UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [XX]
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Check the appropriate box:
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[ ] Confidential, for use of the Commission Only
[XX] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
Commission File No. 0-2670
60 East 42nd St. Associates
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement,
if other than Registrant)
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4) Date Filed:
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6/29/99
60 EAST 42nd ST. ASSOCIATES
c/o Wien & Malkin LLP
60 East 42nd Street - 26th Floor
New York, New York 10165-0015
Telephone (212) 687-8700
Telecopier (212) 986-7679
STATEMENT BY THE AGENTS IN THE
SOLICITATION OF PARTICIPANT CONSENTS
Dated June 30, 1999
This Statement is issued in connection with the
Solicitation of Participant Consents by Peter L. Malkin, Anthony
E. Malkin, Scott D. Malkin, Jack K. Feirman, Thomas N. Keltner,
Jr., Mark Labell and Richard A. Shapiro, as the agents (the
"Agents") for the participants (the "Participants") in 60 East
42nd St. Associates ("Associates"). Associates was formed in 1958
to acquire the land and improvements known as 60 East 42nd Street
in New York City (the "Building"), subject to a net operating
lease (the "Lease") to Lincoln Building Associates (the "Lessee").
See Section I. - Background.
The Agents are requesting that the Participants consent
to a program proposed by the Lessee for financing and completing
improvements which the Lessee and the Agents have concluded are
necessary to preserve the Building's physical plant, its
competitive market position, and Associates' long-term investment
return. Under the Lessee's proposal, a substantial portion of the
cost of such improvements and certain other improvements in the
future will be paid from the proceeds of an increase in the fee
mortgage (the "Fee Mortgage"), and the Lessee's basic rent to
Associates will increase to pay the resulting increase in debt
service. This Fee Mortgage financing will spread the improvement
cost and stabilize the amount available for distribution to the
Participants. To induce the Lessee to make the improvements which
are not required by the Lease, the Agents will be authorized to
grant the Lessee options to extend the Lease beyond its current
expiration of 2033 to 2083, and the Agents will be further
authorized to grant additional lease extension rights in the
future for such consideration and upon such terms as the Agents
then deem appropriate for the benefit of Associates.
As attorneys-in-fact for the Participants, the Agents
will implement the program after receiving the Participants'
consent. As part of this program, the Agents will be authorized,
as they deem appropriate for the benefit of Associates from time
to time in the future, to refinance the Fee Mortgage with an
institutional lender and without personal liability for a
principal amount not to exceed $40,000,000 plus refinancing costs.
The proceeds of any increased debt will be applied to the
Property, and any increased debt service will be paid by an
equivalent increase in Basic Rent paid by the Lessee.
It is anticipated that this Statement and the
accompanying form of Consent will be mailed to the Participants on
June 30, 1999. The Solicitation of Consents will terminate 90
days after the date of this letter, unless extended by the Agents,
but in no event later than December 31, 1999. The Agents will
advise all Participants of the Solicitation results not later than
90 days after the termination date, including any extension.
I. BACKGROUND
A. Organization of Associates
Associates is a New York partnership organized in 1958
by Lawrence A. Wien, who served until his death as one of
Associates' partners. Peter L. Malkin continues to serve as a
partner, his sons Anthony E. Malkin and Scott D. Malkin serve as
partners, and other members of Wien & Malkin LLP serve as the
other partners. Each partner acts as the Agent for a group of
Participants under a participating agreement (a "Participating
Agreement").
The terms of all the Participating Agreements are
identical. Participants have the right to approve or disapprove
certain Agent actions, including this financing and lease
extension program. The percentage of Participants required to
approve this proposal is described in Section X. - Terms of
Solicitations of Consents.
B. The Property
The Property consists of 60 East 42nd Street, a 55-story
building constructed in 1930, with a concourse and lower level,
containing approximately 1,093,000 square feet of office space and
23,000 square feet of retail space, located diagonally opposite
Grand Central Terminal on 42nd Street between Park Avenue and
Madison Avenue and including a small light protector building at
301 Madison Avenue (collectively, the "Property" or the
"Building").
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The Building contains retail stores on the street,
concourse and lower levels and approximately 605 office tenants
engaged in a variety of businesses and professions. As of June 1,
1999, the Building was approximately 97% occupied.
C. The Lease
1. Term
The current term of the Lease expires in 2033. If this
program is approved, the Lease will be subject to extension in 25
year increments to 2083 and thereafter for further periods based
upon additional consideration as approved by the Agents in accord
with this Statement.
2. Rent
The Lease requires the Lessee to pay the following rent
for each fiscal year (October 1 through September 30):
a. Basic rent ("Basic Rent") each year equal to the
sum of (i) the annual debt service on the Fee Mortgage and (ii)
$24,000.
b. Overage rent ("Overage Rent") equal to (i) 100% of
the Lessee's net profit from the Property up to $1,053,800
("Additional Rent") and (ii) 50% of the Lessee's remaining net
profit ("Further Additional Rent").
Basic rent is payable monthly and is subject to
adjustment equal to any increase or decrease in Fee Mortgage debt
service on the existing principal amount. Additional Rent is
advanced monthly based on the Lessee's net profit for the prior
fiscal year and then adjusted in the following fiscal year based
upon actual results. Further Additional Rent is payable within 60
days after fiscal year-end.
For the past 10 fiscal years, the Lessee has paid the
full $1,053,800 of Additional Rent plus Further Additional Rent.
For the most recent fiscal year ended September 30, 1998, the
Lessee paid $1,053,800 of Additional Rent plus $1,529,651 of
Further Additional Rent. Although the Lessee is permitted to
deduct accumulated losses from certain prior fiscal years against
advances for Additional Rent, there is currently no accumulated
loss from past fiscal years to be deducted against current or
future payments of Additional Rent. See Section I.F. Financial
Information.
3. Other Material Lease Terms
The Lessee pays all insurance, real estate tax, repair,
maintenance and other operating expenses for the Property. The
Lessee is not required to make capital improvements to the
Property.
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The Lessee has the right to assign the Lease without
Associates' consent, so long as the assignee assumes all Lease
obligations. The Lessee also has the right to surrender the Lease
to Associates on 60 days' notice.
D. Fee Mortgage
The Fee Mortgage balance is currently approximately
$12,000,000, having been last refinanced in 1994. The maximum Fee
Mortgage authorized under this program is $40,000,000 plus
refinancing costs, on the basis that (i) the proceeds of any
increase in the Fee Mortgage shall be applied to improvements and
repairs at the Property and (ii) any increased debt service on the
Fee Mortgage shall be paid by Associates from an equivalent
increase in Basic Rent paid by the Lessee.
Interest payable on the existing Fee Mortgage principal
balance is at the annual rate of 8.85%. The Fee Mortgage matures
October 31, 2004. Based upon preliminary discussions with Morgan
Guaranty Trust Company of New York, trustee for the current holder
of the Fee Mortgage, it is anticipated that for any Fee Mortgage
increase in 1999 the annual interest rate will be about 7.5%, the
debt service will be based on a 25-year amortization schedule, and
the maturity will be approximately five years. The increase in
the Fee Mortgage may be incurred in multiple drawdowns or from
different lenders, in order to enhance borrowing cost efficiency,
and the mortgage may be standing with interest only.
E. Competition
Pursuant to new space leases, the rental rate currently
asked of prospective office tenants at the Building is
approximately $39.00 to $55.00 per square foot (exclusive of
electricity charges). The Building's rents under existing leases
are currently lower than those charged by similar office buildings
of similar age and location.
The Lessee operates the Building free of any federal,
state or local governmental rent regulation. Rents are governed
by existing leases and market conditions.
F. Financial Information
The Participants have received total distributions
representing an annual return on their original cash investment at
rates of approximately 34.5% for 1998, 41.5% for 1997, and 41.3%
for 1996. These percentages were calculated by dividing the cash
payments to the Participants in each year by the Participants'
original $7,000,000 cash investment in the Property. Certain
Participants may have purchased their interests for amounts
different than the original cash investment, and their return on
their investment will thus be different.
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Each monthly installment of Basic Rent is applied to pay
monthly debt service on the Fee Mortgage and basic supervisory
compensation to Wien & Malkin LLP. Additional Rent is applied to
pay monthly distributions to the Participants, and Further
Additional Rent is applied to pay additional distributions to the
Participants, in each case including any required additional
supervisory compensation to Wien & Malkin LLP. See Section I.G. -
Supervisory Services to Associates.
Attached are audited financial statements of Associates
as of December 31, 1996, 1997 and 1998, including in each case the
balance sheets and the related statements of income, partners'
capital and cash flows. Also, See Section
VII. Agents' Discussion and Analysis of Financial Condition and
Results of Operation.
Jacobs Evall & Blumenfeld LLP serves as Associates'
independent public accountants and has performed certain other
financial accounting work for Associates, including tax return
preparation.
G. Supervisory Services to Associates
No Agent receives remuneration from Associates for
serving as Agent. Peter L. Malkin is Chairman and Anthony E.
Malkin is Senior Director of Supervisory Services of Wien & Malkin
LLP. The other Agents are members of Wien & Malkin LLP, except
Scott D. Malkin who has substantial experience in real estate and
has been approved by the Participants as a successor Agent.
Wien & Malkin LLP has acted as supervisor and legal
counsel for each of Associates and the Lessee from inception. A
non-exclusive list of Wien & Malkin LLP's supervisory services to
Associates includes maintaining partnership records, performing
physical inspections of the Property, reviewing insurance
coverage, conducting annual partnership meetings, issuing reports
to the Participants, and administrative oversight of special
transactions such as the proposed program. 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, review of financial statements submitted to
Associates by the Lessee and of audited financial statements and
tax information prepared by Associates' independent certified
public accountants, and distribution of such materials to the
Participants. Wien & Malkin LLP also prepares quarterly, annual
and other periodic filings with the Securities and Exchange
Commission and applicable state authorities.
In consideration of its supervisory services to
Associates, Wien & Malkin LLP receives (i) a basic payment of
$24,000 a year ("Basic Supervisory Compensation") and (ii) an
additional payment of 10% of the cash distributions to
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Participants in any year in excess of 14% on the $7,000,000 cash
investment ("Additional Supervisory Compensation"). Wien &
Malkin LLP pays all disbursements relating to Wien & Malkin LLP's
ordinary services to Associates, including accounting and other
professional fees, filing and search fees, document preparation,
and mailing costs. For the year ended December 31, 1998,
Associates paid Wien & Malkin LLP Basic Supervisory Compensation
of $24,000 and Additional Supervisory Compensation of $159,506.
II. OPERATIONS MATTERS
A. Proposed Improvement Program
The improvements proposed to be completed after December
31, 1998, are shown in Exhibit A and are estimated to cost
approximately $22,800,000 over approximately two to three years.
Each item has been recommended by Wien & Malkin LLP supervisory
staff based upon a program prepared by the Lessee the design,
engineering and bidding of which has been, for the great majority,
fully concluded by expert consultants and specially hired in-house
personnel. Included in the budget are: (a) $4,000,000 for
replacement of all Building windows, (b) $4,200,000 for public
corridor and elevator lobby upgrades, (c) $3,200,000 for new
public bathrooms, (d) $2,700,000 for elevator system
modernization, (e) $625,000 for new elevator cabs, (f) $385,000
for new concierge desk and new card key and security system, (g)
$1,550,000 for roof and parapet replacement and repairs, (h)
$2,350,000 for water riser replacement, (i) $750,000 for facade
restoration, (j) $800,000 for new marketing center, new conference
center, and upgrading of the Building law library, and (k)
$100,000 for lobby retail arcade upgrades. The balance will be
available for contingencies discovered in the field and
improvement of tenant spaces.
B. Financing
The $22,800,000 estimated cost of the improvements over
approximately two to three years will be funded substantially
through an increase in the Fee Mortgage (from the current
approximately $12,000,000). Associates will own the improvements
paid from the Fee Mortgage proceeds and will pay the increased
debt service from an equivalent increase in Basic Rent paid to
Associates by the Lessee. The increased Basic Rent and cash
payments for improvements will be deducted in computing Additional
Rent. Assuming that $1,053,800 of Additional Rent continues to be
paid each year without reduction for funding improvements, the new
debt service and improvement costs will be borne equally by
Associates and the Lessee and will be spread through mortgage
renewals over many years, thus stabilizing distributions to
Participants.
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Neither Associates nor the Participants will be
personally liable for payment of the Fee Mortgage. To minimize
interest charges, the Agents will seek the advance of the Fee
Mortgage increase in installments as the work proceeds. The
maximum Fee Mortgage debt authorized by the program will be
$40,000,000, and the actual amount will depend upon future
improvements and repairs at the Property and funding available
from cash flow.
The Fee Mortgage increase, as advanced, will be held by
Associates and applied to the improvement program as expended by
the Lessee. For purposes of determining Overage 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 Lessee.
If the Lessee were to pay for the improvements without
such financing, the full cost would be currently deducted against
Overage Rent. 100% of the distributions to Participants is derived
from Overage Rent. If the full cost were deducted as spent
against Overage Rent, distributions to Participants would be
significantly reduced, if not eliminated, during the next several
years. The proposed Fee Mortgage financing will instead spread
the improvement cost through successive refinancings over a longer
term and stabilize the amount of Overage Rent payable by the
Lessee for distribution to Participants.
C. Basic Rent
Currently, Basic Rent is $1,087,842 a year, to be
adjusted to reflect any increase or decrease in debt service on
the existing principal amount of the Fee Mortgage. Under the
program proposed in this Statement, the Basic Rent payable to
Associates by the Lessee will increase to pay all debt service on
the increase in the Fee Mortgage.
Assuming an increase in the Fee Mortgage from
$12,000,000 to $34,000,000 with interest at 7.5% on the additional
$22,000,000 and with 25 year amortization, Basic Rent will
increase annually by $1,950,937 to pay debt service on the Fee
Mortgage increase, and Further Additional Rent will decrease by
one-half of that amount, prior to any increase in Further
Additional Rent due to increased revenue resulting from the
improvements.
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D. Lease Modification
The Lease will be modified as required to confirm the
increase in Basic Rent. The Agents will have discretionary
authority to grant the Lessee lease extension options in the
future when deemed appropriate by the Agents for the benefit of
Associates. When the Lessee completes $22,800,000 of improvements
substantially in accord with this program, the Agents will grant
two 25-year extensions to 2083.
The granting of lease extension options to 2083 will
trigger a New York State Transfer Tax of approximately $300,000.
These transfer taxes would typically be paid by Associates as the
transferor, but the Lessee has agreed that the transfer taxes will
be funded from the Fee Mortgage increase to be serviced through
the Lessee's increased Basic Rent.
In concluding that the Lessee's completion of the
improvement program justifies the Lease extension option, the
Agents have consulted with 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 Lessee. Brown Harris concluded that
there is a positive net present value for each of Associates and
the Lessee arising from the program. Brown Harris is independent
of Associates, the Agents, the Lessee, and Wien & Malkin LLP. A
copy of its report is enclosed.
E. Solicitation and Program Expenses
The expenses for the consent solicitation, lease
amendment, refinancing, transfer and recording taxes, legal fees,
and related costs will be paid from the Fee Mortgage increase
which is serviced by the Lessee's Basic Rent increase and
deducted in computing Overage Rent. Wien & Malkin LLP will
represent as counsel Associates and the Lessee in connection with
this program at standard hourly rates, and Associates will
indemnify Wien & Malkin LLP and the Agents as well as their
advisers and affiliates and the managing agent against any claim
or expense arising in connection with the program.
III. CERTAIN EFFECTS OF THE IMPROVEMENT AND FINANCING PROGRAM
A. Generally
Payment for the improvement program (whether by
repayment of the Fee Mortgage increase through increased Basic
Rent or direct payment for services and materials) is deductible
in computing Overage Rent. Therefore, each of Associates and the
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 Lessee will have contributed half the cost.
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The Agents believe there are good prospects that
increases in rental income from tenants will offset and ultimately
be greater than the increases in the Lessee's expense for Basic
Rent over the course of the program, thus moderating or avoiding
any reduction of Overage Rent and distributions.
The improvement and financing program will have no
direct effect on the Agents as such. There is no change in the
Basic Supervisory Fee or the formula under which Wien & Malkin LLP
receives Additional Supervisory Compensation, but such
compensation will vary in proportion to any variation in Overage
Rent. See Section V. - Potential Conflicts of Interest.
