SPECIAL REPORT: GULF COAST RECOVERY

Ground zero on the delta
Recovering New Orleans’ apartment stock has required some extraordinary efforts from owners, developers and managers. But they are determined to make the city’s housing stock better than ever in this reborn community.

By John Zipperer

APARTMENT FINANCE TODAY · MAY 2006

New Orleans – Apartment manager Sandy Feraci is living these days in a cramped portable trailer with family members while her house sits heavily damaged by the 2005 storms.

But as Feraci drives through neighborhood after neighborhood of ruined houses and deserted streets, she mentions a public park near downtown where a tent city has grown up. People live there without air conditioning, indoor plumbing or any possessions. “New Orleans always had a need for affordable housing,” she said. “And we still do today, but I just don’t know where we’ll put them.” New Orleans is run these days by people like Feraci – dealing with personal and professional challenges, with examples of even worse straits always visible to them as they drive around town or look at the properties next door.

Post-hurricane New Orleans is a city that elicits great hopes from apartment developers and investors, but it also baffles them with some of the challenges of rebuilding a city that was flattened by a natural disaster made worse by human folly.

The federal government is seen as both the bungler of the post-storm response and the provider of hope for the future rebuilding of this great city. The high-profile bungling started with a slow response to the disaster and continued through a much-criticized attempt to house evacuees in hotels, on cruise ships and in mobile trailers – an approach that resulted in billions of dollars of waste, according to housing industry leaders who argued that sufficient private housing already existed in the Southeast to handle the displaced residents.

But the source of hope comes from legislation passed in December to help fund the development of housing to replace the huge loss of livable structures here (see GO Zone info in sidebar, right), and developers are already lining up to tap that source of funding, which is aimed at targeted affordable housing (for residents earning up to 60% of area median income). The challenge for market-rate rentals is higher, but developers are hopeful that lenders will return to the market once things settle, probably later this year.

Dealing with uncertainty

Discussions with multifamily professionals here often end with them expressing how exhausted they are and how much work they still have to do. It would be depressing if it didn’t come after they had just recited some amazing stories of post-hurricane recovery.

They talk about providing emergency housing for New Orleans’ overworked and overwhelmed police officers, who had been reduced to living on cramped cruise ships with their families. Or about how their residents armed themselves to successfully defend the property from looters. And how their property manager, who lost her own home, moved into a unit on the apartment property while directing repairs seven days a week, and then gave up her apartment so it could be rented – at a premium – to another evacuee returning to the city. And then, in the most hopeful sign for the city, they talk about the new developments they are already planning and how they’re working hard to line up financing.

These are the owners, developers and managers of apartments in this devastated city, many of whom returned within a few weeks of Hurricane Katrina’s fierce attack in August 2005, which led to the failure of levees and the flooding of huge sections of town. Many of them lost their own homes and had to relocate to other cities, set up temporary offices elsewhere, locate their scattered employees and residents, and try to put all the pieces together again.

They are tired, but they are also proud of rebuilding lives and buildings, even while insurers, some lenders and government officials argue about how to complete the recovery.

The ultimate success of their efforts will depend on just how fast the market of lenders and equity investors settles on a view of New Orleans. Updated housing elevation standards for New Orleans were finally released April 11 mandating that buildings be raised at least three feet above the grade of the surrounding land, and in some cases, higher. This will allow former residents to finally decide whether they can afford to rebuild because they can start to estimate the costs of reconstruction. City residents had feared the rules would mandate even higher – and thus costlier – elevations.

Other sources of uncertainty have to do with the difficulty in underwriting the danger of rebuilding here. One major tax credit investor, visiting New Orleans to see the situation for himself, recited a long list of reasons why he was skeptical about investing in new housing, and his list closely matched the lists of challenges mentioned by apartment professionals on the ground here: slow payment of insurance claims, uncertainty about future cost or availability of insurance coverage, labor shortages, rising property taxes, the improvement of the levees, crime and rising security costs, and uncertainty about how many former residents will return to the city.

