Friedman, Billings, Ramsey Group Inc. is merging with the real estate investment trust it founded five years ago in an odd marriage between Washington's largest investment bank and a tax-exempt real estate investment firm.

FBR Group will buy the 89 percent of FBR Asset Investment Corp. that it doesn't already own for about $795 million in stock based on yesterday's closing share prices of both companies. The deal will combine FBR's investment-banking and brokerage business with the steady, dividend-paying business of real estate investment.

The deal left some observers of the companies flummoxed because the corporate structure will be unique among investment banks.

"I'm not sure what the combined entity is going to look like," said Bjorn Turnquist of SNL Financial LC. "How do you value it?"

FBR Group officials said the driving motivation behind the deal was two-fold: to boost the market value of the combined company above $1 billion, and to increase the size and potential of its investment-banking business.

Based on current stock prices, the new company's market capitalization will be more than $1.1 billion -- $403 million for FBR Group and $782 million for FBR Asset. Co-chief executive Emanuel J. Friedman said the size will draw the attention of institutional and individual investors that currently pass over FBR Group because of its relatively small size. And the merger, Friedman said he hopes, will create a more valuable stock that the firm can use to buy other investment operations.

However, there will be limits on how much FBR can expand its banking business and still have the combined company qualify for tax advantages available to a subsidiary of a REIT. REITs pay no taxes but must distribute 90 percent of their income as dividends to shareholders, who are taxed on that income. No more than 20 percent of a REIT's assets can be invested in a taxable subsidiary, and at least 75 percent of a REIT's income must come from real estate sources.

The investment bank will become a tax-paying subsidiary of the REIT holding company. FBR Group's assets would amount to about 8 percent of the combined company's total assets as of Sept. 30.

FBR Group projects that it will save from $25 million to $35 million in taxes next year under the REIT setup.

"It's a creative structure," said Erik Woodworth of Cohen Brothers & Co., which helped manage one of FBR Asset's recent stock offerings but doesn't own stock in either company.

The combined company will have stockholder equity of more than $960 million, based on each firm's most recent quarterly statements. That capital can be used, under certain restrictions, to bolster FBR Group's banking business.

FBR Group created FBR Asset in 1997 to invest in mortgage-backed securities. FBR Group's asset-management business, led by co-chief executive Eric F. Billings, runs FBR Asset for an annual fee. FBR Asset has no employees itself, only the $5.8 billion in mortgage-backed securities investments it has amassed. FBR Asset sold $500 million of stock to the public in the past two years and borrowed against that equity to purchase its mortgage securities investment portfolio.

Under the deal's terms, shareholders in FBR Asset will receive 3.65 shares of FBR Group that will then be converted into shares of the new company. The purchase price represented a premium of 22 percent over the closing price of FBR Asset on Thursday, before the deal was announced.

The merger is subject to approval from shareholders of both companies, as well as from the Federal Reserve and other regulatory agencies. It can also be terminated if shares in FBR Group average below $8.75 or above $10.55 for 10 trading days before the expected close of the deal.

Shares in FBR Group fell immediately after the announcement and closed at $8.70, down 80 cents, or 8.4 percent. Shares of FBR Asset opened higher and closed at $31.22, up $2.85, or about 10 percent.

Friedman said he was excited about the larger capital base the deal would provide to the investment bank, which recently recorded healthy quarterly earnings. "All of a sudden we're a company earning almost $200 million a year in the middle of an industry going through the greatest recession since I've been in the business," he said. "And now that we're an investment bank with a billion dollars in capital, we'll have even more success in the business."