Lehman Bros has invested a lot in Archstone, which owns and operates one of the largest and highest-quality apartment portfolios in the country. In fact, critics would say the firm has invested way too much, pointing to the $22 billion leveraged buyout in 2007 that was instrumental in forcing the firm into bankruptcy.

Yet Lehman seems poised to sink even more money into Archstone to make sure it doesn’t lose it. At the very least, Lehman, which owns 47 percent of Archstone, is working actively to stymie Equity Residential’s efforts to purchase a 26.5 percent ownership interest in the apartment company for $1.325 billion.

The Chicago-based REIT’s bid is for roughly half of the collective interests owned by Bank of America and Barclays. Archstone’s portfolio consists of nearly 50,000 units and another 1,300 units currently under construction.

"This could be a protracted legal battle," says Andrew J. McCulloch, a senior analyst for Newport Beach, Calif.-based Green Street Advisors. "I don’t see any quick resolution."

Lehman has called into question the legality of Equity Residential’s contract with Archstone’s other two owners, Bank of America (BofA) and Barclays, which own 28 percent and 25 percent of Archstone, respectively. Lehman claims that neither BofA nor Barclays notified it of negotiations with the apartment REIT—something the financial institutions were required to do per the original ownership agreement.

No time to plan

On the surface, the lack of notice might seem inconsequential since Lehman has roughly 60 days to match Equity Residential’s bid via a right of first offer. (It’s worth noting that even if Lehman exercises that right, Equity Residential has 30-day option to purchase the other 26.5 percent owned by BofA and Barclays.)

If one digs a little deeper, however, BofA and Barclay’s alleged oversight has indeed created a difficult situation for Lehman. Experts point out that if Lehman had been notified of negotiations, it would have had more time to strategize and respond.

As things stand, Lehman is presumably scrambling to find the capital to exercise its right of first offer. In fact, the sector is buzzing about a possible partnership with The Blackstone Group and/or Brookfield Asset Management.

Yet another partnership might be the last thing Lehman wants or needs. In fact, the whole situation with Archstone is messy because of its complicated ownership structure and the fact that the stakeholders are at cross purposes.

For several months, Lehman has been battling it out with BofA and Barclays over Archstone’s future. While Lehman wants to hold onto Archstone, perhaps even take it public once again, insiders say that BofA and Barclays want out as quickly as possible. And Equity Residential’s bid gets the banks one step closer to their goal—a goal that Lehman obviously does not share.

"Lehman likely believes asset values will keep rising given the strong outlook for fundamentals in the sector and the expectation of higher NOI in the future," McCulloch says. "They believe the Equity Residential bid also values the assets well below current market values and assigns zero value for the platform."

In fact, Lehman contends that Equity Residential’s offer is way too low. Interestingly, many industry experts said the same thing in 2007 when Archstone accepted Lehman’s bid.