Investors have not “been totally scared off, but I think they have some questions,” said Chris Dischinger, co-owner of LDG Development of Louisville, Ky. LDG has applied for the Gulf Opportunity Zone (GO Zone) tax credits authorized by Congress in December 2005 to build projects in Hattiesburg, Miss.; Gonzales, La. (about 40 minutes north of New Orleans); and Baton Rouge, La. “The overarching issue is what are you going to be able to do – what’s the availability of insurance and labor?” asked Dischinger. (For a report on Mississippi’s Gulf Coast rebuilding effort, click here.)

GE Commercial Finance is very interested in playing an investment role in the Gulf Coast’s recovery, but it won’t throw fundamental real estate concerns out the window just to be involved, according to one company representative. The size and targeting of its investment is uncertain, pending greater clarity on the future of New Orleans and the rest of the Gulf Coast. “What I would like to do … is find a way for GE to invest equity to help rebuild or rehabilitate affordable housing in the GO Zone areas,” said Larry Mandel, managing director of affordable housing in the company’s GE Real Estate division. But he said he’s trying to figure out how to assess the situation. “First of all, where’s the housing going to be built? How are you going to locate the housing, and where’s the infrastructure to support the housing?” Two other big sources of uncertainty were demographics – what percentage of New Orleans’ former citizens will return – and the constricted timeframe for using the GO Zone tax credits.

Experts expect that the developments likely to have the strongest attraction to investors will be those that serve the poor and working classes, both of which have historically been poorly served by New Orleans’ housing stock. Before the storm, the city “had about 35,000 blighted properties,” according to one local developer and investor, who preferred to remain unnamed. Providing housing for the city’s many hospitality and tourism-related companies will be a big opportunity for developers, he added. GO Zone credits will play a fundamental role in financing such deals.

Gary Downs, a partner in the San Francisco office of the law firm Pillsbury Winthrop, has been very busy working on New Orleans development projects. He acknowledged the challenges created by the wait for the final FEMA flood maps (expected to be released in late May or early June). But he is optimistic about the city’s potential to come back better than before. “It feels like things are finally moving forward,” he said.

Owners dealing with one dreaded issue – rampant mold in buildings that were flooded – got some help from a mold-cleanup pilot project in New Orleans carried out by Enterprise Community Partners, the National Center for Healthy Housing and NeighborWorks America. The three groups tested a mold remediation regime on four homes to come up with a guide for owners. “You can do it – [reduce] the mold and the spores and inhabit the unit again,” said Tom Brooks Jr., a management consultant at NeighborWorks America. The groups estimated that mild and moderately damaged structures can be made safe for about $3 to $4 a square foot. (The free guide can be downloaded from www.centerforhealthyhousing.org.)

Fortune 500 companies, large banks, and Fannie Mae and Freddie Mac are likely to make up 80% to 85% of the investment market for GO Zone tax credits, according to Greg Judge, who oversees the national tax credit equity production and underwriting for MMA Financial. Speaking at a Novogradac & Co., LLP, conference on Gulf Coast rebuilding, Judge said developments would be best able to survive the market uncertainty of New Orleans “if there’s as little hard debt as possible, and I think that can be done with some of these [GO Zone] financing tools.”

Growth opportunities

Many other communities in Louisiana and in neighboring states also sustained severe damage from the 2005 hurricanes, but the majority of the damage and the lost housing stock was in New Orleans. It was also the place from which the human tragedy of the trapped survivors was televised around the world.

Following the horrors of the storm and its aftermath, some developers and other residents of New Orleans are saying sotto voce that the city finally has a chance to shake off its famed history of mismanagement, crime and corruption. The city reforms will depend to a large degree on the results of mayoral and council elections that were under way at press time, but these locals hope the city that emerges from the rebuilding will be able to deliver better housing for its many residents. They also hope the city reforms its government, tax system and schools.

Despite those challenges, HRI Properties sees a great many opportunities for development and for offering third-party property management services. Its 12 properties in the New Orleans area – part of its 22-property portfolio – range from market-rate downtown lofts to redevelopments of public housing projects.

