Sale of New Orleans ‘GO-Zone’ Development Bonds Not Going Well

New Orleans got more than $1 billion for tax-free bonds to help spur development after Hurricane Katrina, but it’s finding few takers amid a tight credit market and lingering jitters about investing here nearly four years after the storm.

About $740 million remains untouched. Nearly $500 million more has been earmarked for projects, including renovation of the shuttered Hyatt hotel near the downtown sports arenas, but may be in jeopardy because developers can’t sell the tax-exempt bonds, local officials said.

“It’s probably the most frustrating period of finance I’ve ever encountered in my career,” said developer Chris Robertson, who is prepared to mothball the Hyatt project if he can’t sell his company’s $225 million bond allocation. It’s ready for construction “tomorrow,” he said, but “the bond market is still closed up.”

The Gulf Opportunity Zone, or “GO Zone” act, passed after the 2005 hurricanes that devastated the Gulf Coast, was meant to help the region get back on its feet, but the Government Accountability Office found that many businesses in the hardest-hit areas were in no position to apply for the tax incentives because they were dealing with more urgent problems.

Now, officials say, the problem has more to do with tight credit markets and difficulty finding investors willing to buy the GO Zone bonds. And applicants must put up a certain percentage of the project cost too, a provision that can tie up those funds for months.

At year’s end, unused bond allocations set aside specifically for communities like New Orleans will go into a competitive pool. Projects there will remain eligible but must compete with proposals from around the state – including areas less damaged by hurricanes Katrina and Rita.

“There’s no good time for this to happen, but it’s particularly tough now,” said economist Loren Scott. While billions of dollars in construction has provided some insulation from the recession, unemployment is rising and the city has not yet come close to recovering the same level of jobs it had before the storm.

Katrina flooded 80 percent of New Orleans when it struck Aug. 29, 2005. The city’s population, now estimated at about 340,000, is at 75 percent of pre-storm levels. Some neighborhoods are at or near normal, but large tracts of others remain desolate or marred by derelict properties.

“We’re still in recovery mode no question about it,” demographer Greg Rigamer said. “There’s still a lot of money to be reinvested. But unless you can restore confidence in the city, people will not invest here.”

The private sector hasn’t forsaken the city. Hotel and housing developments have gone ahead in some areas. But higher costs of doing business – notably insurance and labor – have limited business development and interest in GO Zone bonds, said state Economic Development Secretary Stephen Moret.

“We obviously are selling all of the positives of New Orleans to national prospects,” Moret said. “Unfortunately, many corporate executives and site-selection consultants have trouble looking beyond some of the first-impression factors.”

Long-standing local quality of life issues – public schools and crime among them – also could be having an effect.

GO Zone bonds are among a range of post-Katrina incentives offered to encourage reinvestment but aren’t “free” money. There’s no public backing or subsidy. Instead, interest to investors is tax exempt.

Developers such as Poydras Properties Hotel Holdings LLC, spearheading the Hyatt renovation, sell their bonds based on investor confidence, their own creditworthiness and the soundness of their plans.

The hotel’s importance is linked to high-profile events at the Louisiana Superdome – host of the NFL’s Saints, the 2013 Super Bowl and annual Sugar Bowl – and the New Orleans Arena, home of big-name entertainment and NBA basketball.

Robertson, the Hyatt developer, said normally there would be a “very high demand” for such bonds.

“It’s not some bureaucracy impeding us,” he said, adding: “It’s a pure time issue, and a pure market issue.”

Mayor Ray Nagin and other leaders want the GO Zone legislation to be extended and tweaked by Congress to make bonds more attractive to smaller investors.

Moret expects state officials to decide in the coming months whether they too will push for an extension. The program is set to expire at the end of 2010, but it’s uncertain how much credit markets will ease by then.

Moret said officials still expect “substantially all” of the state’s $8 billion total allocation to be spoken for by then, but, so far, the shortfall is taking a toll around Louisiana.