Years Late and $1 Million Over Budget, New Orleans Gets Its Cottages

A look back at the boondoggling cronyism that plagued a once-promising New Orleans program to house victims of hurricanes Katrina and Rita.

Many “Katrina Cottages” have been dropped next door to blighted properties that are likely to impair their marketability. Credit: Tom Gogola

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With little fanfare, a cluster of tidy new houses recently went on the market in the Lower 9th Ward of New Orleans, bringing a poorly executed experiment in post-disaster housing to inglorious resolution long delayed.

The 22 one- and two-bedroom houses are the last of the now-notorious “Katrina Cottages” that, almost seven years ago, were conceived as salvation for New Orleanians displaced by hurricanes Katrina and Rita and desperate to come home.

All told, the state built 461 of them. The last-gasp New Orleans batch of these units were shoved across the finish line in a flurry of hasty repairs and added spending, as the developer rushed to beat an April 30 federal deadline.

Though modest in size — the largest is 1,112  square feet — each Katrina Cottage cost taxpayers tens of thousands of dollars more than was budgeted for their development.

They’re being sold by the New Orleans Redevelopment Authority for between $72,000 and $122,000, but they’re not called Katrina Cottages anymore. The new name, purged of unhappy memories, is “New Orleans Cottages,” and they’re meant to be permanent, not temporary shelters. They’re available through a soft-second-mortgage program meant to help hurricane victims and low-income New Orleanians find their way home, affordably.

According to officials with the New Orleans Redevelopment Authority, a dozen of the homes now listed for sale in their colorful brochure have met the city’s compliance requirements with “all specifications, assurances, and programmatic requirements.”

All were built by Louisiana System Built Homes to weather-resistant (if not hurricane-resistant) specs. Concrete pavers lead to front stoops, and the units sport bright paint jobs. Lawn signs warn that the homes are protected by security systems.

Two of the 22 Katrina Cottages offered by the New Orleans Redevelopment Authority are in the 7th Ward and the rest are in the Lower 9th, in the blocks between Caffin Avenue and the Industrial Canal that were the epicenter of Katrina’s devastation. It’s a part of town with a receptiveness to innovative housing ideas and plenty of vacant lots to build on. And yet many of the cottages have been dropped next door to blighted properties that are likely to impair their marketability.

Nonetheless, at least five of the homes were under contract as of this week.

Proceeds from the houses are turned back to the New Orleans Redevelopment Authority, said Christina Stephens, spokeswoman for the state Office of Community Development, under whose aegis the FEMA grant is administered and monitored. “In accordance with their contract with the state, NORA retains all funding to maintain units,” said Stephens, “with remaining funds to be used for affordable homeownership initiatives.”

The five-state Katrina Cottage program was intended to provide quick-to-produce emergency housing that would be a more “dignified” alternative to the once-ubiquitous and much-maligned FEMA trailers. Other states deftly implemented their pieces of the program. Mississippi, for example, could boast of having built at least 500 cottages by mid-2009, though some would prove less sturdy than initially claimed. During the same interval, Louisiana — its program foundering in a sea of politics, liens, bankruptcy, mismanagement and cost overruns — had built exactly none.

Stephens pointed to the overall success of a program that eventually built 461 units around the state at an average of $130,000 per unit. “These quality new homes are certainly in line or less expensive than other affordable housing” constructed with disaster recovery funds, she said.

She added that, though the state is satisfied with the overall administration of the program, it will issue a report in June offering “lessons learned.”

There could be quite a few of them.

Politics At Play

Louisiana’s Katrina Cottage program is the story of a development rooted in cronyism and questionable judgment by both two gubernatorial administrations. Gov. Kathleen Blanco threw the initial $75 million FEMA contract to an upstart company with zero experience in the real estate field but strong ties to a powerful Democratic tycoon. Upon taking office in 2008, Gov. Bobby Jindal rushed to reform the program, but then added months of delay when he demanded contracts be canceled and program administration shifted to the Louisiana Recovery Authority.

Adding to the mess, the program got bogged down to a cost-spiking crawl as the site selection process in New Orleans dragged on. Cottages were designated for lots too small to accommodate them or that had not undergone an environmental review. At least one cottage was moved five times before reaching a final resting place, records show. Some lots were burdened with liens that had to be paid off. Others had persistent pools of standing water and required drainage.