B. Tax Consequences
The improvements paid through the Fee Mortgage increase
shall be made by the Lessee as agent for Associates and shall be
the property of Associates. The applicable income tax deductions
for depreciation shall benefit the 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. If the proposed Fee Mortgage terms require
amortization payments through successive refinancings over a 25-
year period, the Participants will receive a timing benefit
because depreciation deductions will be available during the early
years of debt repayment when depreciation exceeds loan
amortization. Accordingly, there is a tax benefit to the
Participants as a result of the improvement and financing program.
IV. RECOMMENDATIONS
The Agents recommend that the Participants approve the
improvement, financing and lease modification program, for the
following reasons:
-- The improvements will attract more
creditworthy tenants at higher rental rates.
- The improvements are needed to meet the
physical and marketing requirements of the Property
and will enhance its value.
- The Fee Mortgage financing of the improvements
will spread their cost and stabilize distributions
to Participants. In the absence of financing and
lease extensions, the Agents believe that the
Lessee (a) will not undertake all of the
improvements so the opportunity to improve and
protect profit and distributions to Participants
will be diminished and (b) will undertake certain
improvements solely with current cash flow, thereby
significantly reducing distributions to
Participants during the next several years.
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The data and background materials regarding this
financing and improvement program are on file in the office of
Wien & Malkin LLP and are available for review by Participants.
For appointments to inspect and copy such data, and for copies of
such data by mail, call Stanley Katzman, Esq. at (212) 687-8700.
V. POTENTIAL CONFLICTS OF INTEREST
A. Certain Ownership of Participations
As of June 1, 1999, the Agents beneficially owned,
directly or indirectly, the following Participations:
Name and Address Amount of Percent
of Beneficial Beneficial of
Title of Class Owners Ownership Class
Participations Peter L. Malkin $72,500 1.036%
in Partner 60 East 42nd Street
Interest New York, NY 10165
Anthony E. Malkin 25,833 .369%
60 East 42nd Street
New York, NY 10165
Scott D. Malkin 33,334 .476%
35 Mason Street
Greenwich, CT 06830
Thomas N. Keltner, Jr. 2,500 .036%
60 East 42nd Street
New York, NY 10165
Anthony E. Malkin owned of record as co-trustee an
aggregate of $5,000 of Participations. Anthony E. Malkin disclaims
any beneficial ownership of such Participations.
Members of the family of Peter L. Malkin, Anthony E.
Malkin and Scott D. Malkin, or trusts for their benefit, owned of
record or beneficially $85,714 of other Participations. Messrs.
Malkin disclaim any beneficial ownership of such Participations.
No other Agent owns a Participation.
B. Relationships with the Lessee
As of June 1, 1999, record and beneficial ownership of
7.5% of the Lessee is held by Peter L. Malkin and members of his
family. Peter L. Malkin owns of record as trustee, co-trustee or
agent an aggregate of 12.1% of the Lessee and disclaims any
beneficial ownership therein. Certain actions by the Lessee
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require approval of no less than 60% of the partner interests in
the Lessee. The Agents have been advised that the requisite
partners in the Lessee have approved the improvement, financing
and lease modification program on the condition that the program
is approved by the Participants.
Wien & Malkin LLP receives $180,000 annually from the
Lessee for acting as supervisor of the Lessee's partnership
agreement and additional supervisory compensation of 10% of
distributions of cash profit of the Lessee in excess of $400,000
per annum. Wien & Malkin LLP will serve as counsel to Associates
and the Lessee in connection with this program at standard hourly
rates.
The Agents and Wien & Malkin LLP as well as their
advisers and affiliates and the managing agent are being
indemnified by the Lessee and Associates in connection with all
items of the improvement, financing and lease extension program,
including this solicitation.
C. Third Parties
Brown Harris has been retained by the Agents as a
consultant and will receive a fee of less than $35,000 whether or
not the improvement, and financing and lease modification program
is approved. Brown Harris is an independent company, not related
to the Agents, Wien & Malkin LLP, Associates, or the Lessee.
VI. FEES AND EXPENSES
All fees and expenses relating to this solicitation and
the Fee Mortgage increase, including all independent consultants,
will be paid from the Fee Mortgage increase which is serviced by
the Lessee's Basic Rent increase and deducted in determining
Overage Rent.
VII. AGENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
For 1998 for each original $10,000 Participation,
Associates made regular monthly distributions from Additional Rent
aggregating $1,494 plus additional distributions from Further
Additional Rent aggregating $1,956. See Section I.C.2. - The
Lease.
The following summarizes certain material factors
affecting Associates' results of operations for the two years
ended December 31, 1998:
a. Total income decreased for 1998 compared with
the prior year, attributable to decreased
Additional Rent.
b. Total income increased for 1997 compared with
the prior year, attributable to increased
Additional Rent.
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VIII. LIQUIDITY AND CAPITAL RESOURCES
There has been no significant change in Associates'
liquidity for the twelve-month period ended December 31, 1998, as
compared with the twelve-month period ended December 31, 1997.
IX. INFLATION
Inflationary trends in the economy may impact the
operations of the Lessee, and therefore, Overage Rent.
Historically, inflation generally has resulted in an increase in
Overage Rent.
X. TERMS OF SOLICITATIONS OF CONSENTS
Each Agent acts for Participants owning $1,000,000 of
the original $7,000,000 investment in Associates. On June 1,
1999, no person held Participations aggregating more than 5% of
the total outstanding Participations.
On June 1, 1999, there were about 750 Participants
holding Participations. Each Participant's voting percentage in
his or her group is determined by a fraction, whose numerator is
the face amount of the Participation and denominator is the
group's original $1,000,000 investment in Associates.
Each Participating Agreement requires 100% consent for
approval of the proposals made by the Agents in this Statement,
subject to the Participation purchase arrangement described below.
Each Participating Agreement states that, if owners of
90% of the Participations in any Agent's group consent, the Agent
or his 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 Agent's mailing of the request
therefor. 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 as of June 1, 1999, the
purchase price will be $100.
If 90% or more of the Participants in an Agent's group
consent to any element of the improvement, financing and lease
modification program, each Agent (or his designee) presently
intends to purchase the interest of any non-consenting
Participants. Any Participant whose Participation is purchased by
an Agent (or his designee) will not receive any further Overage
Rent paid in respect of the year of purchase or thereafter.
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The solicitation of consents will terminate 90 days
after the date of this Statement but may be extended by the Agents
through December 31, 1999. There is no record date establishing
the identity of the Participants entitled to vote for the program.
Holders of Participations as of June 1, 1999 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,
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 described above.
Wien & Malkin LLP has been authorized by the Agents to
solicit the consents of Participants by mail, telecopier,
telephone and telegram after the mailing of this Statement.
Consent Forms which are signed, dated and returned without a
choice indicated will be deemed to constitute a binding consent.
Any consent (including a deemed consent) is irrevocable.
Participations are not traded on an established
securities market, nor are they readily tradable on a secondary or
equivalent market. Based on Associates' transfer records,
Participations are sold by holders from time to time in privately
negotiated transactions, and, in some instances, Associates is
unaware of the prices at which such transactions occur. However,
Associates has been advised that the known price for private sales
during the past year has been $20,000 per $10,000 original
investment.
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Exhibit A
Lincoln Building 60 East 42nd Street
Building Improvement Program
Project/Item Budget
Elevator system modernization $2,700,000
Elevator cab replacement 625,000
New concierge desk 285,000
Public corridors and elevator lobbies upgrades 4,234,000
New public bathrooms 3,196,000
Lobby retail arcade upgrades, new
awning & displays 95,000
Facade renovation 750,000
New marketing center 210,000
New conference center 200,000
Building law library upgrades 375,000
New cardkey & security system 100,000
Roof & parapet replacements 1,545,000
Water riser replacement 2,353,000
New stairwell lighting & signage 150,000
Misc. electrical & mechanical system upgrades 310,000
Window replacement 4,000,000
Contingency 1,622,000
___________
Total $22,750,000
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CONSENT
60 EAST 42nd ST. ASSOCIATES
As a Participant in 60 East 42nd St. Associates, the
undersigned hereby takes the following action in response to the
letter from Peter L. Malkin to Participants in 60 East 42nd St.
Associates dated June 30, 1999 and the accompanying Statement by
the Agents in the Solicitation of Participant Consents
(collectively, the "Statement"):
1. Proposed Improvement, Financing and Lease Modification
CONSENT WITHHOLD CONSENT
______ Consent to _______ Disapprove of
and Approve of
_______ Abstain from
Consenting to
the program for financing and completing approximately $22,800,000
of improvements and modifying the lease to contain extension
options to 2083, all as described in the Statement.
2. Discretionary Refinancing Authority of the Agents
CONSENT WITHHOLD CONSENT
______ Consent to _______ Disapprove of
and Approve of
_______ Abstain from
Consenting to
giving present and successor Agents discretionary authority to
refinance the Fee Mortgage for a principal amount not to exceed
$40,000,000 plus refinancing costs, with an institutional lender,
non-recourse, from time to time in the future, all as described in
the Statement.
3. Discretionary Lease Modification Authority of the Agents
CONSENT WITHHOLD CONSENT
______ Consent to _______ Disapprove of
and Approve of
_______ Abstain from
Consenting to
-15-
giving present and successor Agents discretionary authority to
grant the Lessee lease extension options from time to time in the
future for such consideration and on such terms as deemed
appropriate by the Agents for the benefit of Associates, all as
described in the Statement.
THE AGENTS RECOMMEND YOUR CONSENT TO ALL FOREGOING ITEMS. A
PARTICIPANT WHO ABSTAINS IS TREATED THE SAME AS A PARTICIPANT WHO
DOES NOT CONSENT.
Dated: ______________________, 1999
___________________________
Signature
PLEASE SIGN, DATE AND PROMPTLY RETURN THIS CONSENT.
ONCE GIVEN, CONSENT MAY NOT BE REVOKED.
IF THIS FORM IS SIGNED, DATED AND RETURNED WITHOUT A CHOICE
INDICATED, THE PARTICIPANT SIGNING SAME SHALL BE DEEMED
TO HAVE CONSENTED.
-16-
[LETTERHEARD OF
JACOBS EVALL & BLUMENFELD LLP]
INDEPENDENT ACCOUNTANTS' REPORT
To the participants in 60 East 42nd St. Associates (a Partnership):
We have audited the accompanying balance sheet of 60 East 42nd St.
Associates ("Associates") as of December 31, 1998, and the related
statements of income, partners' capital (deficit) and cash flows for
the year then ended. These financial statements are the responsibility
of Associates' management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Associates
as of December 31, 1998, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted
accounting principles.
Jacobs Evall & Blumenfeld LLP
Certified Public Accountants
420 Lexington Avenue
New York, N. Y. 10170
January 29, 1999
60 EAST 42ND ST. ASSOCIATES
BALANCE SHEET
DECEMBER 31, 1998
Assets
Cash in Fleet Bank $ 677
Cash in distribution account held
by Wien & Malkin LLP 87,202
87,879
Real estate at 60 East 42nd Street and
301 Madison Avenue, New York City:
Buildings $16,960,000
Less: Accumulated depreciation 16,960,000 -
Building improvements 1,574,135
Less: Accumulated depreciation 1,574,135 -
Land 7,240,000
Mortgage refinancing costs 249,522
Less: Accumulated amortization 105,009 144,513
Total assets $ 7,472,392
Liabilities and partners' capital (deficit)
Liabilities:
First mortgage $12,020,814
Partners' capital (deficit) (4,548,422)
Total liabilities and partners' capital (deficit) $ 7,472,392
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
Income:
Basic rent income $1,087,842
Additional rent income 2,583,451
Total income 3,671,293
Expenses:
Interest on first mortgage $1,063,842
Supervisory services 183,506
Amortization of mortgage refinancing costs 24,776
Professional fees 8,393
Total expenses 1,280,517
Net income $2,390,776
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
YEAR ENDED DECEMBER 31, 1998
Partners' capital (deficit), January 1, 1998 $(4,523,646)
Add, Net income for the year ended
December 31, 1998 2,390,776
(2,132,870)
Less, Distributions:
Monthly distributions, January 1,
1998 through December 31, 1998 $1,046,420
Distribution on November 30, 1998 of
balance of additional rent for the
lease year ended September 30, 1998 1,369,132
2,415,552
Partners' capital (deficit),
December 31, 1998 $(4,548,422)
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
Cash flows from operating activities
Net income $ 2,390,776
Adjustments to reconcile net income to
cash provided by operating activities:
Amortization of mortgage refinancing costs 24,776
Net cash provided by operating activities 2,415,552
Cash flows from financing activities
Monthly distributions to participants (1,046,420)
Distribution on November 30, 1998 of
balance of additional rent for the
lease year ended September 30, 1998 (1,369,132)
Net cash used in financing activities (2,415,552)
Net change in cash -
Cash at beginning of year 87,879
Cash at end of year $ 87,879
Supplemental disclosure of cash flows information
Cash paid in 1998 for:
Interest $ 1,063,842
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Business Activity
60 East 42nd St. Associates ("Associates") is a general partnership
which owns commercial property at 60 East 42nd Street and 301
Madison Avenue, New York, N.Y. The property is net leased to
Lincoln Building Associates.
2. Summary of Significant Accounting Policies
Use of estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management often 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.
Land, buildings, building improvements and depreciation:
Land, buildings and building improvements are stated at cost.
Depreciation was provided on the straight-line method over the
estimated useful life of the buildings, 26 years from October 1,
1958, and the estimated useful life of the building improvements,
20 years, 5 months from May 1, 1964. The buildings and building
improvements are fully depreciated.
Mortgage refinancing costs and amortization:
Mortgage refinancing costs of $249,522, incurred in connection
with the October 6, 1994 refinancing of the first mortgage, are
being amortized ratably over the term of the mortgage, from
October 6, 1994 through October 31, 2004.
3. First Mortgage Payable
On October 6, 1994, a first mortgage was placed on the property with
Morgan Guaranty Trust Company of New York, as trustee of a pension
trust, in the amount of $12,020,814. The first mortgage requires
constant equal monthly payments totalling $1,063,842 per annum for
interest only, at the rate of 8.85% per annum, and matures on October
31, 2004. The real estate is pledged as collateral for the first
mortgage.
60 EAST 42ND ST. ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
3. First Mortgage Payable (continued)
Required principal payments on the first mortgage are as follows:
1999 through 2003 - 0 -
October 31, 2004 $12,020,814
4. Rent Income and Related Party Transactions
On January 4, 1982, Lincoln Building Associates (the lessee)
exercised its option to renew the lease for an additional period
of 25 years, and the lease period now extends through September
30, 2008. The lease includes an option to renew for one additional
period of 25 years through September 30, 2033.
Effective October 6, 1994, the lease, as modified, provides for
annual basic rent of $1,087,842, which is equal to the sum of
$1,063,842, the constant annual mortgage charges, plus $24,000.
In the event of a mortgage refinancing, unless there is an increase
in the mortgage balance, the annual basic rent will be modified and
will be equal to the sum of $24,000 plus an amount equal to the
revised mortgage charges. In the event that such mortgage refinancing
results in an increase in the amount of outstanding principal balance
of the mortgage, the basic rent shall be equal to $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 the refinancing.
The lease, as modified, also provides for additional rent, as follows:
1. Additional rent equal to the first $1,053,800 of the lessee's
net operating income, as defined, in each lease year.
2. Further additional rent equal to 50% of the lessee's remaining
net operating income, as defined, in each lease year.
For the lease year ended September 30, 1998,the lessee reported
additional rent of $2,583,451 based on an operating profit of
$4,113,103 subject to additional rent.
Additional rent is billed to and advanced by the lessee in equal monthly
installments of $87,817. While it is not practicable to estimate that
portion of additional rent for the lease year ending on the ensuing
September 30th which would be allocable to the current three month
period ending December 31st, Associates' policy is to include in its
income each year the advances of additional rent income received from
October 1st to December 31st.
No other additional rent is accrued by Associates for the period between
the end of the lessee's lease year ending September 30th and the end of
Associates' fiscal year ending December 31st.
A partner in Associates is also a partner in the lessee.
60 EAST 42ND ST. ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
5. Supervisory Services and Related Party Transactions
Payments for supervisory services, including disbursements and cost
of accounting services, are made to the firm of Wien & Malkin LLP.
A member of that firm is a partner in Associates.
