Credit concerns collapse New Orleans-based World Trade Center deal

New Orleans CityBusiness, Sep 1, 2008 by Ariella Cohen

Redeveloping the World Trade Center at the foot of Canal Street could be years away, banking and development experts say, without an unexpectedly brisk turnaround of the global finance market or more public subsidy.

"This is a hard deal (in the current market)," said Alicia Glen, managing director of the Urban Investment Group at Goldman Sachs. "To make an investor comfortable with its very real risk, a tremendous amount of subsidy is going to be needed."

Glen should know. Her New York-based group, which provides development capital to corporations owned by or targeting urban communities, reviewed an investment proposal for the World Trade Center from Full Spectrum, the New York developer that on Aug. 19 backed out of a $30 million deal to redevelop the mostly empty office building into a boutique hotel, green condos, retail spaces and a cultural museum. Ultimately, the Goldman Sachs group chose not to finance the $200 million project because of local and national market factors.

"In addition to the pressures facing all urban markets, New Orleans has the added layers of a recent dramatic loss of population and the need to reinvest in infrastructure that already exists in other cities," Glen said.

While Full Spectrum declined to comment on in its decision to throw in the towel, people with knowledge of the deal say financing problems likely played a major role.

"(Full Spectrum) was trying to make a very tough project work, and then the financial meltdown happened to them. I believe that was the culprit here," said John Keeling, a consultant with the hospitality industry research and capital group PKF Consultants. Keeling worked with the developer in 2007 on feasibility studies for the WTC.

The collapse of the public-private partnership is symbolic of the larger challenge facing developers as they attempt to build in a market where construction costs more and financing is harder to obtain.

It has become cliche that New Orleans possesses a countercyclical economy that flourishes when the rest of the country slows. The development incentives and thousands of rebuilding jobs that arrived after Hurricane Katrina only made the truism appear truer.

In recent months, however, it has become all too obvious the city is not immune to national economic downturns, especially when they manifest in tougher lending standards and higher interest rates.

"The grease that makes everything run is running out and the whole thing here and everywhere else is grinding to a halt," said Larry Haines, president of the New Orleans Real Estate Investors Association.

Evidence of the slowdown can be seen citywide.

In the Bywater, developers Shea Embry and Cam Mangham decided to hold off on the 105-unit residential component of a high-end condo and retail development called ICInola. Finding capital for the $42 million warehouse conversion was impossible in the current market.

"Banks just can't be in the condo market right now," said Embry.

The only sign of the long-planned 70-story, $400 million Trump International Hotel and Tower is a laminated advertisement in a parking lot where developers plan to put the tower.

"We had planned to break ground by now," said Cliff Mowe, one of the project's developers. Mowe said last week that while "everything including this project has been impacted by the financial market," he expects to eventually obtain financing from lenders who have "already expressed interest."

"But we aren't at that point yet," he said.

Other projects not moving forward as planned include a five-star hotel planned by Jax Brewery developer Darryl Berger on a parking lot he owns on the riverside of Shops at Canal Place. Berger applied for $200 million in Gulf Opportunity Zone tax credits in 2006, but the subsidy is now expired, according to the State Bond Commission.

Berger did not respond to requests for comment, but in a February interview Berger Jr. told CityBusiness he and his father were having trouble securing needed private financing.

For experienced developers such as Berger, getting banks to put up the capital needed to build should get easier in the coming year, Keeling said.

"But even for developers who have pre-existing relationships with lenders, hotels are not an easy sell anymore and the pool of lenders gets winnowed down even more tightly when it comes to New Orleans," Keeling added.

Already, Berger and developer Pres Kabacoff of HRI Properties have expressed interest in taking over the World Trade Center redevelopment. They tied for second in the bidding war that Full Spectrum won in 2007 and are now discussing partnering on the job, Kabacoff said.

But to make the deal work this time, more public dollars would be needed.

"We would have to work in a public-private partnership that takes into consideration the realities of the current credit market," Kabacoff said.

The Bureau of Governmental Research, a watchdog organization long critical of government-subsidized private development, said a call for more public assistance should put question marks in the minds of taxpayers.