5% of the total outstanding participations.
The Participating Agreement between an Agent and the
Participants in that Agent's group requires the following percentage
of consents for the proposals made by the Agents in this Statement:
A. Governance Issues
1. As to designation of successor Agents referred to in
Section II.A. above - 75%.
2. As to permitting an Agent to represent more than one
group of Participants referred to in Section II.B. above - 100% of
two or more groups, and then one Agent can represent such groups.
3. As to permitting the Agents to combine two or more
groups of Participants referred to in Section II.C. above - 100% of
two or more groups, and then those groups which have received such
consent can be combined.
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B. Operations Issues
1. As to discretionary authority to the Agents other than
Peter L. Malkin if Peter L. Malkin ceases to serve as an Agent to
consummate future Refinancings, as described in Paragraph III.A.
above - 100%;
2. As to the Lease Modification and Financing Program
(involving the Net Lease modification, consisting of the increases in
Basic Rent to cover debt service charges on the Fee Mortgage
Increase, a permanent increase in Primary Additional Rent, and two 25
year extension options to the Net Lessee, and the Fee Mortgage
Increase) as described in Section III.B. above - 100%, subject to the
Participation Purchase Arrangement described below.
On June 30, 1996, there were 735 Participants holding
participations in the seven groups. Each Participant's voting
percentage in his or her group is determined by a fraction, the
numerator of which is the face amount of the participation owned and
the denominator of which is the group's original $1,000,000
investment in Associates.
The approval of the Lease Modification and Financing
Program is subject to the provision of the Participating Agreement
which states that, if owners of 90% of the Participations in any
Agent's group consent, that Agent or his or her designee shall have
the right to purchase the interest of any Participant in such Agent's
group who has not given such consent within 10 days after the mailing
by the Agent of the request therefor, together with advice that 90%
of the Participants in such Participant's group have so consented
(the "Participation Purchase Arrangement"). The purchase price shall
be the greater of (i) the book value of the participation (original
cost less capital repaid thereon), and (ii) $100. Since the book
value of an original participation has a negative balance of
$6,392.00 as of December 31, 1995 (computed by dividing Associates'
negative equity of $4,474,094 by the original $7,000,000 cash
investment), the price would be $100. The interest of any non-
consenting Participant would not be repurchased without prior written
notice that the holders of 90% of the outstanding participations of
the non-consenting Participant's group have consented and that the
non-consenting Participant has 10 days within which to consent to the
Lease Modification and Financing Program. Note that a vote to
"Abstain" is treated for purposes of the Participation Purchase
Arrangement the same as a vote to "Disapprove" the Lease Modification
and Financing Program.
If 90% or more of the Participants in an Agent's group
consent to the Lease Modification and Financing Program, each Agent
(or his designee) presently intends to purchase the interest of any
non-consenting Participant for $100. Funds for the purchase of the
interests of non-consenting Participants will not be provided by
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Associates. Any Participant whose participation is purchased by an
Agent (or his designee) will not receive any further Additional Rent
paid in respect of the year of purchase or thereafter.
The solicitation of consents will terminate 60 days after
the date of this letter, but may be extended by the Agents through
_________________. There is no record date establishing the identity
of the Participants entitled to vote for the proposals. Holders of
participations as of ________, 1996 will be recognized as entitled to
vote. However, if any Participation is transferred before the
consent with respect to that Participation is given, the transferee
will be entitled to vote. If consent to the proposals has been given
prior to the transfer of a Participation, however, the transferee
will be bound by the vote of the transferor. In addition, the Agents
and their designees will be entitled to vote the Participation of any
non-consenting Participant whose interest is purchased by them under
the Participation Purchase Arrangement (as defined above).
WM&B has been authorized by the Agents to solicit the
consents of Participants by mail, fax, telephone and telegram after
the mailing of this Statement. Forms of Consent that are signed and
returned without a choice indicated as to any proposal for which
consent is sought will be deemed to constitute a consent to the
applicable proposal or proposals, as the case may be, and will be
binding on each Participant as if such Participant had actually
indicated such choice on such form. If the Consent is returned
undated, it will be deemed dated as of the date received by the
Agents.