6. Professional Fees and Related Party Transactions
Payments for professional fees, including disbursements, are made
to the firm of Wien & Malkin LLP, a related party.
7. Income Taxes
Net income is computed without regard to income tax expense since
Associates does not pay a tax on its income; instead, any such taxes
are paid by the participants in their individual capacities.
8. Concentration of Credit Risk
Associates maintains cash balances in a bank and in a distribution
account held by Wien & Malkin LLP. The bank balance is insured by
the Federal Deposit Insurance Corporation up to $100,000, and at
December 31, 1998 was completely insured. The distribution account
held by Wien & Malkin LLP is not insured. The funds held in the
distribution account were paid to the participants on January 1,
1999.
[LETTERHEARD OF
JACOBS EVALL & BLUMENFELD LLP
CERTIFIED PUBLIC ACCOUNTANTS]
INDEPENDENT ACCOUNTANTS' REPORT
To the participants in 60 East 42nd St. Associates (a Partnership):
We have audited the accompanying balance sheet of 60 East 42nd St. Associates
("Associates") as of December 31, 1997, and the related statements of income,
partners' capital (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of Associates' management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Associates as of December
31, 1997, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
Jacobs Evall & Blumenfeld LLP
Certified Public Accountants
420 Lexington Avenue
New York, N. Y. 10170
January 31, 1998
60 EAST 42ND ST. ASSOCIATES
BALANCE SHEET
DECEMBER 31, 1997
Assets
Cash in Fleet Bank $ 677
Cash in distribution account held
by Wien & Malkin LLP 87,202
87,879
Real estate at 60 East 42nd Street and
301 Madison Avenue, New York City:
Buildings $16,960,000
Less: Accumulated depreciation 16,960,000 -
Building improvements 1,574,135
Less: Accumulated depreciation 1,574,135 -
Land 7,240,000
Mortgage refinancing costs 249,522
Less: Accumulated amortization 80,233 169,289
Total assets $ 7,497,168
Liabilities and partners' capital (deficit)
Liabilities:
First mortgage $12,020,814
Partners' capital (deficit) (4,523,646)
Total liabilities and partners' capital (deficit) $ 7,497,168
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
Income:
Basic rent income $1,087,842
Additional rent income 3,163,880
Total income 4,251,722
Expenses:
Interest on first mortgage $1,063,842
Supervisory services 237,634
Amortization of mortgage
refinancing costs 24,776
Professional fees 47,545
Total expenses 1,373,797
Net income $2,877,925
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
YEAR ENDED DECEMBER 31, 1997
Partners' capital (deficit), January 1, 1997 $(4,498,870)
Add, Net income for the year ended
December 31, 1997 2,877,925
(1,620,945)
Less, Distributions:
Monthly distributions, January 1,
1997 through December 31, 1997 $1,046,420
Distribution on December 2, 1997 of
balance of additional rent for the
lease year ended September 30, 1997 1,856,281
2,902,701
Partners' capital (deficit),
December 31, 1997 $(4,523,646)
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
Cash flows from operating activities
Net income $ 2,877,925
Adjustments to reconcile net income to
cash provided by operating activities:
Amortization of mortgage refinancing costs 24,776
Net cash provided by operating activities 2,902,701
Cash flows from financing activities
Monthly distributions to participants (1,046,420)
Distribution on December 2, 1997 of
balance of additional rent for the
lease year ended September 30, 1997 (1,856,281)
Net cash used in financing activities (2,902,701)
Net change in cash -
Cash at beginning of year 87,879
Cash at end of year $ 87,879
Supplemental disclosure of cash flows information
Cash paid in 1997 for:
Interest $ 1,063,842
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. Business Activity
60 East 42nd St. Associates ("Associates") is a general partnership
which owns commercial property at 60 East 42nd Street and 301 Madison
Avenue, New York, N.Y. The property is net leased to Lincoln Building
Associates.
2. Summary of Significant Accounting Policies
Use of estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management often 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.
Land, buildings, building improvements and depreciation:
Land, buildings and building improvements are stated at cost.
Depreciation was provided on the straight-line method over the
estimated useful life of the buildings, 26 years from October 1,
1958, and the estimated useful life of the building improvements,
20 years, 5 months from May 1, 1964. The buildings and building
improvements are fully depreciated.
Mortgage refinancing costs and amortization:
Mortgage refinancing costs of $249,522, incurred in connection with
the October 6, 1994 refinancing of the first mortgage, are being
amortized ratably over the term of the mortgage, from October 6,
1994 through October 31, 2004.
3. First Mortgage Payable
On October 6, 1994, a first mortgage was placed on the property with
Morgan Guaranty Trust Company of New York, as trustee of a pension
trust, in the amount of $12,020,814. The first mortgage requires
constant equal monthly payments
60 EAST 42ND ST. ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
3. First Mortgage Payable (continued)
totalling $1,063,842 per annum for interest only, at the rate of 8.85%
per annum, and matures on October 31, 2004. The real estate is pledged
as collateral for the first mortgage.
Required principal payments on the first mortgage are as follows:
1998 through 2003 - 0 -
October 31, 2004 $12,020,814
4. Rent Income and Related Party Transactions
On January 4, 1982, Lincoln Building Associates (the lessee) exercised
its option to renew the lease for an additional period of 25 years, and
the lease period now extends through September 30, 2008. The lease
includes an option to renew for one additional period of 25 years
through September 30, 2033.
Effective October 6, 1994, the lease as modified provides for annual
basic rent of $1,087,842, which is equal to the sum of $1,063,842, the
constant annual mortgage charges, plus $24,000. In the event of a
mortgage refinancing, unless there is an increase in the mortgage
balance, the annual basic rent will be modified and will be equal to
the sum of $24,000 plus an amount equal to the revised mortgage
charges. In the event that such mortgage refinancing results in an
increase in the amount of outstanding principal balance of the
mortgage, the basic rent shall be equal to $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 the refinancing.
The lease, as modified, also provides for additional rent, as follows:
1. Additional rent equal to the first $1,053,800 of the lessee's
net operating income, as defined, in each lease year.
2. Further additional rent equal to 50% of the lessee's remaining
net operating income, as defined, in each lease year.
60 EAST 42ND ST. ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Rent Income and Related Party Transactions (continued)
For the lease year ended September 30, 1997, there was additional
rent of $3,163,880 based on an operating profit of $5,273,959
subject to additional rent.
Additional rent is billed to and advanced by the lessee in equal
monthly installments of $87,817. While it is not practicable to
estimate that portion of additional rent of the lease year ending
on the ensuing September 30th which would be allocable to the current
three month period ending December 31st, Associates' policy is to
include in its income each year the advances of additional rent
income received from October 1st to December 31st.
No other additional rent is accrued by Associates for the period
between the end of the lessee's lease year ending September 30th and
the end of Associates' fiscal year ending December 31st.
A partner in Associates is also a partner in the lessee.
5. Supervisory Services and Related Party Transactions
Payments for supervisory services, including disbursements and cost of
accounting services, are made to the firm of Wien & Malkin LLP. Some
members of that firm are partners in Associates.
6. Professional Fees and Related Party Transactions
Payments for professional fees, including disbursements, are made to
the firm of Wien & Malkin LLP, a related party.
7. Income Taxes
Net income is computed without regard to income tax expense since
Associates does not pay a tax on its income; instead, any such taxes
are paid by the participants in their individual capacities.
60 EAST 42ND ST. ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
8. Concentration of Credit Risk
Associates maintains cash balances in a bank and in a distribution
account held by Wien & Malkin LLP. The bank balance is insured by
the Federal Deposit Insurance Corporation up to $100,000, and at
December 31, 1997 was completely insured. The distribution account
held by Wien & Malkin LLP is not insured. The funds held in the
distribution account were paid to the participants on January 1,
1998.
[LETTERHEAD OF
JACOBS EVALL & BLUMENFELD
CERTIFIED PUBLIC ACCOUNTANTS]
INDEPENDENT ACCOUNTANTS' REPORT
To the participants in 60 East 42nd St. Associates (a Partnership):
We have audited the accompanying balance sheet of 60 East 42nd St. Associates
("Associates") as of December 31, 1996, and the related statements of income,
partners' capital (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of Associates' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Associates as of December 31,
1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Jacobs Evall & Blumenfeld LLP
Certified Public Accountants
420 Lexington Avenue
New York, N. Y. 10170
January 23, 1997
60 EAST 42ND ST. ASSOCIATES
BALANCE SHEET
DECEMBER 31, 1996
Assets
Cash in Fleet Bank $ 677
Cash in distribution account held
by Wien, Malkin & Bettex LLP 87,202
87,879
Real estate at 60 East 42nd Street and
301 Madison Avenue, New York City:
Buildings $16,960,000
Less: Accumulated depreciation 16,960,000 -
Building improvements 1,574,135
Less: Accumulated depreciation 1,574,135 -
Land 7,240,000
Mortgage refinancing costs 249,522
Less: Accumulated amortization 55,457 194,065
Total assets $ 7,521,944
Liabilities and partners' capital (deficit)
Liabilities:
First mortgage $12,020,814
Partners' capital (deficit) (4,498,870)
Total liabilities and partners' capital (deficit) $ 7,521,944
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
Income:
Basic rent income $1,087,842
Additional rent income 3,105,275
Total income 4,193,117
Expenses:
Interest on first mortgage $1,063,842
Supervisory services 236,528
Amortization of mortgage refinancing costs 24,776
Total expenses 1,325,146
Net income $2,867,971
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
YEAR ENDED DECEMBER 31, 1996
Partners' capital (deficit), January 1, 1996 $(4,474,094)
Add, Net income for the year ended
December 31, 1996 2,867,971
(1,606,123)
Less, Distributions:
Monthly distributions, January 1,
1996 through December 31, 1996 $1,046,420
Distribution on November 30, 1996 of
balance of additional rent for the
lease year ended September 30, 1996 1,846,327
2,892,747
Partners' capital (deficit),
December 31, 1996 $(4,498,870)
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
Cash flows from operating activities
Net income $ 2,867,971
Adjustments to reconcile net income to
cash provided by operating activities:
Amortization of mortgage refinancing costs 24,776
Net cash provided by operating activities 2,892,747
Cash flows from financing activities
Monthly distributions to participants (1,046,420)
Distribution on November 30, 1996 of
balance of additional rent for the
lease year ended September 30, 1996 (1,846,327)
Net cash used in financing activities (2,892,747)
Net change in cash -
Cash at beginning of year 87,879
Cash at end of year $ 87,879
Supplemental disclosure of cash flows information
Cash paid in 1996 for:
Interest $ 1,063,842
See accompanying notes to financial statements.
60 EAST 42ND ST. ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Business Activity
60 East 42nd St. Associates ("Associates") is a general partnership which
owns commercial property at 60 East 42nd Street and 301 Madison Avenue, New
York, N.Y. The property is net leased to Lincoln Building Associates.
2. Summary of Significant Accounting Policies
Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management often 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.
Land, buildings, building improvements and depreciation:
Land, buildings and building improvements are stated at cost.
Depreciation was provided on the straight-line method over the estimated
useful life of the buildings, 26 years from October 1, 1958, and the
estimated useful life of the building improvements, 20 years, 5 months
from May 1, 1964. The buildings and building improvements are fully
depreciated.
Mortgage refinancing costs and amortization:
Mortgage refinancing costs of $249,522, incurred in connection with the
October 6, 1994 refinancing of the first mortgage, are being amortized
ratably over the term of the mortgage, from October 6, 1994 through
October 31, 2004.
3. First Mortgage Payable
On October 6, 1994, a first mortgage was placed on the property with Morgan
Guaranty Trust Company of New York, as trustee of a pension trust, in the
amount of $12,020,814. The first mortgage requires constant equal monthly
payments
60 EAST 42ND ST. ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
3. First Mortgage Payable (continued)
totalling $1,063,842 per annum for interest only, at the rate of 8.85% per
annum,and matures on October 31, 2004. The real estate is pledged as
collateral for the first mortgage.
Required principal payments on the first mortgage are as follows:
1996 through 2003 - 0 -
October 31, 2004 $12,020,814
4. Rent Income and Related Party Transactions
On January 4, 1982, Lincoln Building Associates exercised its option to
renew the lease for an additional period of 25 years, and the lease period
now extends through September 30, 2008. The lease includes an option to
renew for one additional period of 25 years through September 30, 2033.
Effective April 1, 1979, the lease was modified to provide for annual basic
rent of $1,255,194 through September 30, 1983, and any renewal term of the
lease, or until such time that the first mortgage was refinanced. In the
event of such mortgage refinancing, unless there is an increase in the
mortgage balance, the annual basic rent will be modified and will be equal
to the sum of $24,000 plus an amount equal to the revised mortgage charges.
In the event that such mortgage refinancing results in an increase in the
amount of outstanding principal balance of the mortgage, the basic rent
shall be equal to $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 the refinancing.
Effective October 6, 1994, the annual basic rent is $1,087,842, which is
equal to the sum of $1,063,842, the constant annual mortgage charges, plus
$24,000.
The lease, as modified, also provides for additional rent, as follows:
1. Additional rent equal to the first $1,053,800 of the lessee's net
operating income, as defined, in each lease year.
2. Further additional rent equal to 50% of the lessee's remaining net
operating income, as defined, in each lease year.
60 EAST 42ND ST. ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Rent Income and Related Party Transactions (continued)
For the lease year ended September 30, 1996, there was additional rent of
$3,105,275 based on an operating profit of $5,156,749 subject to additional
rent.
Additional rent is billed to and advanced by the lessee in equal monthly
installments of $87,817. While it is not practicable to estimate that
portion of additional rent of the lease year ending on the ensuing September
30th which would be allocable to the current three month period ending
December 31st, Associates' policy is to include in its income each year the
advances of additional rent income received from October 1st to December
31st.
No other additional rent is accrued by Associates for the period between the
end of the lessee's lease year ending September 30th and the end of
Associates' fiscal year ending December 31st.
A partner in Associates is also a partner in the lessee.
5. Supervisory Services and Related Party Transactions
Payments for supervisory services, including disbursements and cost of
accounting services, are made to the firm of Wien, Malkin & Bettex LLP.
Some members of that firm are partners in Associates.
6. Income Taxes
Net income is computed without regard to income tax expense since Associates
does not pay a tax on its income; instead, any such taxes are paid by the
participants in their individual capacities.
7. Concentration of Credit Risk
Associates maintains cash balances in a bank and in a distribution account
held by Wien, Malkin & Bettex LLP. The bank balance is insured by the
Federal Deposit Insurance Corporation up to $100,000, and at December 31,
1996 was completely insured. The distribution account held by Wien, Malkin
& Bettex LLP is not insured. The funds held in the distribution account
were paid to the participants on January 1, 1997.
[
LETTERHEARD OF BROWN HARRIS STEVENS]
FAIRNESS OPINION INVOLVING:
THE LINCOLN BUILDING
60 EAST 42ND STREET
NEW YORK, NEW YORK
PREPARED FOR:
WIEN & MALKIN LLP
60 EAST 42ND STREET
NEW YORK, NEW YORK 10165
ATTENTION: PETER L. MALKIN, ESQ.
PREPARED BY:
BROWN HARRIS STEVENS
APPRAISAL & CONSULTING, LLC
770 LEXINGTON AVENUE
NEW YORK, NEW YORK 10021
TABLE OF CONTENTS
ITEM PAGE
Summary of Report ................................................ 1
Capital Improvement Program; Financing............................ 2
Summary of Analyses Completed..................................... 4
Definitions; Discount Rates....................................... 4
Property Description.............................................. 4
Grand Central Area................................................ 5
Terms of the Master Lease and Proposed Lease Extension............ 6
Historical Financial Results...................................... 7
Base Case Scenario - Assuming The Capital Improvement Program
and No Lease Extension.......................................... 7
Proposed Scenario - Assuming The Capital Improvement Program Is
Undertaken and the Lease Extension Granted .....................11
Summary of Comparison ............................................15
ADDENDUM
Justification for Discount Rates
Legal Description
Current Ownership and Recent History
Lease Summary
Exhibit A - Building Improvement Program
Certification
Limiting and Contingent Conitions
SUMMARY OF REPORT
THE LINCOLN BUILDING
60 EAST 42ND STREET
NEW YORK, NEW YORK
PROPERTY
DESCRIPTION: A 55-story building containing
approximately 1,093,000 square feet of
office space and 23,000 square feet of
retail space.