Of the 20 cottages that wound up in the Lower 9th Ward, 18 were modular units built off-site. As a result of the multiple layers of delay, every one of them had to be completely gutted and rebuilt — obviating the efficiencies of off-site, assembly line-style construction. Floors, subfloors, walls and doors had to be torn out and replaced at the last minute.

“It is important to remember,” Stephens said, “that any modular units that have to be transported need some restoration.”

Stephens said that the state, FEMA and New Orleans all knew that the units would require extensive repairs once they got to New Orleans, but that “protective measures like indoor warehouse storage of the units would have cost more than the methods we used on the units, which were wrapping the roofs and restoring them” on-site in New Orleans.

The price of delay was steep: Homes budgeted at  $110,000 came in $40,000 above that figure. Add to that the cost of hauling some of the more nomadic cottages from lot to lot — in one case, records indicate that a unit went from St. Martinville to New Iberia to two different locations in the Louisiana National Guard’s Jackson Barracks before winding up in the 9th Ward.

Hundreds of thousands of dollars were spent repairing the units that had become uninhabitable.

“One was sitting around for so long, when we opened it up, it looked like it had gone through a hurricane,” said a source who had ongoing access to the building sites this winter.

“They are pre-fab houses, but almost everything in them had to be demo’d and replaced,” he said. “In every house, every floor had to be torn out.”

Records obtained by The Lens show that in the final spasm of spending, nearly $1 million in cost overruns, were amassed in a scramble to meet the April 30 deadline set by an exasperated FEMA.

Among cost increments:

? Late-stage repairs to the 18 modular homes: $367,795.

? “Acceleration” costs, as the deadline approached: $194,700.

“Every unit we’ve put in service,” Stephens said, “has had to meet the approval of FEMA, the state and the receiving entity — in this case, NORA. There should be more concern if little or no additional funds were expended to place these units and ready them in final sale.”

But other contractual add-ons had already goosed the budget for these units by nearly $500,000 before the damaged cottages even got to New Orleans. These included storage fees and the controversial payment of liens against a bankrupt St. Martinville subcontractor who feared the units under construction would be seized by his creditors. Approved by the Jindal team’s new program managers, that bailout alone cost taxpayers another $121,000.

Bottom line: The 22-home project for New Orleans, originally budgeted at $2,334,356, came in at $3,303,592 — a 42 percent overrun of $969,236.

A Response to Disaster

With the New Orleans disaster prominently in mind, Congress created the Alternative Housing Pilot Program in the summer of 2006. Co-sponsored by U.S. Sen. Mary Landrieu (D-La.), the $400 million program was a search for alternatives to the FEMA trailers that had proved to be a less-than-ideal solution to the housing crisis that followed the 2005 hurricanes.

The trailers — condemned for use in areas subject to hurricanes — were later deemed to be health hazards because of formaldehyde fumes and other problems.

The search for a sturdier, more hospitable alternative led to a burst of ideas from proponents of New Urbanism, a movement among planners and architects that seeks to incorporate pedestrian-friendly, small-town design concepts — including an abundance of owner-occupied, single-family housing — in an urban setting. Other names had been proposed for the units before “Katrina Cottages,” prevailed – among them  “Carpet Cottages,” “Courtyard Cottages,” and “Katrina Kernel Cottages.”

In Dec. 2006, FEMA awarded $74.5 million to Louisiana to build about 500 of them, and in due course Katrina Cottages wound up in four locations around the state. The remaining federal money was divided among Texas, Florida, Mississippi and Alabama.

The original grant said construction and siting of the Louisiana cottages was to be completed by the end of 2009.

Within a day of the program’s announcement, in Oct. 2006, a company known as  Cypress Realty Partners secured incorporation papers in Louisiana and, despite its lack of a track record, was chosen by the state from among 45 companies seeking to be the sole developer of Katrina Cottages in Louisiana.

Cypress was founded by four college friends, according to profile of them in the University of Virginia’s alumni magazine: Jonathon Cave, William Smith Jr., Kristopher Kirkpatrick and Benjamin Dupuy, all of whom graduated from UVA in the 1990s.

