Developer Rappaport finds a niche as court-appointed receiver
Gary D. Rappaport started his retail development company in 1984, so he has endured a real estate bust before. This time, when most development work ran dry, he was ready.
Rappaport's McLean-based company has a portfolio of more than 12 million square feet of shopping centers and mixed-use projects, all of them between Baltimore and Richmond. Though it typically makes its money developing property, leasing and brokering deals, it has carved a niche for itself recently as a court-appointed receiver for properties that are in the process of being foreclosed upon.
Its work as a receiver on six local properties has brought the Rappaport Cos. coveted fee income that has allowed Rappaport to maintain and expand his staff rather than lay people off, as many developers have done. He said he first did some work as a receiver in the late 1980s, during the last downturn.
"These are times where we don't have any development so we don't have any development fees, and we don't have major leasing fees," he explained. "But as developers, we've built up an infrastructure that has to be sustained."
One of the properties Rappaport is managing as a receiver is Fair Lakes Promenade, a 145,000-square-foot Fairfax shopping complex that the Peterson Cos., builder of National Harbor, was forced to give up when it could not pay the debt service on the property after tenants such as Linens 'n Things and CompUSA closed.
"We lost three major anchors in a 45-day period," said Steven B. Peterson, president of the Peterson Cos. "The lenders were not willing to work with us, so we did what every developer in America would do, we disposed of the property. You can't fall too much in love with your own real estate or you'll make bad decisions."
After Rappaport was recommended as receiver by CWCapital, special servicer for the property, he signed Nordstrom Rack for the Linens 'n Things space and electronics retailer hhgregg for the CompUSA space. Now the shopping plaza is humming again, and Rappaport says he may consider buying it. "One, it gives you fees overseeing an operating company when you don't have development fees," he said of his receiver work. "But on the other side, it also gives you first opportunity, many times, to understand the property and be a potential opportunity buyer."
With an estimated $187 billion in distressed commercial real estate assets nationally, the need for banks to identify receivers for properties that are not meeting loan agreements has increased dramatically.
Bank of America uses receivers to "ensure that rents are collected and accounted for, and also to ensure that expenses are paid so that critical services are maintained for the tenants," said spokeswoman Shirley Norton. "All of this operates to preserve value."
Typically, a lender has the opportunity to recommend to a judge a company to serve as receiver, so Rappaport's relationship with banks has been key. "One of the candidates you might go to first would be a customer, because you have experience with them and you know they can handle that type of property," said Joe Carter, executive vice president of commercial real estate for Wells Fargo.
"In times like these, where developers do have stressed cash flow," Carter said, "it's a source to continue to operate their business, to keep their people employed and perhaps make money on it."