LOCATION: Occupies the south side of 42nd Street
thru-block to 41st Street forming a "T"
shape with frontage on Madison Avenue.
PROPERTY
IDENTIFICATION: Block 1276, Lot 42
INTERESTS VALUED: Fairness Opinion comparing present value of
cash flows and reversion accruing to both
the lessor and the lessee if (a) the proposed
Capital Improvement Program is implemented
with financing of substantially all of the
total budgeted Capital Improvement amount of
approximately $22.8 million and (b) the
50 year Lease Extension is provided
(2033 through 2083), all as compared
with the present value of the cash flows
and reversion assuming no Capital
Improvement Program and no Lease Extension.
DATE OF VALUE: June 25, 1999
OWNERSHIP: Leasehold Estate: Lincoln Building Associates
Leased Fee Estate: 60 East 42nd Street
Associates
CONCLUSION:
In summary, we have concluded that undertaking the Capital Improvement
Program and granting the Lease Extension Option with debt financing of
substantially all of the capital improvement budget amount of approximately
$22,800,000 will result in a positive benefit to the lessor and to the lessee.
We believe the Capital Improvement Program with the Lease Extension is fair to
both the lessor and the lessee.
Wien & Malkin LLP
60 East 42nd Street
New York, New York 10165-0015
Attention: Peter L. Malkin, Esq.
June 25, 1999
RE: The Lincoln Building
60 East 42nd Street
New York, New York
Ladies and Gentlemen:
In accordance with your request, this report serves as a fairness opinion
to both the lessor and lessee at 60 East 42nd Street regarding the
proposed Capital Improvement Program (attached as Exhibit A) and a
50 year Lease Extension from October 1, 2033 to September 30, 2083
on the same terms as the existing lease. For both the lessor and the
lessee, the projected cash flows and any applicable lessor reversion with
the Capital Improvement Program and the Lease Extension are
compared with the cash flows and any applicable lessor reversion
without the Capital Improvement Program and the Lease Extension.
We conclude that the Capital Improvement Program with the Lease
Extension is fair to both the lessor and the lessee.
We understand that this report may be utilized by partners and participants
in the lessor and lessee in deciding whether to undertake the Improvement
Program and the Lease Extension.
CAPITAL IMPROVEMENT PROGRAM; FINANCING
The Capital Improvement Program totals approximately $22.8
million and is included as Exhibit A in the addendum of this report.
The major components of the program include the following:
- - Replacement of approximately 4,900 windows
throughout the building with energy efficient thermal
pane modern windows;
- - Modernization of the building's elevator system,
including a new intercom system;
- - Twenty seven new elevator cabs;
-2-
- - Installation of New Marketing and Conference Centers
and an upgrade of the Law Library;
- - Public Corridor and Elevator Lobby upgrade;
- - Roof & parapet replacement;
- - Facade restoration;
- - Water riser replacement;
- - Installation of a lobby concierge desk with new card key
and security system; and
- - New Public Bathrooms.
It is our opinion that with these improvements, the Lincoln Building will
be able to compete more successfully with newer and improved
properties, in terms of obtaining new tenants, keeping its existing tenant
base, and enhancing its rent levels.
We believe it is reasonable to assume that at least 80% of such budget is
for capital or special items beyond the normal repairs and maintenance
required under the lease. If only 80% of the proposed improvement
budget were held to constitute capital or special items beyond lease
requirements, the remaining 20% of the budget would be required to be
performed as an operating expense. Any resulting increase or decrease
in any year in base case expenses for such required items (whether
funded from debt financing or cash flow) would not change our
conclusions herein, because our basic conclusions derive solely from the
incremental impact of discretionary expenditures.
We assumed that substantially all of the Capital Improvement Budget
was funded with debt financing, and completed within two to three
years. To the extent that any portion of such budget is deemed to be
required under the lease, we believe it is beneficial to both the lessor and
the lessee that such portion be included in the debt financing for the
Capital Improvement Program, because this will spread the costs of all
work over the term of the debt, will permit the continuing payment of
overage rent distributions, and will enhance the net present value of the
income streams for both the lessor and lessee.
We understand that, under the lessee's proposal to the lessor, the Capital
Improvement Program and the related debt financing will be undertaken
by the lessee only if the Lease Extension is granted by the lessor. In the
absence of debt financing, the application of lessee's operating revenues
to pay for such improvements would extend the completion of the
project for years and would likely eliminate or greatly reduce overage
rent to the lessor in those years.
-3-
SUMMARY OF ANALYSES COMPLETED
A brief description of each step undertaken in completing our analysis is as
follows:
1. Inspected the property and reviewed the Proposed Budget for
Capital Improvements as provided by Wien & Malkin LLP and
attached as Exhibit A hereto.
2. Conducted a brief overview of the Midtown Manhattan Grand Central
office market.
3. Reviewed the terms of the master lease between the lessor and
lessee as well as the terms of the proposed Lease Extension.
4. Analyzed the property's historical financial statements for the past
15 years (1983-1998) in order to determine average growth rates in
income, expenses, cash flow, and net operating income.
5. Prepared a cash flow analysis which sets forth the projected property
cash flows attributable to both the lessor and the lessee assuming no
Capital Improvement Program and no Lease Extension, with the
current lease expiring in 2033 and 100% ownership of the property
reverting to the lessor as of that date. This cash flow represents the
base case scenario and is utilized for comparison purposes to
determine whether undertaking the Capital Improvement Program
and granting the Lease Extension are beneficial to both the lessee
and the lessor.
6. Prepared a cash flow analysis which sets forth the projected property
cash flows attributable to both the lessor and the lessee assuming
that the proposed Capital Improvement Program is undertaken and
the Lease Extension is granted to 2083.
DEFINITIONS; DISCOUNT RATES
Net operating income is defined as the income prior to payment of
capital items. Cash flow is defined as the income subsequent to payment
of capital items.
We have used capitalization and discount rates for the different cash
flows and positions as described in the Addendum.
For the purpose of our analysis, no value has been attributed to the
existing or increased basic rent, because such rent is applied in full solely
to pay mortgage debt service and annual supervisory fees.
PROPERTY DESCRIPTION
The Lincoln Building, identified as 60 East 42nd Street, is located on the
south side of East 42nd Street forming a T-shape with frontages on both
East 41st Street and Madison Avenue. It is located directly across 42nd
-4-
Street from Grand Central Terminal. The building was constructed in
1930 and is 55 stories in height. It possesses approximately 1,093,000
square feet of office space and 23,000 square feet of retail space and is
currently approximately 97% occupied.
The building has recently undergone certain capital improvements
including the restoration of the lobby and its ceiling and the lower 42nd
Street facade and entryway.
GRAND CENTRAL AREA
The property is located within the heart of the Grand Central area of
Midtown Manhattan, across 42nd Street from Grand Central Terminal.
The Grand Central area lies between Lexington and Madison Avenues
and from 45th to 41st Streets. It is anchored by Grand Central Terminal
which is located on the southwest side of the super-block bounded by
Vanderbilt and Lexington Avenues and 42nd and 45th Streets. The
block is also improved with the Grand Hyatt Hotel to the east of Grand
Central, the Graybar Building and 420 Lexington Avenue to the
northeast, and the MetLife Building to the north.
Grand Central Terminal, which gives the area its name, is nearing
completion of its more than $200 million renovation. The three year
project included a "top to bottom" restoration with new escalators, new
HVAC, new entrances, and new retail to help defray the cost of the
project. The three objectives of the restoration are to restore the historic
fabric of the building, to modernize the terminal as a railroad station, and
to make the terminal a destination point for retail and restaurants. Upon
completion, the terminal will have 120 stores with retail and commercial
space totaling 160,000 square feet. Included in this retail space is the
"Grand Central Market", consisting of vendors selling fresh vegetables,
breads and cheeses. The renovation of Grand Central Terminal is
representative of the continued renewed interest in the submarket.
According to the year-end 1998 Commercial Market Report - New
York, prepared by Insignia/ESG, the Midtown Manhattan office market
further tightened in 1998 with a total leasing activity of 17.8 million
square feet. Its overall availability rate decreased to 8.1% as of year-end
1998 from 9.1% as of year-end 1997. Average asking rents in Midtown
rose 22% in 1998 to $43.66 per square foot as of year-end. Six of
Midtown Manhattan's eight submarkets registered single-digit
availability rates at year's end. However, the Grand Central submarket
was the only submarket to post negative net absorption for 1998 with
the return of 930,000 square feet. Its reported availability rate as of year-
end increased to 14.1%. However, it also recorded the biggest increase
in average asking rents with a 30% increase during 1998 from year-end
1997. It also reported 3.5 million square feet of total leasing activity,
representing the second highest among all Midtown submarkets in 1998.
-5-
The large increase in rental rates for the Grand Central submarket was
due, in part, to the reinvestment in and repositioning of existing office
properties to high-end product, including the Chrysler Building, the
French Building, the Helmsley Building, and 685 Third Avenue. It is
our opinion that the capital renovation program planned for the Lincoln
Building will result in a similar repositioning and ability to attract new,
higher-quality tenants and retain existing tenants, and increase rental
levels.
TERMS OF THE MASTER LEASE AND PROPOSED LEASE
EXTENSION
The Lincoln Building is net leased by the fee owner, 60 East 42nd Street
Associates, as the lessor, to Lincoln Building Associates, as the lessee,
until September 30, 2033. The lessee pays a net basic rent plus a primary
additional rent and a secondary additional rent or overage rent of 50%
of net cash flow to the lessor. The basic net rent is currently $1,087,843
per annum (for payment of mortgage debt service and fixed annual
supervisory fees), and primary and secondary additional rents are
payable as follows:
- - Primary additional rent is equal to the first $1,053,800 of the
lessee's income, as defined, in each lease year.
- - Overage rent or secondary additional rent is equal to
50% of the lessee's remaining income, as defined, in
each lease year.
Proposed Lease Extensions
In the Capital Improvement Program and Lease Extension, as per the
proposed agreement, the terms of the existing master lease will remain
the same so that (a) the net basic rent will increase to include debt
service on the increased mortgage financing for the improvements and
(b) the lessee's primary additional rent will remain at $1,053,800.
The Capital Improvement Program, budgeted at a total of approximately
$22.8 million, is proposed to be undertaken by the lessee via financing of
substantially all the proposed costs through increasing the fee mortgage
financing on the building. The mortgage will be without recourse to the
lessor or the lessee. Once work is commenced, the cost of the capital
improvements will be financed over two to three years.
The payments for the capital improvement program will consist of debt
service on an estimated $22,000,000 increase in the existing
$12,000,000 fee mortgage. The mortgage increase is payable at an
estimated 7.5% interest rate with a 25-year amortization schedule
through successive maturities in 2004 (the maturity of the current
mortgage) and 2009 (assuming an initial five-year extension of the
mortgage upon such maturity). The resulting annual debt service on this
-6-
mortgage increase is $1,950,937. Thereafter the debt increase is
assumed to be refinanced at a fully amortizing forty year loan at an
interest rate of 8.5%. The annual debt service on this mortgage increase
beginning in 2009 is therefore estimated at $1,542,827 payable through 2048.
This annual cost is deducted in determining the lessee and lessor cash flows.
In computing overage rent, the financing cost (interest and principal) on
the capital improvements will be deducted as paid from the lessee's
income. The lessor will contribute indirectly via the reduced overage
rent payable to it. In this way, the lessor and lessee each will contribute
50% of this capital cost.
HISTORICAL FINANCIAL RESULTS
As previously mentioned, we have analyzed the property's historical
financial statements for the past 15 years (1983 -1998). We determined
that the property's cash flow prior to payments for basic rent, primary
additional rent and overage rent, increased at an average annual rate of
approximately 2.0% per annum. The past 15 year period is a good
representation of a full market cycle; and it is our opinion that the
average annual increase is indicative of possible future average annual
increases assuming the property continues to be operated in its current
condition, except that the absence of any capital improvement over an
extended period of time could cause such rate of annual increase to fall
to zero or negative.
During that same 15-year period, the annual average rate of inflation
(CPI Index) for all urban consumers in New York and northeastern New
Jersey was 5.07%. The buildings' income therefore increased below
inflation during that period. We have considered the lower expected
inflation rates and growth in office employment in light of the strength of
the subject building and location. Grand Central Terminal provides an
unassailable anchor for the area. The building's neighborhood and
occupants provide for a diverse tenancy without reliance on any one
industry. Considering all these factors, for the purpose of this analysis,
we have assumed a continuing 2% increase each year through 2033,
even in the absence of capital improvements.
After discussions with supervisory staff and research and analysis of the
current market for office space within this market, we have projected an
appropriate estimate of the property's cash flow for 1999 at $8,900,000.
BASE CASE SCENARIO - ASSUMING NO CAPITAL
IMPROVEMENT PROGRAM AND NO LEASE EXTENSION
Utilizing the assumptions previously discussed in regard to first year
cash flow and projected annual growth rates, we have prepared a cash
flow analysis which sets forth the projected property cash flows
attributable to both the lessor and the lessee assuming no Capital
Improvement Program is undertaken and no Lease Extension is granted.
Upon expiration of the current lease in 2033, 100% ownership of the
property reverts to the lessor. This cash flow represents the current base
case scenario for comparison to determine whether the Capital
Improvement Program and Lease Extension are beneficial to both the
lessee and lessor.
-7-
The Lessor's Cash Flows are set forth as follows:
Primary Additional Rent - As per the lease terms in-place, primary additional
rent is payable each year throughout the term of the lease in the amount of the
first $1,053,800 of the lessee's income, as defined. This amount represents a
stable and predictable cash flow with little risk. We have therefore chosen to
discount these annual cash flows to present value at the rates of 8% and 9% per
annum. The total present value of the primary additional rent cash flows from
1999 through 2033 is estimated to range from $12,195,573 to $11,057,333.
Overage Rent - As per the lease terms in-place, overage rent or secondary
additional rent is equal to 50% of the lessee's remaining income, as defined, in
each year. This amount is based upon our projections of total cash flow and is
not a stated or guaranteed amount. This annual amount has been discounted to
present value at a much higher rate than primary additional rent, as it is
payable after both basic rent and primary additional rent resulting in more
risk associated with its estimated collection. We have therefore applied
discount rates of 13% and 14% to each year's projected overage rent amount.
The total present value of the overage rent cash flows from 1999 through 2033
is estimated to range from $28,088,231 to $25,880,930.
Fee Value of Property - We have also estimated the fee simple value of the
property as of 2033, when the total property will revert to the lessor. The
property's estimated total net operating income without deduction of any rental
obligations or overrides as of 2033 was capitalized into value at the
appropriate rate and discounted to present value. We capitalized the projected
2033 net operating income of $20,067,519 (i.e., $17,450,017 cash flow plus 15%
for estimated capital expenses) by the capitalization rate of 10.75% (less 4.5%
of the resulting total for selling expenses) and discounted it to present value
at rates of 13% and 14%. The resulting present value of the fee simple interest
in the property as of 2033 is estimated to range from $2,473,677 to $1,817,267.
Lessor's Total Cash Flows - The present value of the lessor's total cash flows
is as follows:
Lessor's Cash Flows
Rent Low Rates Present Value High Rates Present Value
Primary Add'l Rent 8% $12,195,573 9% $11,057,333
Overage Rent 13% $28,088,231 14% $25,880,930
Fee Simple Value
As of 2033 13% $ 2,473,677 14% $ 1,817,267
TOTAL: $42,757,481 $38,755,530
The cash flows are set forth on a page following this discussion.
-8-
The Lessee's Cash Flows are set forth as follows:
Remaining Cash Flow - The lessee's annual cash flows are equal to the
remaining cash flow which is available after payment of all three forms of rent
and as well as payment of the overrides to both Wien & Malkin LLP and
Helmsley Spear, Inc., which are annual lessee responsibilities. This amount is
also based upon our projections and is not a stated or guaranteed amount. We
have therefore applied a discount rate which reflects increased risk associated
with collection of this rent and have applied discount rates of 13.5% and 14.5%
to each year's projected overage rental amount. This annual amount has been
discounted to present value at a slightly higher rate than the lessor's overage
rent given the fact that we are valuing a leasehold position which possesses
more risk as ownership of the real estate eventually reverts to the lessor. The
total present value of the lessee's cash flows from 1999 through 2033 is
estimated to range from $24,535,860 to $22,672,446.
