How Rappaport Is Handling Its Hundreds Of Retail Tenants Who Can't Pay The Rent

The unprecedented crisis the retail industry is facing came to a crescendo Wednesday, as the first monthly rent payments came due since thousands of businesses were forced to close because of the coronavirus.

Rappaport, a retail owner and broker with 1,750 leases in its portfolio, had already heard from 450 tenants seeking rent relief as of Wednesday morning, CEO Gary Rappaport said on Bisnow's Leadership in Uncertainty webinar. 

A Rappaport spokesperson told Bisnow Thursday morning that number had risen to around 550 tenants seeking relief. Rappaport does not expect to see the full picture until the end of next week, as some rent payments or relief requests may come in late. 

By the time the dust settles, he said he expects more than 1,000 of his tenants would end up not paying their rent. Thus far, the rent relief requests have come in the form of legal letters, emails and phone calls. Rappaport said his 110-person company has had conversations with every tenant that has made a request.

Through conversations with its investment partners and the owners for which it manages buildings, Rappaport has decided to give tenants a 60-day rent deferral. It is promising to revisit the issue when that period is over, and it has not made any firm commitments as to when the rent must be paid.

"All we're doing is that we're kicking the issue down the road for 60 days," he said. "We are deferring the rent. We are not putting anyone in default. We are not charging any late fees. We are not writing any documents. We're just letting it run."

Given the stay-at-home orders in place throughout the D.C. region, Rappaport said he understands 60 days may not be enough, and he is open to granting additional deferrals after that period.

"When this crisis is over, the coronavirus, it is going to take a long time for these tenants to open again," Rappaport said. "I want every tenant to open that has an opportunity to open. And I believe that forcing or charging late fees or doing anything that's not helpful to the tenants is not only just not the way I live, but it's also not a good business decision."

A private company with individual partnerships for each deal, Rappaport is also having conversations with investors who are considering liquidating their ownership positions. He said three or four investors have inquired about that possibility.  

The company's structure doesn't give investment partners the power to decide when to sell assets, and it typically holds onto its properties, so Rappaport said he always works to accommodate an investor who needs liquidity. He said he would first offer to sell the stake to the other investors on that specific deal,  then to the investors on his other deals, and then he would go to his list of potential investors who have not yet worked with him.

"At this point, hopefully it won't change, if those choices did not occur, I would probably buy the interest from the investor in order to keep the reputation during these times so that other investors know in the future that in the worst of times, they were able to sell," Rappaport said.

For investors looking to buy assets during the crisis when values are low, Rappaport said he doesn't see any such opportunities out there yet. He said nobody is putting properties on the market right now and everything is on hold. 

He also said he wouldn't be able to secure an acquisition loan. He typically leverages purchases with a 66% to 75% loan-to-value ratio, and he said no lenders are doing those deals right now, especially for retail properties. But he does expect some opportunities will present themselves later in the year. 

"Not the summer, but I think by the fall or the end of the year, surely there are going to be opportunities out there," Rappaport said. "If the price is right, maybe the debt is only 50%, maybe the debt is with a commercial lender that has more liquidity, and maybe it's with a personal guarantee that I'm willing to put on a loan in order to buy something with very high returns."

As for the leasing market, Rappaport said it is also frozen in place. In addition to its existing assets and leasing assignments on behalf of others, Rappaport also has at least two developments with retail space available, the recently delivered Avec building on H Street and Skyland Town Center in Southeast D.C. 

"There's not many deals getting done," Rappaport said. "We are doing everything we can, but we are not signing many leases right now. Hopefully we will, but if not, that's just part of getting through this crisis and being able to jump right back on top of it once we get through it."