As you read this, history is being made. The joint venture of New York City private equity firms Tishman Speyer Properties and Lehman Bros. Holdings is about to seal the deal on its $22.2 billion acquisition of Denver, Colo.-based Archstone-Smith Trust, the titanic multifamily apartment real estate investment trust that will be taken private for $60.75 per share. Announced in May and scheduled to close on Oct. 5, the transaction will mark the largest multifamily cash privatization to date, setting a new standard for private equity buyouts of public multifamily entities. That's if it happens.

Originally pegged to close by the end of the third quarter, the deal was officially postponed on Aug. 6 to its current October close date. Although the postponement is just five days into the fourth quarter—and shareholders approved the merger by a wide margin on Aug. 22—some industry observers still question whether the deal is going to go through at all. “I will make a call on the deal: It is deader than dead,” says Matt McManus, chairman of the Philadelphia-based real estate investmentand development firm Bluestone Real Estate Capital. “That deal was consummated when the debt markets were as healthy as possible, and they won't get back to that level anytime soon. Not by [this] Oct. 5, not by Oct. 5, 2009. The only way it will happen is if the seller and buyer readjust the price. It is the classic example of a deal that got caught over a barrel.”

While McManus is perhaps the most vocally pessimistic among a panel of multifamily experts weighing in on the future of REIT privatizations for this article (see “Meet the Panel,” right), he is by no means alone. His take on how debt availability (or the lack thereof) will affect the Archstone deal—or any future REIT privatizations, for that matter—is shared by observers on- and off-the-record. In particular, experts say that the so-called “barbell strategy” of buying large public real estate portfolios, selling them down, and either keeping the profit or using the proceeds to power up new development is highly unlikely in an atmosphere where downstream buyers are having difficulty with their own structured financing.

“There is a more substantial question mark today than there was even six months ago, considering the availability of financing and the cost of that financing,” explains Bill Fryer, senior partner and head of the Real Estate Market Capital Practice Group for Atlanta-based law firm King and Spalding. “Tighter credit markets severely affect the ability to sell assets post acquisition. To maximize that universe of buyers, you are looking at traditional, fixed-rate mortgage financing. That market is unsettled, and that is an inhibitor.”

Private equity entities in the Archstone deal face the additional pressure of their own financing, which involves assuming $6.5 billion in Archstone debt and sourcing up to $17.1 billion in additional debt purchasers to fund the transaction. “On this Archstone deal, the interest rates on their debt are supposed to exceed the net operating income percentage on the portfolio. How does that work?” questions Richard Gollis, principal of San Francisco-based The Concord Group, a real estate investment advisory firm. “When it comes to privatizations, so much will be driven by what the credit markets do. That will be the larger issue over the next 12 months.”

In the past few years, multifamily REITs have privatized for a variety of reasons, from escaping the demands of Sarbanes-Oxley to accessing the widespread availability of private capital. Now, the penchant to go private is not so cut-and-dried. Here, MFE surveys the past, present, and future of REIT privatizations.

THAT WAS THEN The major multifamily REIT privatizations of 2004 and 2005—including Gables Residential, AMLI, and Town and Country—were powered in part by tremendous real estate valuations and eager buyers that had relatively cheap and stable access to debt financing. It was the perfect climate for REITs seeking exit from a public market notorious for undervaluing both existing portfolios and development pipelines in relation to stock price.

“Multifamily real estate has always been a tough sell on Wall Street—that's just the nature of the beast,” explains Michael Stewart, president of Pacific Property Assets, an Irvine, Calif.-based private multifamily apartment owner of approximately 5,800 units across Southern California and Arizona. “Eighty percent of the return on real estate is when you sell it. Operating and collecting rents is a nice thing if you are good at it, and it certainly keeps the lights on, but it doesn't light up the board. Until you liquidate those assets, there is really nothing to measure.” And of course, once you've liquidated, you no longer have the underlying equity.

On Feb. 1, 2005, Gables Residential CEO Chris Wheeler noted that discrepancy and the generally poor valuation of his company on Wall Street during a quarterly earnings call. He suggested the Gables board would likely approve a sale of the company for a cash offer of around $45 per share. “There were a number of people listening to that call that took that as a signal,” says Fryer, who acted as legal advisor to the eventual buyout team of New York City-based ING Clarion and Lehman Bros.

At the time, cap rates were compressing and assets were growing in value almost daily, Fryer recalls. “If you put institutional-grade product on the market, you'd have 20 to 30 buyers showing up, so there was a degree of frustration [among the REITs],” he says. According to Gable's merger proxy statement filed with SEC (see “Deep Background,” page 52), the Gables board pondered selling portions of the REIT's portfolio at various meetings in 2004 and 2005 but ultimately dismissed the notion in favor of an all-out sale of the company.

“Gables' board was very sophisticated. [They] considered that one way to maximize shareholder value at that time was to sell down the Florida assets to condo converters who were paying outlandish prices for any assets that could possibly be converted,” says Gill Menna, a partner at Boston-based law firm Goodwin and Proctor, which acted as an advisor to Gables during the privatization. “But the board did not have the intestinal fortitude to render their company down to a development company in Texas and the Inland Empire.”