Lessee's Total Cash Flows - The present value of the lessee's cash flows is as
follows:
Lessee's Cash Flows
Rent Low Rates Present Value High Rates Present Value
Remaining Cash Flow 13.5% $24,535,860 14.5% $22,672,446
TOTAL: $24,535,860 $22,672,446
The cash flows are set forth on a page following this discussion.
-9-
<TABLE>
02-Jul-99
Lincoln Building
Projected Operations Assuming No Lease Extension or Capital Improvement Program
<CAPTION>
Overage Rent:
Total Total
Cash Basic Primary Base Base Profit
Year Flow Rent Additional Profit Split 50/50
<S> <C> <C> <C> <C> <C> <C>
1999 8,900,000 1,087,843 1,053,800 6,6758,357 3,379,179
2000 2.0% 9,078,000 1,087,843 1,053,800 6,936,357 3,468,179
2001 2.0% 9,259,560 1,087,843 1,053,800 7,117,917 3,558,959
2002 2.0% 9,444,751 1,087,843 1,053,800 7,303,108 3,651,554
2003 2.0% 9,633,646 1,087,843 1,053,800 7,492,003 3,746,002
2004 2.0% 9,826,319 1,087,843 1,053,800 7,684,676 3,842,338
2005 2.0% 10,022,846 1,087,843 1,053,800 7,881,203 3,940,601
2006 2.0% 10,223,302 1,087,843 1,053,800 8,081,659 4,040,830
2007 2.0% 10,427,768 1,087,843 1,053,800 8,286,125 4,143,063
2008 2.0% 10,636,324 1,087,843 1,053,800 8,494,681 4,247,340
2009 2.0% 10,849,050 1,087,843 1,053,800 8,707,407 4,353,704
2010 2.0% 11,066,031 1,087,843 1,053,800 8,924,388 4,462,194
2011 2.0% 11,287,352 1,087,843 1,053,800 9,145,709 4,572,854
2012 2.0% 11,513,099 1,087,843 1,053,800 9,371,456 4,685,728
2013 2.0% 11,743,361 1,087,843 1,053,800 9,601,718 4,800,859
2014 2.0% 11,978,228 1,087,843 1,053,800 9,836,585 4,918,293
2015 2.0% 12,217,793 1,087,843 1,053,800 10,076,150 5,038,075
2016 2.0% 12,462,149 1,087,843 1,053,800 10,320,506 5,160,253
2017 2.0% 12,711,392 1,087,843 1,053,800 10,569,749 5,284,874
2018 2.0% 12,965,619 1,087,843 1,053,800 10,823,976 5,411,988
2019 2.0% 13,224,932 1,087,843 1,053,800 11,083,289 5,541,644
2020 2.0% 13,489,430 1,087,843 1,053,800 11,347,787 5,673,894
2021 2.0% 13,759,219 1,087,843 1,053,800 11,617,576 5,808,788
2022 2.0% 14,034,403 1,087,843 1,053,800 11,892,760 5,946,380
2023 2.0% 14,315,092 1,087,843 1,053,800 12,173,449 6,086,724
2024 2.0% 14,601,393 1,087,843 1,053,800 12,459,750 6,229,875
2025 2.0% 14,893,421 1,087,843 1,053,800 12,751,778 6,375,889
2026 2.0% 15,191,290 1,087,843 1,053,800 13,049,647 6,524,823
2027 2.0% 15,495,115 1,087,843 1,053,800 13,353,472 6,676,736
2028 2.0% 15,805,018 1,087,843 1,053,800 13,663,375 6,831,687
2029 2.0% 16,121,118 1,087,843 1,053,800 13,979,475 6,989,738
2030 2.0% 16,443,540 1,087,843 1,053,800 14,301,897 7,150,949
2031 2.0% 16,772,411 1,087,843 1,053,800 14,630,768 7,315,384
2032 2.0% 17,107,859 1,087,843 1,053,800 14,966,216 7,483,108
2033 2.0% 17,450,017 1,087,843 1,053,800 15,308,374 7,654,187
TOTAL 444,950,851 38,074,505 36,883,000 369,993,346
</TABLE>
<TABLE>
Lessor Group
Total Lessor Lessor Lessor Fee Value 2033
Group W&M LLP Net Primary Net Profit Base + Overage NOI Cap Rate
Year Total Override *Additional ReSplit 50/50 Rent 10.75%
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
1999 4,432,979 345,298 1,046,420 3,041,261 4,087,681 0
2000 2.0% 4,521,979 354,198 1,046,420 3,121,361 4,167,781 0
2001 2.0% 4,612,759 363,276 1,046,420 3,203,063 4,249,483 0
2002 2.0% 4,705,354 372,535 1,046,420 3,286,399 4,332,819 0
2003 2.0% 4,799,802 381,980 1,046,420 3,371,401 4,417,821 0
2004 2.0% 4,896,138 391,614 1,046,420 3,458,104 4,504,524 0
2005 2.0% 4,994,401 401,440 1,046,420 3,546,541 4,592,961 0
2006 2.0% 5,094,630 411,463 1,046,420 3,636,747 4,683,167 0
2007 2.0% 5,196,863 421,686 1,046,420 3,728,756 4,775,176 0
2008 2.0% 5,301,140 432,114 1,046,420 3,822,606 4,869,026 0
2009 2.0% 5,407,504 442,750 1,046,420 3,918,333 4,964,753 0
2010 2.0% 5,515,994 453,599 1,046,420 4,015,975 5,062,395 0
2011 2.0% 5,626,654 464,665 1,046,420 4,115,569 5,161,989 0
2012 2.0% 5,739,528 475,953 1,046,420 4,217,155 5,263,575 0
2013 2.0% 5,854,659 487,466 1,046,420 4,320,773 5,367,193 0
2014 2.0% 5,972,093 499,209 1,046,420 4,426,463 5,472,883 0
2015 2.0% 6,091,875 511,187 1,046,420 4,534,267 5,580,687 0
2016 2.0% 6,214,053 523,405 1,046,420 4,644,228 5,690,648 0
2017 2.0% 6,338,674 535,867 1,046,420 4,756,387 5,802,807 0
2018 2.0% 6,465,788 548,579 1,046,420 4,870,789 5,917,209 0
2019 2.0% 6,595,444 561,544 1,046,420 4,987,480 6,033,900 0
2020 2.0% 6,727,694 574,769 1,046,420 5,106,504 6,152,924 0
2021 2.0% 6,862,588 588,259 1,046,420 5,227,909 6,274,329 0
2022 2.0% 7,000,180 602,018 1,046,420 5,351,742 6,398,162 0
2023 2.0% 7,140,524 616,052 1,046,420 5,478,052 6,524,472 0
2024 2.0% 7,283,675 630,368 1,046,420 5,606,888 6,653,308 0
2025 2.0% 7,429,689 644,969 1,046,420 5,738,300 6,784,720 0
2026 2.0% 7,578,623 659,862 1,046,420 5,872,341 6,918,761 0
2027 2.0% 7,730,536 675,054 1,046,420 6,009,063 7,055,483 0
2028 2.0% 7,885,487 690,549 1,046,420 6,148,519 7,194,939 0
2029 2.0% 8,043,538 706,354 1,046,420 6,290,764 7,337,184 0
2030 2.0% 8,204,749 722,475 1,046,420 6,435,854 7,482,274 0
2031 2.0% 8,369,184 738,918 1,046,420 6,583,846 7,630,266 0
2032 2.0% 8,536,908 755,691 1,046,420 6,734,797 7,781,217 0
2033 2.0% 8,707,987 772,799 1,046,420 6,888,768 7,935,188 178,274,240
**
TOTAL 221,879,673 18,757,967 36,624,700 203,121,706 178,274,240
</TABLE>
<TABLE>
Lessee Group
Wien & Malkin Helmsley
Group LLP Spear Lessee
Year Total Override * Override * Profit
<CAPTION>
<S> <C> <C> <C> <C> <C>
1999 3,379,179 297,918 297,918 2,783,343
2000 2.0% 3,468,179 306,818 306,818 2,854,543
2001 2.0% 3,558,959 315,896 315,896 2,927,167
2002 2.0% 3,651,554 325,155 325,155 3,001,243
2003 2.0% 3,746,002 334,600 334,600 3,076,801
2004 2.0% 3,842,338 344,234 344,234 3,153,870
2005 2.0% 3,940,601 354,060 354,060 3,232,481
2006 2.0% 4,040,830 364,083 364,083 3,312,664
2007 2.0% 4,143,063 374,306 374,306 3,394,450
2008 2.0% 4,247,340 384,734 384,734 3,477,872
2009 2.0% 4,353,704 395,370 395,370 3,562,963
2010 2.0% 4,462,194 406,219 406,219 3,649,755
2011 2.0% 4,572,854 417,285 417,285 3,738,284
2012 2.0% 4,685,728 428,573 428,573 3,828,582
2013 2.0% 4,800,859 440,086 440,086 3,920,687
2014 2.0% 4,918,293 451,829 451,829 4,014,634
2015 2.0% 5,038,075 463,807 463,807 4,110,460
2016 2.0% 5,160,253 476,025 476,025 4,208,202
2017 2.0% 5,284,874 488,487 488,487 4,307,899
2018 2.0% 5,411,988 501,199 501,199 4,409,591
2019 2.0% 5,541,644 514,164 514,164 4,513,316
2020 2.0% 5,673,894 527,389 527,389 4,619,115
2021 2.0% 5,808,788 540,879 540,879 4,727,030
2022 2.0% 5,946,380 554,638 554,638 4,837,104
2023 2.0% 6,086,724 568,672 568,672 4,949,379
2024 2.0% 6,229,875 582,988 582,988 5,063,900
2025 2.0% 6,375,889 597,589 597,589 5,180,711
2026 2.0% 6,524,823 612,482 612,482 5,299,859
2027 2.0% 6,676,736 627,674 627,674 5,421,389
2028 2.0% 6,831,687 643,169 643,169 5,545,350
2029 2.0% 6,989,738 658,974 658,974 5,671,790
2030 2.0% 7,150,949 675,095 675,095 5,800,759
2031 2.0% 7,315,384 691,538 691,538 5,932,307
2032 2.0% 7,483,108 708,311 708,311 6,066,487
2033 2.0% 7,654,187 725,419 725,419 6,203,349
TOTAL 184,996,673 17,099,667 17,099,667 150,797,338
</TABLE>
Lower Higher
Discount Discount
Present Values Rates PV Rates PV
Lessor
Primary Additional Rent 8.0% 12,195,573 9.0% 11,057,333
Overage Rent 13.0% 28,088,231 14.0% 25,880,930
Fee Value 2033 13.0% 2,473,677 14.0% 1,817,267
Total 42,757,481 38,755,530
Lessee 13.5% 24,535,860 14.5% 22,672,446
* Override payments have been computed in accord with the related information
in the Addendum.
** Fee value has been computed by applying a 10.75% capitalization rate to the
projected net operating income in 2033 for the entire property. Such NOI
was computed as cash flow in 2033, plus 15% as an estimate of capitalized
expenses. Additionally, a selling expense equal to 4.5% of the capitalized
value has been deducted to reflect necessary selling costs. Such price
reflects an absence of capital improvements for more than 30 years as
projected.
CHECK:
Lessor Group Total 221,879,673 Total Base Profit 369,993,346
Lessee Group Total 184,996,673 Primary Additional Rent 36,883,000
Combined 406,876,346 Combined 406,876,346
-10-
PROPOSED SCENARIO - ASSUMING THE CAPITAL IMPROVEMENT PROGRAM IS UNDERTAKEN AND
THE LEASE EXTENSION IS GRANTED
Utilizing the assumptions previously discussed in regard to first year cash
flow, we have prepared a cash flow analysis which sets forth the projected
property cash flows attributable to both the lessor and the lessee assuming
the Capital Improvement Program is undertaken and the Lease Extension is granted
through 2083. This cash flow has been compared with the previously presented
base case scenario to determine whether the Capital Improvement Program and
the Lease Extension are beneficial to both the lessee and lessor at
substantially all of the budgeted capital improvement amount.
The completion of this program results in a decreased cash flow due to the
additional expenses for the program and concurrently a projected increase in
cash flow due to the ability to increase rental rates and retain more tenants
upon lease expiration. It is our opinion that undertaking the Capital
Improvement Program will result in the property's ability to obtain higher
rental rates and could potentially result in operating cost savings, in property
maintenance with an increasing positive effect to the property's cash flow.
Other office buildings within the Grand Central District which have been
renovated to a high degree have been able to increase their obtainable base
rents substantially. It is our opinion that the proposed renovation program
will have the same effect for the Lincoln Building. We have therefore projected
that, if the Capital Improvement Program is undertaken, the property's cash flow
will increase in the first 10 years by higher annual rates than if the property
is not renovated. After the first 10 years, we have assumed that the cash flow
will increase at an average annual rate of 2%. The rates are applied as
follows:
Years Annual Increase
1999 ($8,900,0000 - existing cash flow)
2000 4%
2001 5%
2002 6%
2003-05 7%
2006 6%
2007 5%
2008 4%
2009 3%
2010-2083 2%
The cost of the Capital Improvement Program has been deducted from the
estimated cash flow in this scenario. The cash flow payments for the Capital
Improvement Program will consist of debt service on an estimated $22,000,000
increase in the existing $12,000,000 fee mortgage, with such increase payable at
an estimated 7.5% interest rate with a 25-year amortization schedule through
-11-
successive maturities in 2004 and 2009, and a resulting annual debt service
amount on such increase of $1,950,937. Thereafter this debt increase is
assumed to be refinanced as a fully amortizing forty year loan at an interest
rate of 8.5%. The annual debt service on such increase beginning in 2009 is
therefore estimated at $1,542,827 payable through 2048. This annual debt
service cost is deducted as an expense in determining the lessee and lessor
cash flows.
The Lessor's Cash Flows are set forth as follows:
Primary Additional Rent - As per the lease terms in-place, primary additional
rent is payable each year throughout the term of the lease in the amount of the
first $1,053,800 of the lessee's income, as defined. This amount represents a
stable and predictable cash flow with little risk, and the safety and permanence
of this cash flow is substantially enhanced by the Capital Improvement Program.
We have therefore chosen to discount these annual cash flows to present value
at the rates of 7.5% and 8.5% per annum. The total present value of the primary
additional rent cash flows from 1999 through 2083 is estimated to range from
$13,922,418 to $12,298,835.
Overage Rent - As per the lease terms in-place, overage rent or secondary
additional rent is equal to 50% of the lessee's remaining income, as defined, in
each year. This amount is based upon our projections of total cash flow as well
and is not a stated or guaranteed amount. This annual amount has been
discounted to present value at a higher rate than primary additional rent, as it
is payable after both basic rent and primary additional rent resulting in more
risk associated with its estimated collection. However, we believe that the
Capital Improvement Program enhances the probability of such collection, so we
have chosen to apply discount rates of 12.5% and 13.5% to each year's projected
overage rent amount. The total present value of the overage rent cash flows
from 1999 through 2083 is estimated to range from $32,817,994 to
$29,405,052.
Fee Value of Property - We have also estimated the fee simple value of the
subject property as of 2083, when the total property will revert to the lessor.
The property's estimated total net operating income without deduction of any
rental obligations or overrides as of 2083 was capitalized into value at the
appropriate rate and discounted to present value. We capitalized the projected
2083 net operating income of $74,911,091 (i.e., $65,140,079 cash flow plus
15% for estimated capital expenses) by the capitalization rate of 10.75% (less
4.5% of the resulting total for selling expenses) and discounted it, as adjusted
for the completion of the Capital Improvement Program, to present value at
rates of 12.5% and 13.5%. The resulting present value of the fee simple
interest in the subject property as of 2083 is estimated to range from $29,866
to $14,076.
-12-
Lessor's Total Cash Flows - The present value of the lessor's total cash flows
is as follows:
Lessor's Cash Flows
Rent Low Rates Present Value High Rates Present Value
Primary Add'l Rent 7.5% $13,922,418 8.5% $12,298,835
Overage Rent 12.5% $32,817,994 13.5% $29,405,052
Fee Simple Value
As of 2083 12.5% $ 29,866 13.5% $ 14,076
TOTAL: $46,770,278 $41,717,963
The cash flows are set forth on a page following this discussion.
