May 29 (Bloomberg) -- Tishman Speyer Properties LP and Lehman Brothers Holdings Inc. may buy U.S. apartment developer Archstone-Smith Trust for more than $12 billion, three people familiar with the negotiations said.

Tishman, the New York-based real estate investor, also would assume debt, bringing the total value of the transaction to more than $20 billion, according to the people, who declined to be identified before an agreement is reached. Archstone is the second-largest U.S. apartment real estate investment trust, with a market value of $12.3 billion.

The acquisition would give Tishman and Lehman more than 86,000 apartments from New York to San Francisco as rental demand increases and home prices fall, according to forecasts from the National Association of Realtors. Rents may rise 6 percent to 6.5 percent this year in markets where Denver-based Archstone is strong, UBS AG estimates.

Archstone has ``high-quality assets, presence in key markets, low leverage and high-rise properties that can be viewed as call options on the next condo wave,'' UBS analyst Alexander Goldfarb wrote in a May 24 note to clients. He has a ``neutral 2'' rating on the stock.

Archstone ranks as the No. 2 publicly traded owner of apartments in the U.S. after Sam Zell's Chicago-based Equity Residential. Zell's Equity Office Properties Trust was acquired in February by New York-based leveraged buyout firm Blackstone Group LP for about $39 billion, including debt.

Share Gains

Trading in Archstone shares were suspended pending news. The shares rose $4.27, or 7.7 percent, to $59.50 at 8:19 a.m. in trading before the open of U.S. exchanges. The shares gained $4.10, or 8 percent, to $55.23 in New York Stock Exchange composite trading on May 25 amid takeover speculation. REIT Zone Publications, an industry newsletter, reported last week that Tishman may be in discussions with Archstone, led by Chief Executive Officer Scot Sellers.

Archstone spokesman David Pendery, Sellers and Charles Mueller, the chief financial officer, didn't return telephone calls seeking comment. Tishman spokesman Rick Matthews said the company had no comment. Hannah Burns, a Lehman spokeswoman, also declined to comment.

Archstone owned or had a stake in 86,014 units, including those under construction, at the end of March. More than 90 percent of the properties are in the Washington, New York, southern California, San Francisco, Boston and Seattle metropolitan areas, where analysts expect rents to rise. The company also has more than $4 billion of projects in development or in the planning stages, including four in southern California valued at $540 million.

Acquisition in Germany

Archstone acquired five high-rise buildings in New York City last year to rank as the largest publicly traded apartment owner in Manhattan, according to the company's annual report. The company also expanded in Europe by purchasing DeWAG to gain 6,400 residential units, mainly in southern and western Germany.

The company's funds from operations rose for the past three years and net income climbed for five consecutive years, data compiled by Bloomberg show. Funds from operations is net income excluding gains, losses, depreciation and amortization. It's used to gauge the performance of REITs and doesn't comply with generally accepted accounting principles.

More Deals?

``Private equity values these REITs far more than the market does,'' said Leo Wells, president of Wells Capital Inc., which owns Archstone shares. ``The public markets tend to look at just dividends, whereas private equity is looking for growth combined with the dividend. You will either see more deals or you will see the price of REITs climb appreciably.''

Closely held Tishman Speyer, founded in 1978 by Jerry Speyer and Robert Tishman, is a global developer mostly known for its office properties, including New York's Rockefeller Center and Chrysler Building. The company paid $5.4 billion last year to buy Stuyvesant Town-Peter Cooper Village, Manhattan's largest apartment complex with 11,200 units.

Tishman Speyer is developing 1,000 condominiums in San Francisco and in 1999 opened two mixed-use, 500-apartment towers at 63rd Street and West End Avenue in New York City.

Led by Raymond Mikulich and Mark A. Walsh, Lehman's real- estate buyout arm has invested in 1 Times Square, the Manhattan building famed for the lowering of a ball to mark the New Year, and the Chrysler Building. The New York-based securities firm helped Tishman Speyer finance the 2005 purchase of the MetLife Building in New York for $1.72 billion.

Lehman opened its first high-return real estate fund in 2000, gathering $1.6 billion from employees and outside investors. The company's second property fund was started in 2005 with $2.4 billion and $1.1 billion for a separate fund to invest in mezzanine loans. The firm began to raise money for a third fund this year.

To contact the reporters on this story: Justin Baer in New York at jbaer1@bloomberg.net; David M. Levitt in New York at dlevitt@bloomberg.net.

Last Updated: May 29, 2007 09:51 EDT