Participations are not traded on an established securities
market, nor are they readily tradeable on a secondary market or the
substantial equivalent thereof. Based on Associates' transfer
records, Participations are sold by holders from time to time in
privately negotiated transactions, and, in many instances, Associates
is unaware of the prices at which such transactions occur (other than
certain intra-family transfers involving Participations owned by
members of WM&B or their families). However, Associates has been
advised that sales prices during the past two calendar years for an
original $10,000 Participation were $20,000.
If you have any question or desire any additional
information concerning this consent solicitation, please communicate
in writing with any partner in Wien, Malkin & Bettex, 60 East 42nd
Street, New York, New York 10165-0015 or by fax at 212-986-7679.
PLEASE SIGN, DATE AND IMMEDIATELY RETURN THE COLORED COPY
OF THE CONSENT IN THE ENCLOSED ENVELOPE. ONCE GIVEN, CONSENT MAY NOT
BE REVOKED.
-24-
<PAGE>
<PAGE>
PRELIMINARY COPY
C O N S E N T
(SOLICITED BY PETER L. MALKIN, RALPH W. FELSTEN,
DONALD A. BETTEX, STANLEY KATZMAN, JOHN L. LOEHR,
RICHARD A. SHAPIRO AND THOMAS N. KELTNER, JR.
AS AGENTS (THE "AGENTS") ON BEHALF OF
60 EAST 42ND ST. ASSOCIATES)
As a Participant in 60 East 42nd St. Associates, the owner of
the Lincoln Building at 60 East 42nd Street, New York, New York, I
hereby take the following actions in response to the Agents'
proposals as outlined in the Statement Issued by the Agents in
connection with the Solicitation of Consents of the Participants,
dated ________________, 1996 (the "Statement"):
A. GOVERNANCE ISSUES
1. Designation of Successors to the Agents
CONSENT WITHHOLD CONSENT
[ ] Consent to [ ] Disapprove of
and Approve of
[ ] Abstain From
Consenting To
the designation of the successor Agents, as described in Section
II.A. of the Statement.
2. Permitting an Agent to Serve as the Agent
For More Than One Group of Participants
CONSENT WITHHOLD CONSENT
[ ] Consent to [ ] Disapprove of
and Approve of
[ ] Abstain From
Consenting To
permitting an Agent to act as agent for more than one group, as
described in Section II.B. of the Statement.
<PAGE>
<PAGE>
3. Permitting the Agents to Combine Groups of Participants
CONSENT WITHHOLD CONSENT
[ ] Consent to [ ] Disapprove of
and Approve of
[ ] Abstain From
Consenting To
permitting the Agents to combine groups of Participants, as
described in Section II.C. of the Statement.
B. OPERATING ISSUES
1. Discretionary Authority of the Agents
CONSENT WITHHOLD CONSENT
[ ] Consent to [ ] Disapprove of
and Approve of
[ ] Abstain From
Consenting To
permitting present and successor Agents to succeed to Peter L.
Malkin's discretionary authority to consummate future
Refinancings, as described in Section III.A. of the Statement.
2. Proposed Improvement Program, Lease
Modifications and Fee Mortgage Increase
CONSENT WITHHOLD CONSENT
[ ] Consent to [ ] Disapprove of
and Approve of
[ ] Abstain From
Consenting To
the Lease Modification and Financing Program described in Section
III.B. of the Statement.
The Agents recommend that Participants consent to all of the
above. Note that a vote to abstain is treated the same as a vote
to disapprove.
The solicitation of Consents will terminate on ____________,
but may be extended until ____________. <PAGE>
Each of the matters for which a consent or authorization is
being solicited is more fully described in the Statement, receipt
of which is hereby acknowledged and which is incorporated herein
by reference.
IF THIS FORM IS SIGNED AND RETURNED WITHOUT A CHOICE INDICATED ON
ANY OR ALL OF THE FIVE ITEMS, CONSENT WILL BE DEEMED TO HAVE BEEN
GIVEN AS TO SUCH ITEM OR ITEMS AS IF SUCH CONSENT WAS ACTUALLY
INDICATED ON SUCH FORM. IF THE CONSENT IS RETURNED UNDATED, IT
WILL BE DEEMED DATED AS OF THE DATE RECEIVED BY THE AGENTS. ONCE
GIVEN, CONSENT (OR DEEMED CONSENT) AS TO ANY ITEM MAY NOT BE
REVOKED AS TO SUCH ITEM.