Cave is a co-founder of The Cypress Group, a Washington, D.C.-based corporation that “provides institutional investment and corporate managers with actionable intelligence and analysis of political processes with outcome-specific probability and immediate market relevance,” according to marketing materials.

Before the Katrina Cottages came along, the Cypress Group had no experience in real estate development.

Dupuy was a Washington lobbyist at the time Cypress Realty Partners was incorporated.

Kirkpatrick, a scion of one-time state Rep. Claude Kirkpatrick of Baton Rouge, in June 2007 formed a second entity, Katrina Cottage Partners, LLC, to claim a piece of the action under the federal program Cypress Realty Partners was managing. Louisiana System Built Homes, operating out of the abandoned Fruit of the Loom site in St. Martinville, was to do the actual fabricating of the modular units.

Cypress Realty also enlisted the services of Cusato Cottages, LLC, and the architecture firm of Duany Playter-Zyberk & Co.

A New Urbanist architect and planner prominent in recovery planning after the 2005 hurricanes, Andres Duany is credited with developing the original Katrina Cottage concept, which he rolled out at a post-Katrina conference on emergency housing held in Mississippi in October 2005.

In marketing materials describing the Louisiana project, cottage developer Marianne Cusato said, “The premise of the Katrina Cottage is to create a house that is safe, affordable and can be built quickly — yet at the same time looks nice.”

Cusato said that the cottages, “originally designed as a dignified alternative to the FEMA trailer,” had “evolved into a nationwide sensation that is finding popularity as affordable housing, guesthouses, resorts and camps.”

Problems Getting a Clean Budget

Throughout 2007, Cypress Realty Partners offered several budgets to FEMA and the Louisiana Housing Finance Authority, but a 2009 state legislative audit, quoted from a FEMA letter critical of the Cypress deal. The company, FEMA reported, was unable to establish a “legally acceptable budget without duplicative fees and excessive profits.” The audit also had trouble “determining the legal status of Cypress Realty Partners.”

Cypress Realty Partners LLC was not subject to state bidding requirements because the company was engaged as a consultant rather than as a construction company. (State agencies seeking professional services are not required to choose the lowest bidder.) Further exemption from bidding lay in Cypress having been deemed a “sole source” contractor by the state Division of Administration, according to the 2009 legislative audit of the program. Sole-source contracts allow companies to skirt public bid requirements if they are, for example, the only such company that can perform the needed service, or if a contract is signed under emergency circumstances.

But with Cypress unable to produce a budget acceptable to FEMA, the Louisiana Housing Finance Authority hired Luster National Inc. to assist with budgeting and contract negotiations.

Luster, a consulting firm that specialized in managing capital improvement projects, proposed a budget that expanded the role of the Louisiana Housing Finance Authority, the state agency that handles affordable housing. The authority was to pick the sites and oversee the purchase of any real estate, order construction materials and streamline implementation of the federal grant by cutting out layers of subcontractors that Cypress, as a consultant, otherwise would have had to hire.

Under the Luster proposal, Cypress retained a management role, and would collect a 6 percent fee for managing the $75 million in federal money.

The Luster takeover looked like a step toward lower costs:

One Cypress proposal would have built 440 units at about $170,000, which was a step down from the initial $192,000-per-unit bid floated by the upstart firm. Luster expanded the order to 700 cottages (250 of which were never built), but whittled the per-unit cost to $105,000.

After months of negotiations, Cypress’ budget was approved on Aug. 22, 2007. Its management fee was raised to 10 percent — or about $7 million — and the average cost to develop each unit rose to $110,000.

Soon after the budget was approved, FEMA released $74.5 million to the state, and by the end of September 2007, the Louisiana Housing Finance Authority finalized the Development Services Agreement with Cypress.

Four years later, development costs had risen yet again to an average of $140,000.

In a late-October 2007 letter to then-Gov. Kathleen Blanco, Louisiana Housing Finance Agency director Milton Bailey wrote that “barring any further delays…it is reasonable to expect that the first ground-breaking could occur within 60 to 90 days.”

Within a month, Bailey had hired Grace & Hebert, a Baton Rouge architecture firm, to orchestrate the efforts of Cypress Realty, project subcontractors and federal and state auditors. Bailey identified the Jackson Barracks site as having the highest potential for fast-track completion of the program’s first cottages, but another two years would pass before the base’s 91 units were housing military personnel.

