Insignia spins off Insignia/ESG.

Lured by the endless possibilities of around-the-world-office management opportunities and his personal philosophy of bigger being better, Insignia Financial Group Chairman Andrew Farkas has cut a deal to sell the apartment market ownership and management business outside of New York City and will concentrate instead on growing the commercially-oriented Insignia/ESG brand of commercial sales and services globally, along with the metro area's residential management franchises.

In a deal valued at $910 million, by the end of 1998 Insignia Financial Services, which is traded on the New York Stock Exchange as INF, will be merged with the Denver-based Apartment Investment & Management Company (AIMCO) traded on the NYSE under AIV, and then Insignia/ESG will be spun off into a new, publicly traded company.

Edward S. Gordon would become a member of the office of the chairman, while Stephen B. Siegel will continue as president and chief executive.

Farkas purchased the Edward S. Gordon Company in 1996 for about $84 million in a bid to become as "dominant in commercial services in the course of the next several years as we've been able to become in residential over the last five years," he said at that time.

The new spin-off company would continue the flag Insignia/ESG and would also be publicly traded. It would be debt-free and have at least $35 million in cash, an amount that could be as much as $70 million, Farkas said in a conference call explaining the transaction. The final numbers for some of the elements will not be known until the actual transaction takes place in the third quarter.

AIMCO, meanwhile, would pay current Insignia shareholders about $350 million in preferred stock, including a special dividend of $50 million to be paid on or before January 15, 1999. There will be adjustments if the 20-day average stock price of AIMCO is not between $36 and $38.50 at the time of the sale. AIMCO will also assume $460 million in Insignia debt, primarily related to the ownership of Insignia's apartment complexes and Greenville, SC headquarters; and pay at least $100 million or $13.25 per share for the 25 percent of Insignia's REIT subsidiary, Insignia Property Trust (IPT), that is not owned by Insignia.

IPT owns general and limited partnership interest in partnerships that own about 89,500 units of multi-family housing in 398 properties.

Insignia shareholders would end up owning 20 percent of AIMCO, which Farkas said would become the "largest residential REIT in the U.S.," and would then be able to receive the dividends that must be paid by REITs. Insignia has not paid any dividends to its 31.9 million shareholders, and its stock has languished, despite many acquisitions, industry sources said.

Insignia shareholders would also own stock in the spin-off Insignia/ESG, which Farkas called a "high-grade octane type of stock, focusing on consolidation in the real estate industry."

Neither the spin-off nor the AIMCO transactions are taxable at the shareholder level.

After the merger, along with another proposed merger with Ambassador Apartments, Inc., AIMCO will own 245,000 units and manage over 390,000 units in 2,164 communities in 48 states, and have a portfolio twice as large as its nearest competitor, allowing its "shareholders to participate in the REIT industry as a dominant player."

Farkas and his top residential management team, including Executive Managing Director Frank Garrison, Chief Operating Officer Ron Uretta and Chief Financial Officer James Aston, will continue to work with AIMCO for at least the next two years, as their stock will be "locked up."

AIMCO's chairman and CEO, Terry Considine, said "Greenville will be reinforced as a hub, to reinforce the properties that AIMCO already owns in that area."

He expects that most of the 8,000 employees already working on the newly acquired Insignia residential complexes will receive job offers. In fact, Farkas, Considine and others from the Insignia top residential management team were to be immediately heading for Greenville.

"We are all traveling to Greenville to provide reassurance to the people in Greenville that their career opportunities are getting better," Considine said.

He admitted that in the future, they would "pull the weeds," and probably end up selling or no longer managing locations that he described as not holding their value or deteriorating as places to live.

But in the New York metropolitan area, "Everything that was Kreisel or Douglas Elliman will remain with Insignia/ESG," said Farkas. "It's such a dominant franchise here on both the commercial and residential sides, and we wanted to hold on to it."

The combined Insignia Residential New York manages more than 300 properties, including Fresh Meadows, World Wide Plaza, 1040 Fifth Avenue, and many on Long Island.

The commercial Insignia/ESG currently manages 165 million square feet of commercial and retail space in 48 states and overseas.

Farkas said they will continue to go forward with a "highly simplified story that the market can understand," building up "platforms of opportunities," building dominate market positions, "consolidating and then maximizing asset value, creating above market returns."

"We have gotten there with this transaction and will continue to do so as we go forward," said Farkas. "Our vision for commercial property services is a broader, far-reaching vision of consolidation and globalization, and we expect to continue to make acquisitions going forward."

Although there would be some in the industry who would differ, Farkas said the Insignia/ESG company has "dominance" in New York, Washington and Chicago; has merged with players in Phoenix, Westchester, Portland and Orlando; and has the "premiere" brand in the United Kingdom under the Richard Ellis name. It has also bought 60 percent of an Italian property management firm.

Insignia/ESG will also retain the Cleveland-based Realty One, which was the 10th ranked single-family home seller in the U.S. at the time of its acquisition in the fall of 1997, along with its affiliates that include the First Ohio Mortgage Company, in a $39 million transaction.

William Ackman, a principal in Gotham Partners, which is a New York-based investment company, is one of the current major stockholders of Insignia and reacted to the deal with a request for proceeds to be in either stock or cash.

"If Andrew is locked up for two years, I'm locked up for a year and eleven months," he quipped to Considine during the conference call, which included Greenville employees, analysts and the press.

"This gives us great enthusiasm for the future," said Farkas.