Dated: ________________, 1996 _________________________
Signature
_________________________
Also Print Name Here
<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION 2.
Item 1. Financial Statements
60 East 42nd St. Associates
Condensed Statement of Income
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Rent Income:
Basic rent, from a related
party (Note B) $271,960 $271,960 $ 543,921 $ 543,921
Additional rent from a
related party (Note B) 263,450 263,450 526,900 526,900
-------- -------- ---------- ----------
Total rent income 535,410 535,410 1,070,821 1,070,821
======== ======== ========== ==========
Expenses:
Interest on mortgage (Note B) 265,960 265,960 531,921 531,921
Supervisory services, to a
related party (Note C) 7,845 7,845 15,690 15,690
Amortization of mortgage
refinancing costs 6,194 6,194 12,388 12,388
-------- -------- ---------- ----------
Total expenses 279,999 279,999 559,999 559,999
-------- -------- ---------- ----------
Net income $255,411 $255,411 $ 510,822 $ 510,822
======== ======== ========== ==========
Earnings per $10,000 participa-
tion unit, based on 700 parti-
cipation units outstanding
during the year $ 364.87 $ 364.87 $ 729.75 $ 729.75
======== ======== ========= =========
Distributions per $10,000 parti-
cipation consisted of the
following:
Income $ 364.87 $ 364.87 $ 729.75 $ 729.75
Return of capital 8.85 8.85 17.69 17.69
-------- -------- --------- ---------
Total distributions $ 373.72 $ 373.72 $ 747.44 $ 747.44
======== ======== ========= =========
At June 30, 1996 and 1995, there were $7,000,000 of participations
outstanding.
<PAGE>
<PAGE>
3.
60 East 42nd St. Associates
Condensed Balance Sheet
(Unaudited)
June 30, 1996 December 31, 1995
Assets
Current assets:
Cash $ 87,879 $ 87,879
----------- -----------
Total current assets 87,879 87,879
Real estate
Land 7,240,000 7,240,000
Buildings and Building Improvements 18,534,135 18,534,135
Less, allowance for depreciation 18,534,135 18,534,135
----------- -----------
-0- -0-
Mortgage refinancing costs 249,522 249,522
Less, allowance for amortization 43,069 30,681
------------ -----------
206,453 218,841
----------- -----------
Total assets $ 7,534,332 $ 7,546,720
=========== ===========
Liabilities and Capital
Long-term debt 12,020,814 12,020,814
Capital
Capital deficit, January 1, (4,474,094) (4,449,318)
Add, Net income:
January 1, 1996 through June 30, 1996 510,822 -0-
January 1, 1995 through December 31, 1995 -0- 2,430,979
----------- -----------
(3,963,272) (2,018,339)
----------- -----------
Less, Distributions:
Monthly distributions,
January 1, 1996 through June 30, 1996 523,210 -0-
January 1, 1995 through December 31, 1995 -0- 1,046,420
Distribution on November 30, 1995 of
Additional Rent for the lease year
ended September 30, 1995 -0- 1,409,335
----------- -----------
Total distributions 523,210 2,455,755
----------- -----------
Capital (deficit)
June 30, 1996 (4,486,482) -0-
December 31, 1995 -0- (4,474,094)
----------- -----------
Total liabilities and capital:
June 30, 1996 $ 7,534,332 -0-
December 31, 1995 -0- $ 7,546,720
=========== ===========
<PAGE>
<PAGE>
4.
60 East 42nd St. Associates
Condensed Statements of Cash Flows
(Unaudited)
January 1, 1996 January 1, 1995
through through
June 30, 1996 June 30, 1995
Cash flows from operating activities:
Net income $ 510,822 $ 510,822
Adjustments to reconcile net income
to cash provided by operating
activities:
Amortization of mortgage refinancing
costs 12,388 12,388
Change in accrued interest payable -0- (88,653)
--------- ---------
Net cash provided by operating
activities 523,210 434,557
--------- ---------
Cash flows from financing activities:
Cash distributions (523,210) (523,210)
--------- ---------
Net cash used in financing
activities (523,210) (523,210)
--------- ---------
Net increase (decrease) in cash -0- (88,653)
Cash, beginning of quarter 87,879 176,532
--------- ---------
Cash, end of quarter $ 87,879 $ 87,879
========= =========
January 1, 1996 January 1, 1995
through through
June 30, 1996 June 30, 1995
Cash paid for:
