Post-Katrina, Businesses Still Rebuilding

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Julia Burden never truly understood the term “deer in the headlights” until she took over her late husband’s home health care business in 2003.

Burden, who had never run a business, was handed an operation that was not only burdened by debt, but by a lack of confidence that this small franchise of Interim HealthCare, which provides in-home health care for patients, could turn itself around. But she got past those fears, and two years later, after hiring several employees and advisers to assist her with the numbers side of the business, things began to improve.

“July and August of 2005 were our best months ever,” Burden said, adding that as of Aug. 29, 2005, they had grown the company’s patient base to a high of 425. “We all know what happened next — Katrina.”

Roughly 80% of New Orleans was flooded by the hurricane and more than 180,000 homes were destroyed, according to the Brookings Institute. Small businesses took a big hit too: 60% of New Orleans small businesses were physically ruined by Katrina, according to the Institute for Southern Studies.

Burden returned to her office on Sept. 8, 2005, to find her client roster had dropped from 425 patients to five. Some of her staff and most of her patients had fled to areas all over the country. When Burden finally returned to her water-damaged business, she underwent the task of actually locating those 425 patients.

“We had some of the best nurses and aides ever,” Burden said. “Even though many of them had lost everything and were living wherever they could, they were still seeing the patients as we located them.”

While recovery efforts and funding have been continually flowing into the city, small businesses have faced a triple whammy over the past five years: the Great Recession, multiple hurricanes and the recent BP oil spill have all made it difficult for owners to rebuild what they had pre-Katrina.

Small business owners are facing some of the same struggles as homeowners continue to face in the volatile New Orleans real estate market. Click here to read MainStreet's coverage of New Orleans' residents housing problems five years later.

Katrina Housing Data

The Cost of Katrina

Ralph Brennan, owner of the Ralph Brennan Restaurant Group, was able to leave the city before the hurricane took full force, but his three restaurants — Red Fish Grill, Bacco and Ralph’s on the Park — had to weather the storm.

“Prior to Katrina, hurricanes were a wind event. We were not prepared for that kind of water event,” he said. Brennan’s restaurants suffered minor water damage and he lost an entire refrigerator full of food and supplies. Nevertheless, Brennan was one of the lucky small business owners who returned quickly enough to prevent mold and other larger flood damages from affecting his business.

According to SCORE, a nonprofit that advises small businesses, Hurricane Katrina was the largest single loss in the history of insurance, with $40.6 billion paid and 1.7 million claims recorded.

Brennan had insurance to cover the damages his businesses suffered, though during the two months in which his restaurants remained closed after Katrina, he continued to pay employees and provide them with health care as well as paying other fixed costs such as mortgage payments. This was where the true cost lied for many businesses. Brennan estimates the hurricane cost him about $700,000 in expenses and lost income, after insurance reimbursement.

“Floods don’t count for business interruption and we learned that the hard way,” Brennan said.

Carmen Sunda, director of the Louisiana Small Business Development Center in the Greater New Orleans, has been working with businesses in New Orleans for more than eight years. She says the most astounding change to the cost of doing business in the area is the price of insurance. She worked with one business that was paying $750,000 a year for insurance prior to Katrina and now pays $3 million a year.

Some businesses needed more financial support than insurance could provide following Katrina and many went to the government for help. The Small Business Administration handed out Disaster Recovery Loans for this very purpose.

James Rivera, associate administrator for the SBA Office of Disaster Assistance, said the SBA approved about $11 billion to $12 billion in disaster recovery loans, and about $6 billion of that was actually dispersed to Hurricane-affected homeowners and small business owners. Some small business owners that got approval for larger loans ended up not needing all of the funds because of insurance claims.

Sunda still sees some small business owners that originally came to her for help after Katrina returning to the SBA for assistance five years later. Loans, even from the government, are still loans and the Great Recession compounded with the BP oil spill in June have made recovery difficult.

On top of that, Sunda has seen an increase of 25% to 40% in the cost of doing business in New Orleans, a true hardship for many small business owners. In addition to the cost of insurance, wages have risen considerably in the five years since Katrina. The Brookings Institute reports that wages in the greater New Orleans region increased nearly 14% during the five years since Katrina.

Brennan says this rise in payroll costs has made him unable to return to the same level of staffing that he had pre-Katrina. His restaurants now run with 18% fewer employees.

