October 1, 2008
Some development projects stymied by financing challenges

By Ernie Casados, SFA Market Development Representative – Gulf States

When developer Elie Khoury unveiled his new condominiums and apartments inside a former Canal Street department store on Friday evening, he joined a rare crowd of developers who have managed to open a residential building in New Orleans since Hurricane Katrina without a public subsidy.

That company will likely remain select for some time. Local developers said Friday that the deterioration in the financial markets, which only became more dramatic this week with the collapse of the Lehman Brothers investment house, has made it all but impossible to bring certain types of projects to market.

"Certain product types are pretty much nonstarters," said David Garcia, vice president of development at Khoury's company, the KFK Group. While he said financing is still available for mixed-income apartments, loans for condominiums, hotels and retail projects are a virtual desert.

"The problem that you're seeing is that currently, in the commercial lending area, there are very few players who are willing to make loans," said Scott Willis, an attorney at Fishman Haygood who works in real estate and commercial finance. "You are seeing life insurance companies and some of the more traditional-type lenders -- those transactions tend to require significant equity and good loan-to-values -- and the securitizied market is completely closed down right now."

New Orleans has in many ways been spared a harsh economic downturn. This market never experienced a rash of home foreclosures, and the tide of insurance money and federal rebuilding incentives that flowed into the state after Katrina have to some extent sustained residential and commerical real estate.

Pres Kabacoff, chief executive of HRI Properties, said he sees very little development activity around town that does not involve some sort of public subsidy, whether it be tax credits, tax-exempt Gulf Opportunity Zone bonding capacity or tax increment financing.

But developers say the upheaval in the financial markets has started to erode the value of some of those incentives, especially low-income housing tax credits. Some developers -- including those involved in the rebuilding of the Big Four public housing complexes -- could face a financing gap if they were relying on the tax credits for a substantial portion of their equity.

This week's market gyrations pose perhaps the most substantial threat to the redevelopment of these four public housing complexes. Developers who are working with the Housing Authority of New Orleans to convert those complexes into mixed-income developments have not yet closed on federal low-income tax credit deals, which were supposed to provide more than half of the financing needed for the $635 million endeavor.

Milton Bailey, president of the Louisiana Housing Finance Agency, which awarded the tax credits, said Friday that he is not hopeful about the appetite for tax credits among investors.

"I was optimistic before the credit market meltdown and the bailout of Merrill Lynch and AIG. But I am not that optimistic now," Bailey said by e-mail. Capital markets will need time to recover, he said, adding that a turnaround is unlikely until at least 2009.

"All tax credit projects that have not closed are being adversely affected by the capital market crisis," he said.

Bailey said developers and public agencies such as his will need to locate gap financing sources, such as federal Community Development Block Grants, and lobby Congress to push back the date by which tax credit transactions must be placed in service. At this point, projects must be completed by 2010.

Despite the market's struggles, the Housing Authority of New Orleans is pushing to begin construction on all Big Four public housing sites by the end of the year, with the first breaking ground as early as November, said U.S. Department of Housing and Urban Development spokeswoman Donna White.

At a meeting this week, HANO's one-woman board, Diane Johnson, approved a loan of $115 million in "additional loan funds" to three of the developments -- B.W. Cooper, C.J. Peete and St. Bernard -- a significant amount more than the $68.5 originally outlined in February financial commitments. That loan is unrelated to the decline in tax credit value and was instead earmarked for costs related to demolition, infrastructure, and "pre-development," White said.

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Brought to you by the Steel Framing Alliance (SFA) on the first Wednesday of each month, Framework Online arms you with the latest news and commentary on the steel framing and construction industries. In addition to industry headlines, trends and project profiles, Framework Online provides information and ideas that will better enable members to increase their participation in the residential and commercial construction markets.