Interest $ 620,574 $ 620,574
========= =========
<PAGE>
<PAGE>
60 East 42nd St. Associates 5.
June 30, 1996
Notes to Condensed Financial Statements (Unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed financial
statements have been prepared in accordance with the instructions
to Form 10-Q and therefore do not include all information and
footnotes necessary for a fair presentation of financial position,
results of operations and statement of cash flows in conformity
with generally accepted accounting principles. The accompanying
unaudited condensed financial statements include all adjustments
(consisting only of normal recurring accruals) which are, in the
opinion of the partners in Registrant, necessary for a fair
statement of the results for such interim periods. The partners
in Registrant believe that the accompanying unaudited condensed
financial statements and the notes thereto fairly disclose the
financial condition and results of Registrant's operations for the
periods indicated and are adequate to make the information
presented therein not misleading.
Note B - Interim Period Reporting
The results for the interim periods are not necessarily
indicative of the results to be expected for a full year.
Registrant is a New York partnership which was organized
on September 25, 1958 and which owns fee title to the Lincoln
Building and the land thereunder, located at 60 East 42nd Street,
New York, New York 10165 (the "Property"). Registrant's partners
are Donald A. Bettex, Ralph W. Felsten, Stanley Katzman, Peter L.
Malkin, John L. Loehr, Thomas N. Keltner, Jr. and Richard A.
Shapiro, (collectively the "Partners"), each of whom also acts as
an agent for holders of participations (the "Participants") in
their respective partnership interests in Registrant.
Registrant leases the Property to Lincoln Building
Associates ("Lessee") under a long-term net operating lease (the
"Lease"), the current term of which expires on September 30, 2008.
(There is one additional 25-year term which, if exercised, will
extend the Lease until September 30, 2033.) Lessee is a
partnership whose partners consist of, among others, Mr. Malkin.
The Partners are also members of the law firm of Wien, Malkin &
Bettex, 60 East 42nd Street, New York, New York, counsel to
Registrant and Lessee ("Counsel"). See Note C of this Item 1
("Note C").
The Lease, as modified, provides that Lessee is required
to pay Registrant:
<PAGE>
<PAGE>
60 East 42nd St. Associates 6.
June 30, 1996
(i) an annual basic rent of $1,087,842 (the "Basic
Rent"), which is equal to the sum of $1,063,842, the constant
annual charges on the first mortgage calculated in accordance with
the terms of the Lease, plus $24,000 for supervisory services
payable to Counsel.
(ii) (A) additional rent (the "Additional Rent") equal
to the lesser of (x) Lessee's net operating income for the
preceding lease year or (y) $1,053,800 and (B) further additional
rent ("Further Additional Rent") equal to 50% of any remaining
balance of Lessee's net operating income for such lease year.
(Lessee has no obligation to make any payment of Additional Rent
or Further Additional Rent until after Lessee has recouped any
cumulative operating loss accruing from and after September 30,
1977.)
(iii) $1,053,800 as an advance against Additional Rent,
an amount which will permit basic distributions to Participants at
the annual rate of approximately 14.95% on their remaining cash
investment in Registrant; provided, however, if such advances
exceed Lessee's net operating income for any Lease year, advances
otherwise required during the subsequent lease year shall be
reduced by an amount equal to such excess until Lessee shall have
recovered, through retention of net operating income, the full
amount of such excess.
Further Additional Rent income is recognized when earned
from the Lessee, at the close of the lease year ending September
30. Such income is not determinable until the Lessee, pursuant to
the Lease, renders to Registrant a certified report on the
operation of the Property. Further Additional Rent for the lease
year ended September 30, 1995 was $1,565,928. After payment of
$156,593 to Counsel as an additional payment for supervisory
services, the balance of $1,409,335 was distributed to the
Participants on November 30, 1995.
A new first mortgage loan on the Property in the
original principal amount of $12,020,814 was closed on October 6,
1994 (the "Mortgage"). Annual Mortgage charges are $1,063,842,
payable in equal monthly installments of $88,654, representing
interest only at the rate of 8.85% per annum. The Mortgage will
mature on October 31, 2004 and is prepayable in whole after
October 6, 1995 with a penalty providing interest protection to
the mortgagee. The Mortgage is prepayable in whole without
penalty during the 90-day period prior to its maturity date.