The Lessee's Cash Flows are set forth as follows:
Remaining Cash Flow - The lessee's annual cash flows are equal to the
remaining cash flow which is available after payment of all three forms of rent
and as well as payment of the overrides to both Wien & Malkin LLP and
Helmsley Spear, Inc., which are annual lessee responsibilities. This amount is
also based upon our projections of total net operating income as well and is not
a stated or guaranteed amount. We have therefore applied a discount rate
which reflects the increased risk associated with collection of this rent, as
adjusted for the completion of the Capital Improvement Program, and have
applied discount rates of 13% and 14% to each year's projected overage rental
amount. This annual amount has been discounted to present value at a slightly
higher rate than the lessor's overage rent given the fact that we are valuing a
leasehold position which possesses more risk as ownership of the real estate
eventually reverts to the lessor. The total present value of the overage rent
cash flows from 1999 through 2083 is estimated to range from $28,195,385 to
$25,397,124.
Lessee's Total Cash Flows - The present value of the lessee's cash flows is as
follows:
Lessee's Cash Flows
Rent Low Rates Present Value High Rates Present Value
Remaining Cash Flow 13% $28,195,385 14% $25,397,124
TOTAL: $28,195,385 $25,397,124
The cash flows are set forth on a page following this discussion.
-13-
<TABLE>
Lincoln Building
Projected Operations Assuming Lease Extension and Capital Improvement Program
100% of Capital Budget is Assumed to be Special Improvements
Base Rent: Overage Rent:
Increase from Pre-Existing Total Total
Cash New Capital Basic Primary Base Base Profit
Year Flow Improvements Rent Add'l Rent Profit Split 50/50
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
1999 8,900,000 1,950,937 1,087,843 1,053,800 4,807,420 2,403,710
2000 4.0% 9,256,000 1,950,937 1,087,843 1,053,800 5,163,420 2,581,710
2001 5.0% 9,718,800 1,950,937 1,087,843 1,053,800 5,626,220 2,813,110
2002 6.0% 10,301,928 1,950,937 1,087,843 1,053,800 6,209,348 3,104,674
2003 7.0% 11,023,063 1,950,937 1,087,843 1,053,800 6,930,483 3,465,242
2004 7.0% 11,794,677 1,950,937 1,087,843 1,053,800 7,702,098 3,851,049
2005 7.0% 12,620,305 1,950,937 1,087,843 1,053,800 8,527,725 4,263,863
2006 6.0% 13,377,523 1,950,937 1,087,843 1,053,800 9,284,943 4,642,472
2007 5.0% 14,046,399 1,950,937 1,087,843 1,053,800 9,953,820 4,976,910
2008 4.0% 14,608,255 1,950,937 1,087,843 1,053,800 10,515,675 5,257,838
2009 3.0% 15,046,503 1,542,827 1,087,843 1,053,800 11,362,032 5,681,016
2010 2.0% 15,347,433 1,542,827 1,087,843 1,053,800 11,662,962 5,831,481
2011 2.0% 15,654,382 1,542,827 1,087,843 1,053,800 11,969,911 5,984,956
2012 2.0% 15,967,469 1,542,827 1,087,843 1,053,800 12,282,999 6,141,499
2013 2.0% 16,286,819 1,542,827 1,087,843 1,053,800 12,602,348 6,301,174
2014 2.0% 16,612,555 1,542,827 1,087,843 1,053,800 12,928,084 6,464,042
2015 2.0% 16,944,806 1,542,827 1,087,843 1,053,800 13,260,336 6,630,168
2016 2.0% 17,283,702 1,542,827 1,087,843 1,053,800 13,599,232 6,799,616
2017 2.0% 17,629,376 1,542,827 1,087,843 1,053,800 13,944,906 6,972,453
2018 2.0% 17,981,964 1,542,827 1,087,843 1,053,800 14,297,493 7,148,747
2019 2.0% 18,341,603 1,542,827 1,087,843 1,053,800 14,657,133 7,328,566
2020 2.0% 18,708,435 1,542,827 1,087,843 1,053,800 15,023,965 7,511,982
2021 2.0% 19,082,604 1,542,827 1,087,843 1,053,800 15,398,133 7,699,067
2022 2.0% 19,464,256 1,542,827 1,087,843 1,053,800 15,779,785 7,889,893
2023 2.0% 19,853,541 1,542,827 1,087,843 1,053,800 16,169,071 8,084,535
2024 2.0% 20,250,612 1,542,827 1,087,843 1,053,800 16,566,141 8,283,071
2025 2.0% 20,655,624 1,542,827 1,087,843 1,053,800 16,971,154 8,485,577
2026 2.0% 21,068,737 1,542,827 1,087,843 1,053,800 17,384,266 8,692,133
2027 2.0% 21,490,111 1,542,827 1,087,843 1,053,800 17,805,641 8,902,820
2028 2.0% 21,919,913 1,542,827 1,087,843 1,053,800 18,235,443 9,117,721
2029 2.0% 22,358,312 1,542,827 1,087,843 1,053,800 18,673,841 9,336,921
2030 2.0% 22,805,478 1,542,827 1,087,843 1,053,800 19,121,007 9,560,504
2031 2.0% 23,261,588 1,542,827 1,087,843 1,053,800 19,577,117 9,788,559
2032 2.0% 23,726,819 1,542,827 1,087,843 1,053,800 20,042,349 10,021,174
2033 2.0% 24,201,356 1,542,827 1,087,843 1,053,800 20,516,885 10,258,443
2034 2.0% 24,685,383 1,542,827 1,087,843 1,053,800 21,000,912 10,500,456
2035 2.0% 25,179,090 1,542,827 1,087,843 1,053,800 21,494,620 10,747,310
2036 2.0% 25,682,672 1,542,827 1,087,843 1,053,800 21,998,202 10,999,101
2037 2.0% 26,196,326 1,542,827 1,087,843 1,053,800 22,511,855 11,255,928
2038 2.0% 26,720,252 1,542,827 1,087,843 1,053,800 23,035,782 11,517,891
2039 2.0% 27,254,657 1,542,827 1,087,843 1,053,800 23,570,187 11,785,093
2040 2.0% 27,799,750 1,542,827 1,087,843 1,053,800 24,115,280 12,057,640
2041 2.0% 28,355,745 1,542,827 1,087,843 1,053,800 24,671,275 12,335,637
2042 2.0% 28,922,860 1,542,827 1,087,843 1,053,800 25,238,390 12,619,195
2043 2.0% 29,501,317 1,542,827 1,087,843 1,053,800 25,816,847 12,908,424
2044 2.0% 30,091,344 1,542,827 1,087,843 1,053,800 26,406,873 13,203,437
2045 2.0% 30,693,171 1,542,827 1,087,843 1,053,800 27,008,700 13,504,350
2046 2.0% 31,307,034 1,542,827 1,087,843 1,053,800 27,622,564 13,811,282
2047 2.0% 31,933,175 1,542,827 1,087,843 1,053,800 28,248,704 14,124,352
2048 2.0% 32,571,838 1,542,827 1,087,843 1,053,800 28,887,368 14,443,684
2049 2.0% 33,223,275 0 1,087,843 1,053,800 31,081,632 15,540,816
2050 2.0% 33,887,741 0 1,087,843 1,053,800 31,746,098 15,873,049
2051 2.0% 34,565,495 0 1,087,843 1,053,800 32,423,852 16,211,926
2052 2.0% 35,256,805 0 1,087,843 1,053,800 33,115,162 16,557,581
2053 2.0% 35,961,941 0 1,087,843 1,053,800 33,820,298 16,910,149
2054 2.0% 36,681,180 0 1,087,843 1,053,800 34,539,537 17,269,769
2055 2.0% 37,414,804 0 1,087,843 1,053,800 35,273,161 17,636,580
2056 2.0% 38,163,100 0 1,087,843 1,053,800 36,021,457 18,010,728
2057 2.0% 38,926,362 0 1,087,843 1,053,800 36,784,719 18,392,359
2058 2.0% 39,704,889 0 1,087,843 1,053,800 37,563,246 18,781,623
2059 2.0% 40,498,987 0 1,087,843 1,053,800 38,357,344 19,178,672
2060 2.0% 41,308,967 0 1,087,843 1,053,800 39,167,324 19,583,662
2061 2.0% 42,135,146 0 1,087,843 1,053,800 39,993,503 19,996,752
2062 2.0% 42,977,849 0 1,087,843 1,053,800 40,836,206 20,418,103
2063 2.0% 43,837,406 0 1,087,843 1,053,800 41,695,763 20,847,881
2064 2.0% 44,714,154 0 1,087,843 1,053,800 42,572,511 21,286,256
2065 2.0% 45,608,437 0 1,087,843 1,053,800 43,466,794 21,733,397
2066 2.0% 46,520,606 0 1,087,843 1,053,800 44,378,963 22,189,481
2067 2.0% 47,451,018 0 1,087,843 1,053,800 45,309,375 22,654,687
2068 2.0% 48,400,038 0 1,087,843 1,053,800 46,258,395 23,129,198
2069 2.0% 49,368,039 0 1,087,843 1,053,800 47,226,396 23,613,198
2070 2.0% 50,355,400 0 1,087,843 1,053,800 48,213,757 24,106,878
2071 2.0% 51,362,508 0 1,087,843 1,053,800 49,220,865 24,610,432
2072 2.0% 52,389,758 0 1,087,843 1,053,800 50,248,115 25,124,058
2073 2.0% 53,437,553 0 1,087,843 1,053,800 51,295,910 25,647,955
2074 2.0% 54,506,304 0 1,087,843 1,053,800 52,364,661 26,182,331
2075 2.0% 55,596,430 0 1,087,843 1,053,800 53,454,787 26,727,394
2076 2.0% 56,708,359 0 1,087,843 1,053,800 54,566,716 27,283,358
2077 2.0% 57,842,526 0 1,087,843 1,053,800 55,700,883 27,850,442
2078 2.0% 58,999,377 0 1,087,843 1,053,800 56,857,734 28,428,867
2079 2.0% 60,179,364 0 1,087,843 1,053,800 58,037,721 29,018,861
2080 2.0% 61,382,951 0 1,087,843 1,053,800 59,241,308 29,620,654
2081 2.0% 62,610,611 0 1,087,843 1,053,800 60,468,968 30,234,484
2082 2.0% 63,862,823 0 1,087,843 1,053,800 61,721,180 30,860,590
2083 2.0% 65,140,079 0 1,087,843 1,053,800 62,998,436 31,499,218
TOTAL 2,685,465,846 81,222,466 92,466,655 89,573,000 2,422,203,725 1,211,101,863
</TABLE>
<TABLE>
Lessor Group
Lessor Lessor Lessor Fee Value
Group Total Net Primary Net Profit Net NOI 2083
Year Total Override * Add'l Rent Split 50/50 Total Cap Rate 10.75%
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
1999 3,457,510 247,751 1,046,420 2,163,339 3,209,759 0
2000 4.0% 3,635,510 265,551 1,046,420 2,323,539 3,369,959 0
2001 5.0% 3,866,910 288,691 1,046,420 2,531,799 3,578,219 0
2002 6.0% 4,158,474 317,847 1,046,420 2,794,207 3,840,627 0
2003 7.0% 4,519,042 353,904 1,046,420 3,118,717 4,165,137 0
2004 7.0% 4,904,849 392,485 1,046,420 3,465,944 4,512,364 0
2005 7.0% 5,317,663 433,766 1,046,420 3,837,476 4,883,896 0
2006 6.0% 5,696,272 471,627 1,046,420 4,178,225 5,224,645 0
2007 5.0% 6,030,710 505,071 1,046,420 4,479,219 5,525,639 0
2008 4.0% 6,311,638 533,164 1,046,420 4,732,054 5,778,474 0
2009 3.0% 6,734,816 575,482 1,046,420 5,112,915 6,159,335 0
2010 2.0% 6,885,281 590,528 1,046,420 5,248,333 6,294,753 0
2011 2.0% 7,038,756 605,876 1,046,420 5,386,460 6,432,880 0
2012 2.0% 7,195,299 621,530 1,046,420 5,527,349 6,573,769 0
2013 2.0% 7,354,974 637,497 1,046,420 5,671,057 6,717,477 0
2014 2.0% 7,517,842 653,784 1,046,420 5,817,638 6,864,058 0
2015 2.0% 7,683,968 670,397 1,046,420 5,967,151 7,013,571 0
2016 2.0% 7,853,416 687,342 1,046,420 6,119,654 7,166,074 0
2017 2.0% 8,026,253 704,625 1,046,420 6,275,208 7,321,628 0
2018 2.0% 8,202,547 722,255 1,046,420 6,433,872 7,480,292 0
2019 2.0% 8,382,366 740,237 1,046,420 6,595,710 7,642,130 0
2020 2.0% 8,565,782 758,578 1,046,420 6,760,784 7,807,204 0
2021 2.0% 8,752,867 777,287 1,046,420 6,929,160 7,975,580 0
2022 2.0% 8,943,693 796,369 1,046,420 7,100,903 8,147,323 0
2023 2.0% 9,138,335 815,834 1,046,420 7,276,082 8,322,502 0
2024 2.0% 9,336,871 835,687 1,046,420 7,454,764 8,501,184 0
2025 2.0% 9,539,377 855,938 1,046,420 7,637,019 8,683,439 0
2026 2.0% 9,745,933 876,593 1,046,420 7,822,920 8,869,340 0
2027 2.0% 9,956,620 897,662 1,046,420 8,012,538 9,058,958 0
2028 2.0% 10,171,521 919,152 1,046,420 8,205,949 9,252,369 0
2029 2.0% 10,390,721 941,072 1,046,420 8,403,229 9,449,649 0
2030 2.0% 10,614,304 963,430 1,046,420 8,604,453 9,650,873 0
2031 2.0% 10,842,359 986,236 1,046,420 8,809,703 9,856,123 0
2032 2.0% 11,074,974 1,009,497 1,046,420 9,019,057 10,065,477 0
2033 2.0% 11,312,243 1,033,224 1,046,420 9,232,598 10,279,018 0
2034 2.0% 11,554,256 1,057,426 1,046,420 9,450,411 10,496,831 0
2035 2.0% 11,801,110 1,082,111 1,046,420 9,672,579 10,718,999 0
2036 2.0% 12,052,901 1,107,290 1,046,420 9,899,191 10,945,611 0
2037 2.0% 12,309,728 1,132,973 1,046,420 10,130,335 11,176,755 0
2038 2.0% 12,571,691 1,159,169 1,046,420 10,366,102 11,412,522 0
2039 2.0% 12,838,893 1,185,889 1,046,420 10,606,584 11,653,004 0
2040 2.0% 13,111,440 1,213,144 1,046,420 10,851,876 11,898,296 0
2041 2.0% 13,389,437 1,240,944 1,046,420 11,102,074 12,148,494 0
2042 2.0% 13,672,995 1,269,299 1,046,420 11,357,275 12,403,695 0
2043 2.0% 13,962,224 1,298,222 1,046,420 11,617,581 12,664,001 0
2044 2.0% 14,257,237 1,327,724 1,046,420 11,883,093 12,929,513 0
2045 2.0% 14,558,150 1,357,815 1,046,420 12,153,915 13,200,335 0
2046 2.0% 14,865,082 1,388,508 1,046,420 12,430,154 13,476,574 0
2047 2.0% 15,178,152 1,419,815 1,046,420 12,711,917 13,758,337 0
2048 2.0% 15,497,484 1,451,748 1,046,420 12,999,316 14,045,736 0
2049 2.0% 16,594,616 1,561,462 1,046,420 13,986,734 15,033,154 0
2050 2.0% 16,926,849 1,594,685 1,046,420 14,285,744 15,332,164 0
2051 2.0% 17,265,726 1,628,573 1,046,420 14,590,734 15,637,154 0
2052 2.0% 17,611,381 1,663,138 1,046,420 14,901,823 15,948,243 0
2053 2.0% 17,963,949 1,698,395 1,046,420 15,219,134 16,265,554 0
2054 2.0% 18,323,569 1,734,357 1,046,420 15,542,792 16,589,212 0
2055 2.0% 18,690,380 1,771,038 1,046,420 15,872,922 16,919,342 0
2056 2.0% 19,064,528 1,808,453 1,046,420 16,209,656 17,256,076 0
2057 2.0% 19,446,159 1,846,616 1,046,420 16,553,124 17,599,544 0
2058 2.0% 19,835,423 1,885,542 1,046,420 16,903,461 17,949,881 0
2059 2.0% 20,232,472 1,925,247 1,046,420 17,260,805 18,307,225 0
2060 2.0% 20,637,462 1,965,746 1,046,420 17,625,296 18,671,716 0
2061 2.0% 21,050,552 2,007,055 1,046,420 17,997,076 19,043,496 0
2062 2.0% 21,471,903 2,049,190 1,046,420 18,376,293 19,422,713 0
2063 2.0% 21,901,681 2,092,168 1,046,420 18,763,093 19,809,513 0
2064 2.0% 22,340,056 2,136,006 1,046,420 19,157,630 20,204,050 0
2065 2.0% 22,787,197 2,180,720 1,046,420 19,560,057 20,606,477 0
2066 2.0% 23,243,281 2,226,328 1,046,420 19,970,533 21,016,953 0
2067 2.0% 23,708,487 2,272,849 1,046,420 20,389,219 21,435,639 0
2068 2.0% 24,182,998 2,320,300 1,046,420 20,816,278 21,862,698 0
2069 2.0% 24,666,998 2,368,700 1,046,420 21,251,878 22,298,298 0
2070 2.0% 25,160,678 2,418,068 1,046,420 21,696,191 22,742,611 0
2071 2.0% 25,664,232 2,468,423 1,046,420 22,149,389 23,195,809 0
