SPECIAL FOCUS: AFT’s Top Deals of 2007

APARTMENT FINANCE TODAY • NOVEMBER/DECEMBER 2007

It Doesn’t Get Much Bigger

The $22.2 billion deal for the Archstone-Smith portfolio was struck during a boom, but financed during a capital markets bust.

By Jerry Ascierto

In the biggest multifamily deal of the year, a partnership between Tishman Speyer Properties and Lehman Brothers Holdings, Inc., purchased real estate investment trust (REIT) Archstone-Smith for $22.2 billion.

The deal is the largest acquisition in the history of the multifamily REIT market, and the second-largest privatization of a public real estate company, next to the $39 billion acquisition of Equity Office Properties by the Blackstone Group in February.

Archstone’s portfolio is composed of 359 apartment communities and more than 87,600 units, mainly on the East and West coasts, with some still under construction as of Oct. 5.

When the purchase was announced in late May at the peak of the market, Archstone-Smith said it expected the transaction to close in the third quarter. Initially, the deal was to be funded through conduit executions, according to several industry experts.

But as the credit crisis developed throughout the summer and into the fall, the buyers had to look for financing elsewhere. In fact, the ongoing volatility in the capital markets led the companies to announce in early August that the transaction would be delayed until the beginning of October, causing many industry watchers to wonder whether the deal could get done.

The deal’s debt financing ultimately landed on the doorsteps of government- sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, whose multifamily volume has grown in proportion to the commercial mortgagebacked securities market’s demise.

Freddie Mac bought two pools of loans worth a total of $1.8 billion, secured by new financing on 32 properties, and assumed existing loans on 15 properties. Tishman Speyer and Lehman Brothers provided equity for the deal of approximately $500 million.

For Freddie Mac, being involved in a corporate acquisition of this size was unusual. “That deal was bound for conduit land. If that deal had happened last year, we wouldn’t have seen it,” said Mike May, Freddie Mac’s senior vice president of multifamily originations. “We’re involved in acquisition deals all the time, but this is just huge.” The company said it was the largest pool of loans that its multifamily operation had ever purchased.

Freddie Mac had to be flexible to get the deal done. Although Lehman Brothers is not part of Freddie Mac’s Program Plus Seller/Servicer program of delegated loan originators, the agency gave Lehman special approval to originate mortgages for the GSE in this deal.

Fannie Mae purchased a $7.1 billion credit facility, secured by a portfolio of 105 multifamily properties. The debt is allocated among nine pools—collections of mortgages with similar characteristics— and the mortgage loans in each of the pools are cross-collateralized and cross-defaulted.

“This deal is unique for Fannie Mae in that it is our largest credit facility purchased to date,” said Caroline Blakely, vice president for credit risk management in Fannie Mae’s Housing and Community Development division.

Financing came from other sources as well. The Irvine Co., a Newport Beach, Calif.-based, privately held real estate firm, agreed to buy a 90 percent interest in 15 Archstone- Smith apartment complexes in Southern California. While the value of that transaction was not publicly disclosed, several published reports pegged it at about $1.4 billion. The Irvine Co. also made an equity investment in the larger deal, but the size of that investment was not disclosed.

The piecemeal financing was another sign of the market’s volatility. “Large loan deals are extremely difficult to do now; they’re being broken up,” May said.

As a result of the transaction, Archstone-Smith will be taken private, and at press time planned to delist from the New York Stock Exchange on Oct. 22. For Tishman Speyer, the purchase continues its growth-by-acquisition strategy. Last year, it aggressively expanded its presence in the New York multifamily market when it acquired Stuyvesant Town and Peter Cooper Village, two massive Manhattan apartment developments, for $5.4 billion.