<PAGE>
<PAGE>
60 East 42nd St. Associates 7.
June 30, 1996
The refinancing costs were capitalized by Registrant and
are being expensed ratably during the period of the mortgage
extension from October 6, 1994 to October 31, 2004.
If the Mortgage is modified, upon the first refinancing
which would result in an increase in the amount of the outstanding
principal balance of the mortgage, the Basic Rent shall be equal
to the Wien, Malkin & Bettex annual supervisory fee of $24,000
plus an amount equal to the product of the new debt service
percentage rate under the refinanced mortgage multiplied by the
principal balance of the mortgage immediately prior to such
refinancing. If there are subsequent refinancings which result in
an increase in the amount of the outstanding principal balance of
the mortgage, the principal balance referred to above shall be
reduced by the amount of the mortgage amortization payable from
Basic Rent subsequent to the first refinancing.
Note C - Supervisory Services
Registrant pays Counsel for supervisory services and
disbursements $24,000 per annum (the "Basic Payment"), plus an
additional payment of 10% of all distributions to Participants in
Registrant in any year in excess of the amount representing a
return at the rate of 14% per annum on their remaining cash
investment (the "Additional Payment"). At June 30, 1996, such
remaining cash investment was $7,000,000 representing the original
cash investment of Participants in Registrant.
No remuneration was paid during the three and six month
periods ended June 30, 1996 by Registrant to any of the Partners
as such. Pursuant to the fee arrangements described herein,
Registrant paid Counsel $6,000 and $12,000, respectively, of the
Basic Payment and $1,845 and $3,690 respectively, on account of
the Additional Payment, for supervisory services for the three and
six month periods ended June 30, 1996. The supervisory services
provided to Registrant by Counsel include legal, administrative
services and financial services. The legal and administrative
services include acting as general counsel to Registrant,
maintaining all of its partnership records, performing physical
inspections of the Building, reviewing insurance coverage and
conducting annual partnership meetings. Financial services
include monthly receipt of rent from the Lessee, payment of
monthly and additional distributions to the Participants, payment
of all other disbursements, confirmation of the payment of real
estate taxes, and active review of financial statements submitted
to Registrant by the Lessee and financial statements audited by
and tax information prepared by Registrants' independent certified
public accountant, and distribution of such materials to the
Participants. Counsel also prepares quarterly, annual and other
periodic filings with the Securities and Exchange Commission and
applicable state authorities.
<PAGE>
<PAGE>
60 East 42nd St. Associates 8.
June 30, 1996
Reference is made to Note B of Item 1 ("Note B") for a
description of the terms of the Lease between Registrant and
Lessee. As of June 30, 1996, Mr. Malkin owned a partnership
interest in Lessee. The respective interests, if any, of the
Partners in Registrant and Lessee arise solely from ownership of
their respective participations in Registrant and, in the case of
Mr. Malkin, his individual ownership of a partnership interest in
Lessee. The Partners receive no extra or special benefit not
shared on a pro rata basis with all other Participants in
Registrant or partners in Lessee. However, the Partners, by
reason of their respective interests in Counsel, are entitled to
receive their pro rata share of any legal fees or other
remuneration paid to Counsel for legal and supervisory services
rendered to Registrant and Lessee.
As of June 30, 1996, the Partners owned of record and
beneficially an aggregate $53,333 of participations in Registrant,
representing less than 1% of the currently outstanding
participations therein.
In addition, as of June 30, 1996, certain of the
Partners in Registrant (or their respective spouses) held
additional Participations in Registrant as follows:
Richard A. Shapiro owned of record as custodian, but not
beneficially, a $5,000 Participation. Mr. Shapiro
disclaims any beneficial ownership of such
Participation.
Peter L. Malkin owned of record as trustee or
co-trustee, an aggregate of $55,714 of Participations.
Mr. Malkin disclaims any beneficial ownership of such
Participations.
Isabel Malkin, the wife of Peter L. Malkin, individually
and beneficially, owned $35,000 of Participations.
Mr. Malkin disclaims any beneficial ownership of such
Participations.