HRI’s American Can Apartments, a mixed-income, mixed-use development in New Orleans, has consumed a lot of David Abbenante’s time since Hurricane Katrina. Abbenante, president of HRI’s property management division, has been negotiating with retail tenants and contractors, working to bring back relocated residents, and taking calls at all hours of the day and night on his cell phone.

American Can is a 269-unit complex of six former warehouses. Eighty percent of the units are market rate, and the remaining 20% are reserved for low-income residents. Retail shops – including a restaurant and a wine shop – take up 19,000 square feet and help serve the surrounding neighborhood of single-family homes. Completed in September 2001, American Can was 96% occupied before Katrina; it was 100% occupied at press time, but not before a great deal of hard work by Abbenante and his property management staff to bring the property quickly back online.

The building was built at dock height because of its industrial past, but its first floor still took on about six inches of water – enough to buckle the wood floors in the property management office two feet into the air.

A scarcity of building materials led to long delays in completing projects, a source of frustration for Abbenante, who takes pride in paying on time and never being late with projects. “I have learned now – because I have never been so embarrassed in my life – never to promise a timeframe on anything,” he said.

He recalls agreeing to pay $35,000 extra to have an electrical panel delivered in four weeks instead of eight weeks, but reports that the panel took eight weeks to arrive anyway.

Operating costs have also risen – dramatically, in some cases. Abbenante said his hourly security guard costs before the storm were about $10; he’s currently paying about $18, and he went as high as $30 at one point. His insurance company has told him to expect property insurance premium increases of 300% to 500% this spring, and deductibles will rise. Abbenante said the deductibles increase could have a huge impact if another big storm hits because it will require more equity. “The impact is tremendous. It’ll put the mom-and-pops out of business,” he predicted.

HRI and Kimberly-Clark, its partner in the American Can development, spent about $4 million getting the property back online after the storm. HRI had about $35 million in claims on its New Orleans properties, but so far has received just $5 million in insurance settlements. But insurance does not cover landscaping. “I probably have $100,000 in landscaping costs,” said Cindy Bowles, American Can’s property manager. The water that flooded the property left behind lots of dead fish and chemicals that killed grass and other plants.

One positive aspect about having a multifamily property up and running these days is that rents have increased, at least for the near term. Local multifamily owners said rents have increased 5% to 15%. At American Can, its two-bedroom market-rate units rented before the storm for $1,500; they now go for about $1,700.

Plans for new developments

HRI is submitting six applications to develop new housing using GO Zone credits. Humanitas, Inc., a nonprofit faith-based developer, is submitting an application for a $4.5 million seniors housing development in the first round of GO Zone allocations this spring, and it is looking to do several more in future rounds.

Humanitas Executive Director Bridget Vinson welcomed the high levels of equity – up to $1.12 per tax credit dollar – that investors were reportedly willing to pay for the GO Zone credits and predicted that she would be able to develop her seniors project using only the equity. She plans to take some extra funds she has available from other projects “and put that into the [seniors] project so we can have bigger reserves to cover unknowns,” she said.

Volunteers of America (VoA) had about 1,200 units in New Orleans before the storms, and it plans to rebuild or replace those units as well as develop another 1,000 units a year of workforce housing for several years, according to Patrick Sheridan, VoA’s vice president for real estate development.

One of VoA’s existing properties currently sits empty in the suburb of New Orleans East. Wind Run, a 400-unit mixed-income garden-style complex, had just completed a $2 million exterior renovation before Katrina hit. Now, the first floor apartments require complete renovation to deal with mold and other destruction.

“It was a great community before the storm,” said Sandy Feraci, Wind Run’s community administrator, as she walked through the complex’s empty parking lot. “It was always 95% to 98% occupied.”

Feraci said the property was structurally sound, but she echoed Abbenante by noting the difficulty in getting delivery of materials and parts such as doors and cabinets. “You’re waiting three, four, five months to get materials,” she said. “We keep telling residents we’ll get [rebuilding] done within a six-month period – and here we are in the eighth month. That’s very hard for me. I’m the type of person who likes to deliver what I promise, but I can’t control any of that.”