“We bore the brunt of the recession in [fiscal year] 2009 and then it picked up a little bit in 2010 and we were actually doing quite well until June of this year,” he said.

As a business dependent on tourism and local patrons, Brennan’s restaurants have struggled to return to the same level of success they had pre-Katrina as fewer trade groups choose to hold all-important conventions in the area.

Businesses not based on tourism, like Burden’s health care franchise, have faced a better environment over the past five years. Burden said her business actually spiked immediately after Hurricane Katrina and has steadily been on the rise since then due to the fact that some of her competitors were slow to return or never came back. That client roster that dropped to 5 from 425? It’s now up to about 440.

Unfortunately for Burden, he has some new competitors entering her market as small businesses are starting to see the recovering New Orleans as an attractive market.

The New Kids

New Orleans is attracting a new set of entrepreneurs and in some ways they are changing the way the local economy operates.

According to the Brookings Institute study, “The New Orleans Index at Five,” entrepreneurship has surged post-Katrina, surpassing the national rate.

One small business that is new to the area is The Receivables Exchange, an online marketplace for that helps companies generate cash quickly using accounts receivable. President and co-founder Nic Perkin said the choice to move his online business to New Orleans was because of the city’s rich history.

“We were looking for a city historically associated with commerce and what we found was a city with a brand name,” Perkin said. “It’s a globally recognized city.”

Internet companies like The Receivables Exchange are drawn to the area because of the lower costs of doing business compared to areas like Silicon Valley. Even though Sunda said the cost of business has increased in New Orleans, it is still cheaper for businesses than many other cities in the U.S.

Michael Hecht, CEO of nonprofit Greater New Orleans Inc., said intellectual capital businesses are mobile, which makes them especially unafraid of moving their headquarters to an area where they may need to evacuate due to storms. Most recently, satellite company Globalstar relocated its corporate headquarters from Silicon Valley to Covington, La., and has promised to bring with it relocate or create 150 jobs in the area.

“Silicon Valley doesn't have a monopoly on innovation. Louisiana is increasingly being viewed as a great place to base a company that requires creative talent. This is only the beginning of an exciting new trend," said Louisiana Economic Development Secretary Stephen Moret in a press release announcing Globalstar’s move.

Part of Louisiana’s draw is its digital media tax credit, which allows digital media companies to earn a 25% tax credit for expenditures and 10% for labor in Louisiana.

Hecht said another added perk for small businesses moving to the area is the brain gain that is currently underway.

“Tulane University had more applications this year than any other school in the country. That’s an indication of young people wanting to move here. That brain gain is significant,” Hecht said.

Perkin said his company has reaped the benefits of a talented local population, calling the brain gain one of the “unexpected benefits” of moving to New Orleans.

The Brooking Institute found growth in knowledge-based jobs to be especially key to New Orleans’ recovery, with higher education jobs becoming the fourth largest economic driver in the metropolitan area.

While the economy changes and evolves to the new businesses and talent coming into the area, the government and small businesses that stayed are also learning how to keep up.

Lessons Learned

Following Katrina, many played the blame game with government organizations. Was it the Army Corps of Engineers who were to blame for poorly-constructed levees or FEMA for not reacting swiftly and equally in evacuating residents or did the SBA not get loans to homeowners and small businesses in time?

The speed of SBA loan approvals was highly criticized after Katrina, as applicants waited an average of 70 days for loan approval in 2005.

“I used to say the governor should just drive around in her car and hand out checks, cause that would have been faster,” Brennan said. “I would have loved to see a more streamlined process.”

Criticisms of the SBA are not unfounded, Rivera acknowledged.

“We’re really not proud of what happened during the Gulf Coast hurricanes,” he said. “We made a lot of mistakes and we learned from those mistakes.”

One of those mistakes was a lack of well-staffed loan application processing centers on the ground after Katrina. Since 2005, the SBA has increased its staff from 800 to 1,200 disaster staff in 2010 and an extra 2,000 reserve staff who are used during emergencies.

“These last five years, we’re entrenched in things. I like to say we’re the masters of disaster,” Sunda said.

Small business resources within the government have made these changes, but Sunda says the SBA isn’t the only one who has been forced to adapt following Katrina. The businesses she works with are making changes too.

“Those businesses that were able to reinvent their business model and not be solely dependent on business from the New Orleans area are the most successful right now,” Sunda said.

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