2072 2.0% 26,177,858 2,519,786 1,046,420 22,611,652 23,658,072 0
2073 2.0% 26,701,755 2,572,176 1,046,420 23,083,160 24,129,580 0
2074 2.0% 27,236,131 2,625,613 1,046,420 23,564,098 24,610,518 0
2075 2.0% 27,781,194 2,680,119 1,046,420 24,054,654 25,101,074 0
2076 2.0% 28,337,158 2,735,716 1,046,420 24,555,022 25,601,442 0
2077 2.0% 28,904,242 2,792,424 1,046,420 25,065,397 26,111,817 0
2078 2.0% 29,482,667 2,850,267 1,046,420 25,585,980 26,632,400 0
2079 2.0% 30,072,661 2,909,266 1,046,420 26,116,975 27,163,395 0
2080 2.0% 30,674,454 2,969,445 1,046,420 26,658,589 27,705,009 0
2081 2.0% 31,288,284 3,030,828 1,046,420 27,211,035 28,257,455 0
2082 2.0% 31,914,390 3,093,439 1,046,420 27,774,531 28,820,951 0
2083 2.0% 32,553,018 3,157,302 1,046,420 28,349,296 29,395,716 665,489,227
**
TOTAL 1,300,674,863 121,737,486 88,945,700 1,089,991,676 1,178,937,376
</TABLE>
<TABLE>
Lessee Group
Wien & Malkin Helmsley
Group LLP Spear Lessee
Year Total Override * Override * Profit
<CAPTION>
<S> <C> <C> <C> <C> <C>
1999 2,403,710 200,371 200,371 2,002,968
2000 4.0% 2,581,710 218,171 218,171 2,145,368
2001 5.0% 2,813,110 241,311 241,311 2,330,488
2002 6.0% 3,104,674 270,467 270,467 2,563,739
2003 7.0% 3,465,242 306,524 306,524 2,852,193
2004 7.0% 3,851,049 345,105 345,105 3,160,839
2005 7.0% 4,263,863 386,386 386,386 3,491,090
2006 6.0% 4,642,472 424,247 424,247 3,793,977
2007 5.0% 4,976,910 457,691 457,691 4,061,528
2008 4.0% 5,257,838 485,784 485,784 4,286,270
2009 3.0% 5,681,016 528,102 528,102 4,624,813
2010 2.0% 5,831,481 543,148 543,148 4,745,185
2011 2.0% 5,984,956 558,496 558,496 4,867,964
2012 2.0% 6,141,499 574,150 574,150 4,993,199
2013 2.0% 6,301,174 590,117 590,117 5,120,939
2014 2.0% 6,464,042 606,404 606,404 5,251,234
2015 2.0% 6,630,168 623,017 623,017 5,384,134
2016 2.0% 6,799,616 639,962 639,962 5,519,693
2017 2.0% 6,972,453 657,245 657,245 5,657,962
2018 2.0% 7,148,747 674,875 674,875 5,798,997
2019 2.0% 7,328,566 692,857 692,857 5,942,853
2020 2.0% 7,511,982 711,198 711,198 6,089,586
2021 2.0% 7,699,067 729,907 729,907 6,239,253
2022 2.0% 7,889,893 748,989 748,989 6,391,914
2023 2.0% 8,084,535 768,454 768,454 6,547,628
2024 2.0% 8,283,071 788,307 788,307 6,706,457
2025 2.0% 8,485,577 808,558 808,558 6,868,461
2026 2.0% 8,692,133 829,213 829,213 7,033,706
2027 2.0% 8,902,820 850,282 850,282 7,202,256
2028 2.0% 9,117,721 871,772 871,772 7,374,177
2029 2.0% 9,336,921 893,692 893,692 7,549,537
2030 2.0% 9,560,504 916,050 916,050 7,728,403
2031 2.0% 9,788,559 938,856 938,856 7,910,847
2032 2.0% 10,021,174 962,117 962,117 8,096,940
2033 2.0% 10,258,443 985,844 985,844 8,286,754
2034 2.0% 10,500,456 1,010,046 1,010,046 8,480,365
2035 2.0% 10,747,310 1,034,731 1,034,731 8,677,848
2036 2.0% 10,999,101 1,059,910 1,059,910 8,879,281
2037 2.0% 11,255,928 1,085,593 1,085,593 9,084,742
2038 2.0% 11,517,891 1,111,789 1,111,789 9,294,313
2039 2.0% 11,785,093 1,138,509 1,138,509 9,508,075
2040 2.0% 12,057,640 1,165,764 1,165,764 9,726,112
2041 2.0% 12,335,637 1,193,564 1,193,564 9,948,510
2042 2.0% 12,619,195 1,221,919 1,221,919 10,175,356
2043 2.0% 12,908,424 1,250,842 1,250,842 10,406,739
2044 2.0% 13,203,437 1,280,344 1,280,344 10,642,749
2045 2.0% 13,504,350 1,310,435 1,310,435 10,883,480
2046 2.0% 13,811,282 1,341,128 1,341,128 11,129,025
2047 2.0% 14,124,352 1,372,435 1,372,435 11,379,482
2048 2.0% 14,443,684 1,404,368 1,404,368 11,634,947
2049 2.0% 15,540,816 1,514,082 1,514,082 12,512,653
2050 2.0% 15,873,049 1,547,305 1,547,305 12,778,439
2051 2.0% 16,211,926 1,581,193 1,581,193 13,049,541
2052 2.0% 16,557,581 1,615,758 1,615,758 13,326,065
2053 2.0% 16,910,149 1,651,015 1,651,015 13,608,119
2054 2.0% 17,269,769 1,686,977 1,686,977 13,895,815
2055 2.0% 17,636,580 1,723,658 1,723,658 14,189,264
2056 2.0% 18,010,728 1,761,073 1,761,073 14,488,583
2057 2.0% 18,392,359 1,799,236 1,799,236 14,793,888
2058 2.0% 18,781,623 1,838,162 1,838,162 15,105,298
2059 2.0% 19,178,672 1,877,867 1,877,867 15,422,938
2060 2.0% 19,583,662 1,918,366 1,918,366 15,746,929
2061 2.0% 19,996,752 1,959,675 1,959,675 16,077,401
2062 2.0% 20,418,103 2,001,810 2,001,810 16,414,482
2063 2.0% 20,847,881 2,044,788 2,044,788 16,758,305
2064 2.0% 21,286,256 2,088,626 2,088,626 17,109,004
2065 2.0% 21,733,397 2,133,340 2,133,340 17,466,718
2066 2.0% 22,189,481 2,178,948 2,178,948 17,831,585
2067 2.0% 22,654,687 2,225,469 2,225,469 18,203,750
2068 2.0% 23,129,198 2,272,920 2,272,920 18,583,358
2069 2.0% 23,613,198 2,321,320 2,321,320 18,970,558
2070 2.0% 24,106,878 2,370,688 2,370,688 19,365,503
2071 2.0% 24,610,432 2,421,043 2,421,043 19,768,346
2072 2.0% 25,124,058 2,472,406 2,472,406 20,179,246
2073 2.0% 25,647,955 2,524,796 2,524,796 20,598,364
2074 2.0% 26,182,331 2,578,233 2,578,233 21,025,865
2075 2.0% 26,727,394 2,632,739 2,632,739 21,461,915
2076 2.0% 27,283,358 2,688,336 2,688,336 21,906,686
2077 2.0% 27,850,442 2,745,044 2,745,044 22,360,353
2078 2.0% 28,428,867 2,802,887 2,802,887 22,823,093
2079 2.0% 29,018,861 2,861,886 2,861,886 23,295,088
2080 2.0% 29,620,654 2,922,065 2,922,065 23,776,523
2081 2.0% 30,234,484 2,983,448 2,983,448 24,267,587
2082 2.0% 30,860,590 3,046,059 3,046,059 24,768,472
2083 2.0% 31,499,218 3,109,922 3,109,922 25,279,374
TOTAL 1,211,101,863 117,710,186 117,710,186 975,681,490
</TABLE>
Lower Higher
Discount Discount
Present Values Rates PV Rates PV
Lessor
Primary Additional Rent 7.50% 13,922,418 8.50% 12,298,835
Overage Rent 12.50% 32,817,994 13.50% 29,405,052
Fee Value 2083 12.50% 29,866 13.50% 14,076
Total 46,770,278 41,717,963
Lessee 13.00% 28,195,385 14.00% 25,397,124
* Override payments have been computed in accord with the related information
in the Addendum.
** Fee Value has been computed by applying a 10.75% capitalization rate to the
projected net operating income in 2083 for the entire property.
Such NOI was computed as cash flow in 2083, plus 15% as an estimate of
capitalized expenses. Additionally, we have deducted a selling expense
equal to 4.5% of the capitalized value to reflect necessary selling costs.
CHECK:
Lessor Group Total 1,300,674,863 Total Base Profit 2,422,203,725
Lessee Group Total 1,211,101,863 Primary Additional Rent 89,573,000
Combined 2,511,776,725 Combined 2,511,776,725
-14-
SUMMARY OF COMPARISON
Based upon our aforementioned analyses, we have determined that the Capital
Improvement Program with the Lease Extension is beneficial to the lessor. As
projected, the benefit to the lessor ranges from $4,012,797 to $2,962,433
depending upon discount rates applied.
The lessee is also anticipated to benefit from the Capital Improvement Program
with Lease Extension. As projected, the benefit to the lessee ranges from
$3,659,525 to $2,724,678 depending upon discount rates applied.
The following page sets forth in summary format a comparison of each
scenario's cash flows.
-15-
Lincoln Building
Summary Comparison of Scenarios
Present Values at
Lower Higher
Discount Discount
Rates Rates
Lessor
No Extension/Capital Improvement Program $42,757,481 $38,755,530
Extension and Capital Improvement Program
46,770,278 41,717,963
$ Positive Change / Benefit 4,012,797 2,962,433
Lessee
No Extension/Capital Improvement Program 24,535,860 22,672,446
Extension and Capital Improvement Program
28,195,385 25,397,124
$ Positive Change / Benefit 3,659,525 2,724,678
-16-
In summary, we have concluded that undertaking the Capital Improvement
Program and granting the Lease Extension Option with debt financing of
substantially all of the capital improvement amount of approximately
$22,800,000 will result in a positive benefit to the lessor and
to the lessee. We believe the Capital Improvement Program with the
Lease Extension is fair to both the lessor and lessee.
This report is subject to all the Limiting and Contingent Conditions attached
hereto and made part hereof. We certify that to the best of our knowledge and
belief the statements contained herein are true and correct. The reported
analyses, opinions and conclusions are our unbiased professional analyses,
opinions and conclusions. This report has been prepared in conformity with the
requirements of the Code of Professional Ethics and Standards of Professional
Practice of the Appraisal Institute. The use of this report is subject to the
requirements of the Appraisal Institute relating to review by its duly
authorized representatives. We have no present or contemplated future interest
in the property and our compensation is not contingent on any action or event
resulting from the conclusions in, or the use of, this report.
The State of New York conducts a licensing program for qualified
appraisers under the auspices of the Department of State Division of
Licensing Services. Sharon Locatell (#46000007350) has completed this
licensing program and is a Certified General Appraiser.
The authentic copies of this report are bound in covers bearing the firm name of
Brown Harris Stevens. Accordingly any copy of this letter is incomplete and
ineffective if detached from the report, which contains the text, exhibits, and
Addendum.
We trust this report will serve your purpose and that you will call upon us if
there are any items in the report which require clarification.
Respectfully Submitted,
Sharon Locatell
Executive Director
-17-
[LETTERHEARD OF BROWN HARRIS STEVENS]
ADDENDUM
JUSTIFICATION FOR DISCOUNT RATES
Real estate investors generally agree that discount rates fall within a broad
range, depending upon numerous risk factors including the following:
1) Location - typically, the better the location, the lower the IRR. This
factor is relevant for the subject property due to its favorable location-
across the street from Grand Central Terminal;
2) Physical Characteristics of the Property - the newer the property, the
higher the quality of materials and finishes, and the better the design and
layout of the physical plant, the lower the IRR;
3) Degree of forecasted cash flow growth - the greater the growth forecasted,
the higher the IRR;
4) Amount of Equity Investment Required - the greater the required equity
investment, the higher the IRR;
5) The Interests being Appraised - leasehold interests, particularly those
which involve a termination of the lease at or near the end of the projection
period, require a higher IRR, except that when the leasehold includes operating
control of the property, the increase in such IRR is moderated; and
6) Length of Projection Period - the longer the projection period, the higher
the IRR.
Based on the above, the valuation of the cash flows accruing to the lessor and
lessee via overage rent and remaining cash flow require an overall discount
rate which lies at the mid-to-upper range of IRR's currently required for
investment in Class A Manhattan office buildings.
According to the Peter F. Korpacz Investor Survey, fourth quarter, 1998,
investors require overall IRR's ranging from 9.75% to 13% in Class A office
buildings in Manhattan. The subject property represents a Class B office
building in a Class A Manhattan location. As such, appropriate overall IRR's
for use in our analyses fall in the mid-to-upper range of those reported for
Class A properties located within Manhattan.
In valuing the separate cash flows, we have used discount rates ranging from
7.5% to 9% for the safest and most secure bond-type cash flow consisting of
the primary rent paid to the lessor, which is very secure bond-type cash flow
and would be made more secure by the Capital Improvement Program.
Therefore, we used higher-range bond-type IRR's of 8-9% to discount cash
flow without the Capital Improvement Program and lower-range bond-type
IRR's of 7.5% to 8.5% to discount cash flow with the Capital Improvement
Program.
The discount rates we applied to the lessor's capitalized reversionary value,
the lessor's overage rent, and the lessee's remaining cash flow range from
12.5% to 14.5% which reflect their increased risk over longer holding periods
(with the lessee's remaining cash flow being at the slightly higher discount
rates on account of the reduced safety and permanence in a leasehold position).
We recognize that the Capital Improvement Program gives greater security in cash
flow and any reversion, so we reduced by 0.5% the discount rates for overage
rent and remaining cash flow and any lessor reversion with the Capital
Improvement Program, as compared with the applicable discount rates for such
cash flow and reversion without the Capital Improvement Program.
All the foregoing discount rates have been utilized to discount to present value
the projected cash flows and reversion for each position in our analyses.
