Family of Developers Uses Liquidity to Tap Bank of Boston

Lots of investors would love to get bank financing to snare bargains in the depressed real estate market, but they're not Rappaports.

Instead of the frosty reception their counterparts can expect, Boston-based developers Jerome L. Rappaport and his son, Jerry Jr., get loans. Bank of Boston last month lent $3.75 million, 75% of the purchase price, on a fully occupied, 160-unit apartment complex in Dallas.

The Dallas project was the Rappaports' third deal with the bank since 1988. Their success illustrates what is usually a more painful truth for other prospective borrowers: Liquidity primes the financing pump with cash up front and airtight financial guarantees.

Tough Financing Terms

The bank insisted that Charles River Properties Ltd. put up 25% of the project's cost - $1.25 million - and required the firm to demonstrate the deal would cover expenses plus 1.15-times debt service.

That is familiar territory. "We went through the 1980s and didn't subject ourselves to the philosophy that if you weren't leveraged to the hilt you weren't doing the best deal," the senior Mr. Rappaport said.

Borrowers with these credentials figure to be the only players in position to prosper from today's real estate recession, but there are not many of them.

"They are good long-term customers of the bank, and they are taking advantage of their strength and doing some things in the down market," said Scott C. Dow, a Bank of Boston vice president.

Realty Lending Maintained

Although it has tightened its criteria in the face of rising loan problems, Bank of Boston has never closed its real estate window, said Guilliaem "Rusty" Aertsen, department executive for real estate. The bank expects to lend about $200 million this year, off from about $100 million a month during the real estate boom, he estimated.

The Dallas deal was Charles River's third Texas apartment acquisition financed by the Bank of Boston and brought its total Texas holdings to $16 million.

Charles River is shopping for additional bargains in Texas and in its own beleaguered marketplace. It also is negotiating with Bank of Boston for construction finance for a 238-unit condominium complex in Hanamaulu, Hawaii, that is underway with municipal support.

A Fit with Bank Policy

Mr. Aertsen said the deals fit the bank's policy of funding acquisitions by well-capitalized investors. It also will finance projects built to suit corporations or acquisition and rehabilitation of retail space.

The bank insists on cash equity, Mr. Aertsen said, and on loan-to-value ratios that can be supported by cash flow of a property at debt-coverage ratios significantly higher than in the past. It also is a secured lender, although a company of Charles River's caliber can arrange a partial guarantee, as it did in its most recent deal.

The Rappaports also are accustomed to patience, another quality that was given short shrift in the 1980s but is critical now.

"With all three properties, we're prepared to own them for 10 to 15 years, as opposed to making a killing" on a quick resale, said Jerome Rappaport Jr., who heads acquisitions for the firm. "We didn't need hyperinflation or even inflation to make the deal work."

Solid Projects

Like apartments the firm bought earlier in Houston, the Dallas project is in one of the stronger neighborhoods in what is considered a strong apartment market, the younger Mr. Rappaport said.

The apartments are priced to attract young people on their way to home ownership.

Bank of Boston made the debt-coverage hurdle even harder than usual to clear. It calculated by weighing revenue over the preceding three months against estimated expenses for the year ahead - adjusted upward for inflation.

Debt coverage was steeper than it would have been in the boom years, when little or no payment of principal would be required before loan maturity. The loan from Bank of Boston -- scheduled to mature in three years, with a two-year extension option -- amortizes on a 25-year schedule, Mr. Rappaport Jr. said.

Putting Up Collateral

On top of that, Charles River was required to guarantee 20% of the principal and 100% of the interest using as collateral a $25 million Boston building that it owns free and clear.

Mr. Rappaport said his father was glad to get the financing. But he acknowledged that the developer, conservative as he is, is "uncomfortable" with having to put up 25% of the cost of acquisition.

It took some tough bargaining, he noted, to dissuade the bank from imposing a clause that would have let it call the loan after six months or a year if debt-coverage ratios weren't being met -- even if payments were up to date.

The company found insurance companies were insisting on a 1.25-to-1 debt-coverage ratio and would loan no more than 60% of a project's cost, with no guarantee required. The time insurers required to make a decision was "quite a bit" longer than the bank.

Later Role for Insurer

The younger Mr. Rappaport said it was possible Charles River would turn to an insurer for a long-term mortgage once the bank loan expires.

On the other side of the transaction was an extremely motivated seller, Bluebonnet Savings and Loan Association.

The thrift had tried repeatedly to sell what was one of the better properties in its portfolio, only to have deals fall apart because the buyer couldn't get financing.

And the thrift, which was created in a controversial deal by the Federal Savings and Loan Insurance Corp. in 1988, was under severe pressure from Congress to liquidate assets.

A Big Price Reduction

It was so eager, in fact, that it agreed to cut its price by $500,000, to $5 million, to close the deal with Charles River, the younger Mr. Rappaport said.

His business is a drop in the nation's real estate bucket and only a fraction of Bank of Boston's realty lending. But his situation illustrates not only how the real estate crisis has altered the terms for loans but also a shift in the relationship between banker and borrower.

In the Rappaports' case, the crisis diverted their business from the failed Bank of New England to its crosstown competitor.

The senior Mr. Rappaport said he had maintained a personal account at Bank of Boston and counted the bank among his tenants but had used Bank of New England to finance projects for 30 years.

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