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Should You Buy the Empire State Building?

Want to buy a piece of the Manhattan skyline? The real estate investment trust that owns the Empire State Building filed for an IPO on Monday, giving regular investors a chance to own some of the landmark 102-story skyscraper. But advisers say investors should look elsewhere.

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Empire State Realty Trust aims to raise up to $1 billion with the common stock offering; the timing hasn’t been announced. The REIT owns a dozen office buildings in Manhattan, Westchester County, New York and Connecticut. And New York’s commercial real estate market offers some attractive deals right now, says David B. White, the president and founder of David B. White Financial, a financial planning firm. The reason, he says: Many “premiere” owners are having to sell off “their crown jewels” in order to raise money to pay down debt in other parts of the country hit hard by the real estate downturn. “There’s a unique opportunity to buy properties in New York,” he says.

But some advisers say that instead of owning stock in a public REIT, investors may be better off buying shares of a private REIT that doesn’t trade on an exchange. A private REIT tends to be far less correlated to the movements of the stock market, making it a better diversifier than a REIT’s common stock, says Robert Russell, the president of advisory firm Russell & Company.

Plus, some of the yield from private REITs can be tax-free, and can provide better inflation protection, he says.

That said, private REITs are typically only available to investors with at least $250,000 of investible assets. Experts warn that they’re also far less liquid than stocks, so investors should expect to have that money locked up for 5 to 8 years.

When evaluating public or private deals, Russell recommends looking for occupancy rates of 85 to 100% and leverage of between 30 to 40%. Based on information disclosed in the documents the Empire State Realty Trust filed with the Securities and Exchange Commission, the occupancy rate in their properties is about 80%, or 83% including leases that have been signed but not yet begun, and it is fairly highly leveraged, with a debt-to-equity ratio of 88%.

By that occupancy measure, the Empire State Building itself, while a magnet for marauding apes and star-crossed lovers, is one of the trust’s weaker properties: Its office space is only 67% occupied, although its retail space is about 90% occupied. “It’s not the most desirable location,” says Philip Martin, the director of REIT research at Morningstar. Plus, it’s an older building, and may not offer the kind of space tenants are looking for these days, in a market where tenants still have a good deal of negotiating power, Martin says. What’s more, he says, “When you throw the Empire State Building into a portfolio you’ll likely have a lack of diversification. So much of the square footage and so much of the revenue will come from that building.”

Whether or not the stock is a good buy will ultimately depend on the price, White says. But whatever else the deal does or doesn’t offer, it’ll certainly draw some investor interest. “Sleepless in Seattle is going to be showing on TV tonight, since it’s Valentine’s Day,” White says. “How cool would it be to be sitting there tonight watching the end and saying to your kids, ‘Hey, we own part of that building?’”

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    • Reit Expert you’re flat wrong about private REITs. Sales loads vary, I’ve never been involved with a REIT that had a load of 20%. People like me invest a portion in private REITs to provide insulation from market volatility, receive cash-flow from rents, and they can be included as part of a managed account where you buy them at NAV (void of any commissions).

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