LEGAL DESCRIPTION
ALL that certain lot, piece or parcel of land with the buildings and
improvements thereon erected, situate, lying and being in the Borough of
Manhattan, County of New York, City and State of New York, bounded
and described as follows:
BEGINNING at a point on the southerly side of Forty-Second Street
distant one hundred and five feet westerly from the corner formed by the
intersection of the southerly side of Forty-Second Street with the westerly
side of Park Avenue; running thence southerly parallel with the westerly
side of Park Avenue one hundred and ninety-seven feet six inches to the
northerly side of Forty-First Street; running thence westerly along the
northerly side of Forty-First Street one hundred seventy-nine feet nine
inches; thence northerly parallel with the easterly side of Madison Avenue
and part of the way through a party wall fifty-two feet; thence westerly
parallel with the northerly side of Forty-First Street twenty feet three inches;
thence southerly again parallel with the easterly side of Madison Avenue,
twenty-seven feet; thence westerly again parallel with the northerly side of
Forty-First Street and part of the way through a party wall one hundred feet
to the easterly side of Madison Avenue; running thence northerly along the
easterly side of Madison Avenue, seventy-three feet nine inches; thence
easterly parallel with the southerly side of Forty-Second Street and part of
the way through a party wall one hundred feet; thence northerly again
parallel with the easterly side of Madison Avenue, twenty-four feet eight
and one-quarter inches; thence easterly again parallel with the southerly side
of Forty-Second Street, eighteen feet six inches; thence northerly again
parallel with the easterly side of Madison Avenue seventy-four feet three-
quarters of an inch to the southerly side of Forty-Second Street; thence
easterly along the southerly side of Forty Second Street one hundred and
eighty-one feet six inches to the point or place or beginning;
SAID PREMISES being known as and by the street numbers 60 East 42nd
Street and 301 Madison Avenue;
TOGETHER with the benefits and subject to the burdens of light and air
agreement and declaration made between Lincoln Building Corporation and
Aetna Life Insurance Company, dated January 31, 1941 and recorded
January 31, 1941 in Liber 4475 of Mortgages for New York County at
Page 437;
TOGETHER with all right, title and interest, if any, in and to the use of the
name "Lincoln Building";
TOGETHER with all right, title and interest of the Landlord of, in and to
any streets and roads in front of and adjoining said premises to the centre
lines thereof;
TOGETHER with all fixtures, chattels and articles of personal property
now or hereafter attached to or used in connection with said premises, and
any and all replacements thereof and additions thereof.
CURRENT OWNERSHIP AND RECENT HISTORY
The subject property is currently owned in fee by an entity known as 60 East
42nd Street Associates (lessor), which is comprised of agent partners including
Mr. Peter L. Malkin acting on behalf of a broad group of investors. It is net
leased by an entity known as Lincoln Building Associates (lessee), which is
comprised of principals including Mrs. Harry B. Helmsley, Mr. Peter L. Malkin,
and others. There has been no transfer of ownership since the original lease
was signed in 1958 and thereafter modified six times from 1964-1987.
LEASE SUMMARY
Original Date: October 1, 1958
Modification Dates: 1/1/64, 1/1/77, 4/1/79, 4/1/81, 4/1/82 & 10/1/87
Landlord/Lessor
(Fee Owner): 60 EAST 42ND ST. ASSOCIATES
Tenant/Lessee: LINCOLN BUILDING ASSOCIATES
Leased Premises: 60 East 42nd Street and 301 Madison
Avenue
Original Term: 25 Years; Oct. 1, 1958 - Sept. 30, 1983
Renewal: 2 terms of 25 yrs each
Current Basic Rent: $1,087,843
Primary Rent: $1,053,800
Overage Rent: 50% of any net income of lessee after payment of
basic and primary rent to lessor as
additional rent.
Operating Expenses: Tenant pays all
Real Estate Taxes: Tenant pays all
Assignment: Tenant allowed
Override Payments: Pursuant to existing agreements, the lessor
pays Wien & Malkin LLP 10% of the lessor's
annual cash distributions in excess of $980,000
(14% on its $7,000,000 cash investment), and the
lessee pays each of Helmsley-Spear, Inc. and
Wien & Malkin LLP 10% of the lessee's annual
cash distributions in excess of $400,000.
CERTIFICATE OF VALUE
The undersigned, certifies that, to the best of our knowledge and
belief:
1. The statements of fact contained in this report are true and correct;
2. The reported analyses, opinions and conclusions are limited only
by the reported assumptions and limiting conditions and are our
unbiased professional analyses, opinions and conclusions;
3. Sharon Locatell personally inspected the subject property
described in this report;
4. We have no present or prospective interest in the subject property
described in this report, and we have no personal bias with
respect to the parties involved;
5. Our compensation is not contingent on any action or event
resulting from the analyses, opinions or conclusions in, or the use
of, this report;
6. This appraisal was not based on a requested minimum valuation,
a specific valuation or the approval of a loan;
7. Analyses, opinions and conclusions were developed, and this
report has been prepared, in conformity with the requirements of
the Code of Professional Ethics and Standards of Professional
Conduct of the Appraisal Institute;
8. The use of this report is subject to the requirements of the
Appraisal Institute relating to review by its duly authorized
representatives; and
9. No one provided significant professional assistance to the persons
signing the report.
____
Sharon Locatell
Executive Director
LIMITING AND CONTINGENT CONDITIONS
A. This report is made for the client to which it is addressed and is to
be used by said client only for the purpose stated in the report.
No reliance is to be placed on this report for any other purpose.
B. No responsibility is assumed for matters legal in character. We
render no opinion as to the title, but assume that it is marketable.
The property is appraised as though free and clear of all liens and
encumbrances, except as otherwise indicated. Management and
ownership are presumed to be competent and responsible.
C. No right to expert testimony, attendance in court, or publication
is included with possession of this report.
D. The appraiser has no present or contemplated future interest in
the property.
E. Rentals and other income have been supplied by Wien & Malkin
LLP as supervisor of the lessor and lessee and have not been
subject to independent verification, unless otherwise noted.
Expenses are based either on data supplied by Wien & Malkin
LLP as supervisor of the lessor and lessee or are the appraiser's
own estimate. Other facts reported in the report are correct to
the best of the appraiser's knowledge and belief.
F. In order to obtain a fair evaluation of any report, it must be
considered in its entirety, including the above limiting and
contingent conditions.
G. In the current market, real estate price levels for income
producing properties are dictated by the present value of future
expectations. Under the circumstances, appraisers must quantify
market projections which are, by their character, imprecise.
Property earnings and financial projections contained in our
report represent our informed judgment as to present and
anticipated market trends. Any cash flow analysis implemented
for valuation purposes represents an orderly financial process
superimposed on a market which is typically erratic in behavior.
Any aberrations and/or dramatic changes in the local and national
economy may impact the property's capacity to generate the
earnings set forth herein with the concomitant impact on value.
H. With the exception of possible presence of asbestos, this appraisal
assumes that the property is free of all hazardous materials and
toxic wastes. The presence of hazardous materials or toxic
wastes on the property can substantially impact the value of the
property. A variety of materials including chemicals, metals and
minerals has been determined to be hazardous or toxic under
local, state and/or federal laws and regulations and can be
required to be specially handled and removed from the property
at the expense of the property owner. Certain materials which
may have been used in the construction of the premises or in
building components may be hazardous. Asbestos, for example,
can be hazardous and has been included in a number of building
components such as fire proofing, insulation, linoleum, floor tiles,
ceiling panels and acoustical ceiling coatings. Appraisers are not
experienced in identifying potential toxic waste and hazardous
material problems nor estimating the cost of resolving such
problems. In order to identify the nature and extent, if any, of
toxic wastes and hazardous material problems on the property,
the appropriate experts should be selected and retained.
I. The Americans With Disabilities Act is intended to make many
business establishments equally accessible to persons with a
variety of disabilities; modifications to real property may be
required. State and local laws also may mandate changes.
Brown Harris Stevens Appraisal & Consulting, LLC is not
qualified to advise you as to what, if any, changes may be
required now or in the future. Owners and tenants should consult
their attorneys and qualified design professionals of their choice
for information regarding these matters. Brown Harris Stevens
Appraisal & Consulting, LLC did not determine which attorneys
or design professionals have the appropriate expertise in this area.
Unless otherwise stated herein, this report and any estimate of
value or other evaluation contained herein does not include any
allowance for any cost which may be necessary now, or in the
future, to bring the property into compliance with the
requirements, if any, of the Americans With Disabilities Act.
60 EAST 42nd ST. ASSOCIATES
c/o Wien & Malkin LLP
60 East 42nd Street - 26th Floor
New York, New York 10165-0015
Telephone: 212-687-8700
Telecopier: 212-986-7679
June 30, 1999
To Participants in 60 East 42nd St. Associates ("Associates"):
On behalf of the Agents for the Participants in Associates, I
am seeking your consent to a program to complete and finance
improvements and grant lease extensions at the Lincoln Building
(the "Building").
1. Introduction.
After review with the Lessee, Wien & Malkin LLP supervisory
staff, and on-site Building personnel, I believe the proposed
improvements are necessary to maintain the Building, its
competitive market position, and Associates' long-term investment
return. The Lessee intends to proceed with the program: Were the
Lessee to proceed and pay the cost out of cash flow, overage rent
and extra distributions to Participants would be substantially
reduced and might be eliminated for several years.
The current operating lease extends to 2008 and is renewable
to 2033. The Lessee believes that the costs of the program, which
exceeds the Lessee's responsibility under the lease, justify lease
extension. I agree.
Therefore, I recommend that Associates cooperate by
increasing its mortgage, to facilitate the improvement program and
reduce the impact of the program upon distributions to
Participants, and by extending the lease to incentivize the Lessee
to complete this program and undertake future discretionary
investment in the Building.
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The program is more fully described in the enclosed Statement by
the Agents in the Solicitation of Participant Consents.
2. Background.
Associates has owned the Building since 1958 subject to a
long-term net lease to Lincoln Building Associates (the "Lessee"),
which pays basic rent, from which mortgage debt service and basic
supervisory fees are paid, and overage rent based on operating
profit, from which monthly and extra distributions to Participants
are paid. Total distributions for 1998 were equal to 34.5% of the
original cash investment.
The area of Manhattan surrounding the Building continues to
improve. The sanitation, security, and capital improvements by
the Grand Central Partnership Business Improvement District, New
York City's enhanced image as a place to do business, and the
recent $200,000,000 renovation and restoration of Grand Central
Terminal have been catalysts for transforming the area into one of
the most sought-after office and retail districts in New York
City. There is great potential for attracting quality tenants at
higher rents by upgrading the Building and its systems and
providing greater amenities.
To protect and exploit the Building's economic prospects in
an improved market, the Lessee has prepared a Building upgrade and
amenity enhancement program, the principal components of which
have been designed, engineered, and bid by third party expert
consultants and specially hired in-house personnel.
3. Improvement Program.
The improvements proposed to be completed after December 31,
1998, are shown in Exhibit A to the enclosed Statement and are
estimated to cost approximately $22,800,000 over two to three
years.
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Included in the budget are: (a) $4,000,000 for replacement
of all Building windows, (b) $4,200,000 for public corridor and
elevator lobby upgrades, (c) $3,200,000 for new public bathrooms,
(d) $2,700,000 for elevator system modernization, (e) $625,000 for
new elevator cabs, (f) $385,000 for new concierge desk and new
card key and security system, (g) $1,550,000 for roof and parapet
replacement and repairs, (h) $2,350,000 for water riser
replacement, (i) $750,000 for facade restoration, (j) $800,000 for
new marketing center, new conference center, and upgrading of the
Building law library, and (k) $100,000 for lobby retail arcade
upgrades. The balance will be available for contingencies
discovered in the field and improvement of tenant spaces.
4. Financing.
The $22,800,000 estimated cost of the improvements over
approximately two to three years will be funded substantially
through a fee mortgage increase (from the current approximately
$12,000,000). Associates will own the improvements paid from
mortgage proceeds and will receive tax benefits from depreciation
of the improvements. The increased mortgage charges will be paid
by Associates from an equivalent increase in the basic rent paid
by the Lessee to Associates. Basic rent and cash payments for
improvements will be deducted in computing overage rent, so that
the improvement costs will be borne equally by Associates and the
Lessee but spread over many years, thus stabilizing distributions
to Participants.
As part of this program, the Agents will be authorized
to extend or refinance the increased mortgage with an
institutional lender on a non-recourse basis, from time to time as
they deem appropriate for the benefit of Associates. The maximum
authorized mortgage will be $40,000,000 for funding the program
improvements and other future Building improvements, and the
actual amount will depend in part upon funding available from cash
flow and the actual cost of the work.
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5. Basic Rent.
Currently, basic rent is $1,087,842 a year, to be adjusted to
reflect any increase or decrease in debt service on the existing
mortgage balance. The basic rent payable by the Lessee to
Associates will increase to cover debt service on the increased
mortgage.
The Lessee projects that improvements will enhance Building
rental income paid by office and store tenants and reduce or
completely offset the annual increase in rent expense. However,
assuming no enhancement in bottom line performance from higher
rental rates, higher occupancy, and lower credit loss from all
these improvements, and an initial increase in the mortgage from
$12,000,000 to $34,000,000 with interest at 7.5% on the additional
$22,000,000 and with 25 year amortization, the basic annual rent
increase will be $1,950,937, and overage rent will decrease by
one-half of that amount. For an original $10,000 Participant who
received $3,450 in distributions for 1998, this mortgage increase
would reduce distributions by less than $1,260 a year, prior to
any income enhancement resulting from the improvements.
6. Solicitation and Program Expenses.
The expenses for the consent solicitation, lease amendment,
refinancing, transfer and recording taxes, legal fees, and related
costs will be funded by the mortgage increase which is to be
repaid by the Lessee's increased basic rent. Wien & Malkin LLP
and its affiliates will arrange the mortgage refinancing, and
there will be no brokerage commission paid. Wien & Malkin LLP
will represent as counsel Associates and the Lessee in this
program at standard hourly rates, and it and its affiliates as
well as the Agents will be indemnified by Associates and the
Lessee against any claim or expense arising in connection with the
program.
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7. Lease Extension.
To induce the Lessee to undertake improvements in the future
beyond what it can recoup over the then remaining term of its
lease, Associates' Agents will be authorized to give additional
lease extension rights to the Lessee beyond the current 2033
expiration date for such consideration and upon such terms as the
Agents may then deem appropriate for the benefit of Associates.
The term of each extension will reflect the net present benefit to
Associates from projected increases in basic rent, overage rent
and value which arise from Associates' improvement contributions,
all as determined by a recognized independent expert. Accordingly,
when the Lessee has completed the program, the Agents will
authorize extending the lease for 50 years to 2083 and may grant
further lease extensions in the future for other consideration as
they deem appropriate for the benefit of Associates.
8. Conclusion.
Certain improvements by the Lessee are already in progress or
have been previewed to tenants, brokers, and prospective tenants
and have been welcomed enthusiastically. Combined with a
rededicated staff and new marketing initiatives (including a
newsletter and website), enthusiasm amongst Building tenants and
new interest in the Building by brokers and prospective tenants
indicate that the contemplated expenditures will preserve and
enhance the Building's operating results in an improved market
while the related financing will stabilize the Participants'
returns.
Enclosed are (a) the Statement detailing the program and
including financial reports and a fairness opinion of an
independent expert and (b) a colored Consent Form. Each
Participant should review the Statement before signing and
returning the colored Consent Form.
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The consent of all Participants is required to authorize the
program. Upon receipt of consent from 90% in interest of an
Agent's group, each Participating Agreement empowers the Agent to
purchase for $100 the interest of any Participant who withholds
consent 10 days after notice of 90% consent. Each Agent presently
intends to purchase the interest of any non-consenting Participant
in his group once the 90% threshold is achieved.
By signing, dating and returning the enclosed Consent Form,
you authorize the Agents and any partner or senior director at
Wien & Malkin LLP designated by me to conclude on behalf of
Associates the necessary agreements to effect this financing,
improvement, and lease extension program.
9. Recommendation.
I strongly urge your consent. The Lessee has demonstrated
that the improvements are necessary. Financing of the
improvements through an increase in the mortgage will spread the
costs over the term of the mortgage and will also improve the tax
shelter for Participants. If the program for financing the
improvements and extending the lease is not approved, the Lessee's
full comprehensively planned, bid, and priced improvements will
not be implemented, but overage rent and distributions will still
be reduced or eliminated to the extent the Lessee applies Property
cash flow to perform any part of such improvements.
Please sign, date and return the enclosed Consent Form as
soon as possible. If you have any question, please call any of my
partners at Wien & Malkin LLP, Alvin Silverman, Stanley Katzman,
or Thomas N. Keltner, Jr.
Very truly yours,
Peter L. Malkin
THE AGENTS RECOMMEND YOUR CONSENT. PLEASE SIGN, DATE AND
IMMEDIATELY RETURN THE ENCLOSED COLORED COPY OF THE CONSENT. A
SIGNED CONSENT FORM WHICH IS RETURNED WITHOUT AN INDICATED CHOICE
WILL CONSTITUTE A BINDING AFFIRMATIVE CONSENT. ONCE GIVEN,
CONSENT MAY NOT BE REVOKED.
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