As she dropped plans to seek a second term and yielded the governorship to Bobby Jindal, Blanco had blamed Bailey for the sluggish pace of the state’s Katrina Cottage program.

“Louisiana received its grant award from FEMA on Dec. 22, 2006,” she wrote in Nov. 2007. “Here were are, eleven months later and not a single cottage has been constructed.”

By that time, at least 570 cottages had been built and occupied in Mississippi.

Blanco accused Bailey of “strangling this project in red tape,” owing to concerns it had raised about the selection of Cypress on a no-bid basis.

Bailey supporters retaliated by accusing Blanco of playing politics with the program. One problem with the Cypress proposal was having hired the Shaw Group, one of the state’s largest construction companies, as a subcontractor to provide “mobilization/design services.”  The Shaw Group’s founder, Jim Bernhard, is the former chair of the Louisiana Democratic Party and had been a staunch supporter of Blanco.

In 2005, the relationship was in the news after Bernhard flew Raymond “Coach” Blanco, husband of the then-governor, to Orlando in the Shaw corporate jet for a Louisiana State University football game. Blanco was traveling with Japanese industrialists looking to build a factory in Louisiana and eventually reimbursed Shaw for the flight.

According to documents reviewed by The Lens, Shaw Environmental earned $377,777 from the the Katrina Cottage program.

Citing the cronyism, Baton Rouge attorney Wayne Woods defended Bailey and the board of the Louisiana Housing Finance Agency by blaming Blanco and Cypress for the delays. Woods reminded Blanco that “Cypress was a newly formed company, created for this project. It had little or no development history, and its principals were reluctant to provide and/or dilatory in providing … information to LHFA.”

Woods charged that after six months spent developing a budget, the first one  Cypress submitted  contained “excessive fees and expenses, including layers of management, which served not to build as many cottages as possible, but to maximize profits instead.”

Cypress had “stonewalled efforts by both FEMA and LHFA to negotiate a legally acceptable budget and used local and national political clout in an attempt to strong-arm the LHFA,” Woods wrote. “Having no construction experience itself, Cypress awarded the construction part of this contract to Shaw Construction, a company not noted for expertise in residential land development or home construction.”

When the Louisiana Housing Finance Authority trying to rein in the cost of the cottage program, Woods noted the Shaw contract had been “emailed to board members on Friday evening, Oct. 26, 2007, with Cypress insisting that the Agency approve it by Monday morning, Oct.  29, 2007.”

The agency “will not administer this project to advance a political agenda or reward politically connected companies or individuals,” Woods declared.

Reshuffling the Deck

Bobby Jindal took office as governor of Louisiana on Jan. 14, 2008, and in February he transferred authority over the Katrina Cottage program to the Louisiana Recovery Authority. According to documents from the time, all Katrina Cottage-related contracts from the Louisiana Housing Finance Authority were canceled by March 28, 2008.

The transfer of authority did not accelerate the program, however.

The Louisiana Recovery Authority spent seven months renegotiating the “developer services” contract with Cypress. Shaw Construction had been sliced out of the new agreement, but the terms were otherwise little changed from the contract that had been negotiated by the Louisiana Housing Finance Authority a year earlier. “In the second contract, Shaw opted not to participate,” Stephens said.

To replace the Shaw Group, Cypress hired Apex Solutions, a Baton Rouge company owned by realtor Donnie Jarreau.

Jarreau did not respond to several attempts to solicit comment from him for this story. A spokeswoman for the Cypress Group referred all inquiries about its performance and that of its subcontractors to “the state.”

Under the terms set out by FEMA, Cypress would have until September 2009 to build and site Louisiana’s Katrina Cottages, a deadline soon extended to January 2010.

In March 2009, state legislative auditor Steve Theriot warned that time was running out. If the state didn’t complete its cottage program by Dec. 31, 2009, it stood to lose its $75 million federal grant.

By the end of 2009, about 120 units had been completed at St. Martinville, and an additional 230 were under construction. Units had been moved to lots in St. Charles, Baton Rouge and Jackson Barracks, but none had arrived for use by the general public anywhere in the New Orleans. A further snag lay just ahead.

