What’s fair market value in a white-hot real estate market? Many Wall Street analysts are asking that question after last week’s proposed $4 billion merger between SL Green Realty Corp. (NYSE: SLG) and Reckson Associates Realty (NYSE:RA). Specifically, they are concerned that Manhattan-based SL Green agreed to buy the Long Island-based office REIT at a discount to Reckson’s closing share price last Wednesday.

Many analysts question if Reckson fetched the best price for its Manhattan assets. They also wonder if this deal will flush out a slew of new bidders determined to take down the Reckson portfolio at a higher basis. Given the intensity of demand for New York City commercial real estate, not to mention a heavy volume of capital vying for deals, it’s hardly out of the question. The proposed merger is expected to close in January.

“While we can’t completely rule out a higher offer, we also can’t eliminate the possibility that the deal is not approved,” wrote Banc of America securities analyst John Kim in a Friday research note. Kim also lowered his investment opinion of RA to “neutral” from “buy”.

Why wouldn’t the deal get approval from Reckson’s shareholders? Roughly $2.1 billion of Reckson-owned assets will be sold back to an investor group led by Reckson’s CEO, Scott Rechler. This insider transaction, by which the Rechler group will retain its Long Island, Westchester and New Jersey properties, drew barbs from some analysts who believe that these assets were sold below market value in a so-called “sweetheart deal.”

While it’s hard to determine if both sides agreed to low-ball each other, some analysts see a pattern. In 2002, for example, Reckson sold an industrial portfolio to various Rechler family members who were exiting the publicly traded firm to start a private venture. The public market didn’t block the deal, say analysts, because it was viewed as part of a major restructuring program at Reckson (which was previously criticized for its complicated management structure).

“This [latest Rechler-led deal] is essentially a going-private transaction tagged onto a merger. But even so, the seller still has to go through the various steps to insulate its board from accusations that it’s an insider deal,” says real estate attorney Barnet Phillips of Manhattan-based law firm Skadden, Arps. Phillips has worked on several REIT privatizations over the past three decades.

During last Thursday’s conference call with analysts, SL Green CEO Marc Holliday said that he couldn’t predict if other bidders would emerge. But he did refute accusations that SL Green sold back Reckson’s non-Manhattan assets on the cheap. According to Holliday, his company closely examined the net asset value (NAV) of each property that Rechler-led group agreed to buy.

According to Phillips, the real estate attorney, many REIT covenants allow shareholders to pursue a sweeter deal if they are jilted by a low-ball takeout offer. This usually occurs when a better offer is made for their company. That’s also one reason most large mergers, REIT and otherwise, typically involve so-called “breakup fees”. Phillips says REIT merger breakup fees usually amount to 5% of the total deal (or $200 million on a $4 billion merger), and they are used to prevent the seller from turning down the buyer’s agreed-upon offer for another bid that’s only marginally higher.

“It’s not that unusual to have shareholders and analysts criticizing a deal because one side paid too little,” says Phillips. “But it typically ends up with the attorneys who either get the merger done or settle out of court.”