Earlier this month, one of the world’s most iconic buildings went public as a REIT. The Empire State Building and several smaller properties totaling 7.68 million rentable square feet were combined to form Empire State Realty Trust, Inc. The ticker is ESRT.

My purpose here today is not to examine the company’s valuation, or discuss its investment potential. (I’ll leave that to REIT specialists. The Empire State Building’s high vacancy rate and the ongoing and expensive renovations complicate the analysis.) The REIT may be cheap, dear, or fairly valued. What I am here to discuss is how a quirk of the formation process allows investors to buy identical claims on the REIT’s assets at discounts to the market price of 10% or more.

Prior to the IPO, the ownership structure of the Empire State Building and the trust’s other properties was positively byzantine. Individuals, partnerships, estates, individuals and corporations all owned bits and pieces of the various properties. In order to go public, dozens and dozens of separate owners had to be convinced to vote in favor of the transaction, which would result in them contributing their stakes in return for ownership in the new structure. The process was both lengthy and litigious, but ultimately successful.

Post-IPO, the newly-formed company’s ownership structure is still somewhat convoluted. All of the properties are owned by Empire State Realty OP, LP. This partnership is owned, in turn, by management, Empire State Realty Trust, Inc., and continuing investors who have received LP units in exchange for their stakes in the original ownership structures.

Here’s an ownership chart, adapted from the prospectus and adjusted for the over-allotment option which was fully subscribed.

Again, Empire State Realty Trust, Inc. is the public REIT while Empire State Realty OP, L.P. is the partnership that owns all of the properties.

In simple terms, this chart shows how little of the operating partnership that the public REIT actually owns, just 39.1%. Continuing investors hold a sizable ownership stake, nearly half of the operating partnership’s units.

These operating partnership units not owned by the public REIT or management present the opportunity. The partnership units consist of three different series, all of which are publicly traded.

These partnership units are economically identical to shares of Empire State Realty Trust, Inc., and will receive the same distributions. From the press release announcing the listing of the units:

“The operating partnership units are entitled to the same distributions on a per unit basis as ESRT Class A shares. However, they are non-voting securities with significantly less trading volume than ESRT Class A shares. An operating partnership unit is exchangeable for cash or shares of Class A common stock, on a one-to-one basis, at the Company’s election generally commencing on October 1, 2014.”

The only substantive difference between these operating units and shares of the REIT is voting rights, and the fact that they can be exchanged at the REIT’s option. Because their economic value is identical, the prices of these operating units ought to track the prices of the REIT very closely, with perhaps a small discount for the lack of voting rights. Instead, the units are currently trading at a substantial discount to Empire State Realty Trust, Inc.’s share price.

Discounts on the operating units range from nearly 7% to nearly 15%, based on last trades. Trading in the units has been erratic, with the Series ES units changing hands at $82.00 on October 9 and 10, roughly six times the value of the the REIT’s shares.

While the current discounts offered may be attractive, a larger opportunity could arise when the lockup period on these units expires. Holders of the Series ES, 60, and 250 units are currently prohibited from collectively selling more than the greater of 1.1 million units or $40 million worth of Series ES units, and their same proportional holdings of the series 60 and 250 units. $40 million worth of Series ES units equates to 3.08 million units at the REIT IPO price of $13. There are 46.22 million Series ES units outstanding, so owners may sell 6.67% of their Series ES, 60, and 250 units are any time.

The next substantial lockup expiration comes 180 days after the IPO, when owners may sell up to 50% of their holdings. Lockup restrictions expire completely after one year. I’ve made a simple chart to summarize the lockup calendar.

Presently, only a little more than $60 million worth of operating units can be sold, but this amount will balloon to over $450 million at the beginning of April, 2014. If the market is suddenly flooded with units, the discounts to the REIT price may blow out.

Investors should monitor the trading prices of these operating partnership units in order to take advantage of potential market dislocations caused by motivated sellers or an influx of newly tradable units. Investors who are bullish on Empire State Realty, Inc. could simply buy whichever operating unit offers the biggest discount to the REIT, while investors who are agnostic or bearish on the REIT could easily hedge the trade by purchasing the operating partnership units and shorting the REIT shares.

I must emphasize that the operating partnership units trade at extremely low volumes, and investors should exercise caution in buying or selling.

No position, but monitoring the situation.