In May 2010, the founder of Louisiana System Built Homes, Aubre Shoemake, filed a petition for Chapter 11 bankruptcy protection. He would later claim that delays in Katrina Cottage payments from the state stood to force him into Chapter 7 bankruptcy proceedings.

Records show that to bail out Shoemake, Apex Solutions paid $83,553 to Farmers & Merchants Bank to avoid possible asset seizures of Katrina Cottages at the St. Martinville plant. Apex also paid $109,000 to Premier Staffing, money owed Premier for provided construction crews for the St. Martinville plant.

The add-on payments led to further months of delay, as Apex fought with federal and state auditors over whether these were acceptable “change order” charges. In the end, Apex recovered the money from taxpayers.

As it worked to avoid asset seizures at the St. Martinville house-building plant, Apex relocated completed modular Katrina Cottages to an outdoor staging area in nearby New Iberia. And there they would sit, for almost two years.

New Orleans Finally Gets Its Share

“It’s been awhile since I have been in contact,” wrote the Cypress Group’s Erik Spansel to the New Orleans Redevelopment Authority, in an email dated Oct. 8, 2010, “but it looks like we are finally getting started with the construction of homes under the Alternative Housing Pilot Program.”

That was a full year after construction on Katrina Cottages in Louisiana was supposed to have been completed.

By then, city officials had identified lots for its share of Katrina Cottages, but Spansel’s letter was the first indication that even more delays were in the offing as Cypress struggled to complete its contractual obligations.

The city wasn’t ready to receive the units, in any case. The New Orleans Redevelopment Authority’s Alice Martin reminded Spansel the next day, “we are still in the permitting phase and have not started construction.”

The city agency had worked with the state to find lots for the houses, but once again the program was bedeviled by snags. Email exchanges between city officials and the various players — the state, FEMA and the Cypress Group — reveal some of the problems: Some of the lots under consideration had liens that needed to be settled or dropped. Others were reportedly too small for the Katrina Cottages constructed in St. Martinville. Further delays resulted from confusion between Cypress and the city over which map of parcels Cypress should be working from as it sought to place the cottages.

“Certainly we encountered a number of hurdles associated with building permanent construction,” said Stephens, “including federal environmental clearances, historic reviews and complicated local partnerships that sometimes caused project delays.”

Officials with the New Orleans Redevelopment Authority said in an email to The Lens that the sites were selected “based on clustering development around areas of strength, through existing assets like schools or through [the] strength of the surrounding neighborhood and active redevelopment.”

By the end of 2011, the modular units that would eventually make their way to the Lower 9th Ward were still languishing in New Iberia.

At last, in early January, the units started arriving on the Lower 9th Ward lots, triggering the frantic effort to remediate damage incurred during the years they sat unused.

According to documents provided by the state and city, Apex Solutions workers on the site had to remove all the floors, scrape the floor insulation and install new floor pads and floorings in every house. They had to dehumidify the homes and complete a “mold/mildew treatment.” All the sheetrock and wall insulation had to be removed and replaced; all the interior doors had to be removed and replaced. Interiors and exteriors were repainted.

The remediation work was completed on all the units by the first week of February, and the next two months were spent sorting out the remaining details that go along with new home construction, all of which had to be rushed in order to make the April 30 FEMA deadline. In the end, “the repaired cottages are the same quality as all of the other cottages,” insisted Stephens, adding that there was “no latitude” in replacing anything in the damaged units with materials that weren’t approved by FEMA.

In a statement, FEMA officials directed specific questions abut procurement issues to the state, and insisted that “in regards to oversight, the agency continues to review and evaluate the Louisiana Alternative Housing Project, including the eligibility of expenses within the approved scope of work.”

The city vouches for the quality of the cottages it is offering to Katrina and Rita victims: “We wouldn’t be selling them if we weren’t confident about the structural integrity of the units,” said New Orleans Redevelopment Authority spokeswoman Jasmine Haralson.

Officials at the redevelopment authority declined to comment on the nearly $1 million in overruns incurred in the struggle to bring the cottages to market.

“No, thank you,” they wrote to a reporter. “This question would be better directed at the state.”

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Tags: governancenew orleansdisaster planninghurricane katrina

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