A Suite Deal

[June 14th, 2006] Anybody puzzled why a majority of the City Council recently blasted the Portland Development Commission for being unresponsive to the council's direction need only look at a planned condo project at 209 SW Oak St.

As one of the council's PDC critics, Commissioner Erik Sten, puts it, the downtown Oak Tower's financial underpinnings are "clearly a game."

Here's the history behind that "game," which critics like Sten and Commissioner Randy Leonard say boils down to a private developer getting a great deal with little or no public benefit:

In 2002, the PDC bought a "blighted" two-story building at 3rd and Oak for $1.2 million from ScanlanKemperBard. The city's economic development agency made the purchase based on a January 2002 private appraisal, which said the 10,000-square-foot property was worth $850,000.

Christine Hermann, the PDC's project manager for the property, says the agency faced pressure from the business community to find a use for the long-dormant site, and "might have paid a little too much."

Fast forward to October 2005. The PDC, whose five members are appointed by the mayor, approved a deal in which the commission would give the land to Trammell Crow for a planned 26-story condo tower.

Before handing over the property, the PDC sought another appraisal by the same firm that did the 2002 appraisal, PGP Valuation. But after three years of PDC ownership, during which commercial real estate values downtown soared, PGP found the property's value had plummeted to a negative $2.7 million.

"That sounds like Enron accounting to me," says Bob Scanlan, who sold the property to the PDC. Other critics say the negative appraisal is a contrivance that will allow Trammell Crow to avoid paying union wages.

So how did the property lose nearly $4 million in value in the biggest property bull market in recent Portland history?

PGP appraiser John Ingle wrote the PDC in March 2006 that the current valuation includes a $1 million-plus discount for the financial liability of a long-term lease on parking spaces in the building's basement. (Curiously, two years earlier, those same appraisers only dinged the value by $200,000 because of the parking liability.) PGP declined comment to WW.

The big cost driving the project into "negative" value, however, is an "affordable housing" component that the PDC required for the site.

But like beauty, affordable housing is in the eye of the beholder. The agreement between the PDC and Trammell Crow calls for the developer to offer 15 percent, or 24, of the planned 160 condo units at a price affordable to buyers making no more than 120 percent of the Portland median household income for a family of two (currently $54,312) on the initial sale date, estimated to be in fall 2008.

Three months after the initial offering, the income ceiling goes up to 150 percent; after six months, 175 percent; and after nine months, the units can be sold to anybody. Sten, the council's housing commissioner, says the pricing fails to provide housing for working-class Portlanders.

That means the PDC's free transfer of ownership builds a large subsidy into a project that does not accomplish the city's and PDC's stated goals of providing affordable housing.

The PDC's free property transfer to Trammell Crow undercuts another key council goal: ensuring that public projects provide jobs at what state law calls the "prevailing wage rate," which essentially guarantees that developers will pay higher, union wages.

But public funds must be used in a project for prevailing wage law to apply, says Christine Hammond, administrator of the Oregon Bureau of Labor and Industries' Wage and Hour Division. (The PDC recently won a prevailing-wage case over another PDC project, but BOLI is appealing).

In the Oak Tower project, Hammond, Sten and Leonard say the negative appraisal gives PDC the rationale to say it's not giving anything of value to Trammell Crow, meaning the developer doesn't have to pay prevailing wages.

"PDC has become a tool of very narrow development interests," Leonard says. "They think they make more money by paying less than family wages and creating housing for other than working-class Portlanders. In the long run, I think that PDC threatens its own very existence."

Hermann denies the PDC influenced the appraisal and adds that redevelopment agencies sometimes sell property for less to achieve policy goals such as affordable housing.

If the plummeting value of 3rd and Oak and the not-so-affordable apartments aren't enough to give critics ammunition, PDC also plans to spend up to $500,000 on demolition of the existing building and site cleanup for Trammell Crow. That cost is not included in appraisal value.

"There's just no value at all for the public in this transaction," Sten says.