Tax Breaks For Pricey Housing Spur Suburban Development

Dated: May 23 2016

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Hub 9

HILLSBORO – The new buildings surrounding the Orenco MAX station look like they could have been airlifted from the Pearl District. The train whizzes by a public plaza where families and couples gather. Young professionals drink craft beer and watch sports on the ground floor of an apartment tower. Others eat at outdoor tables beside a French boulangerie.

Tenants in the new development, known as the Platform District, are paying Northwest Portland-like rents, too. And it comes with a big assist from Hillsboro taxpayers to the developer behind the project.

For Portland-area landlords, recent years have marked the most lucrative stretch ever seen thanks to historic growth in population, employment and home values. For developers of multi-family and mixed-use projects, there's never been a better time.

But the Platform District – developed by Vancouver-based Holland Partner Group – received an especially good deal. It saved more than $330,000 in property taxes last year through a little-known state initiative called the Vertical Housing Program, according to a Washington County estimate. By the time the 10-year incentive expires, the Platform District's owners will have saved millions of dollars in property taxes, without any requirement to include affordable housing.

"I think development probably would have occurred there anyway," said Christine Armer, who has lived in the historic Orenco townsite neighborhood opposite the MAX tracks for 11 years. She believes the program is a giveaway to developers.

An analysis by The Oregonian/OregonLive shows that the initiative – which is often used in conjunction with other publicly funded subsidies, such as a $700,000 Metro grant at the Platform District – mostly results in pricey market-rate housing.

Developers defend the program, saying the Platform District and other such projects would have been impossible without the incentives and bring investment to previously depressed areas. And they point out that the incentive has not been widely used and was never designed to provide affordable housing.

"My personal opinion about the affordability crisis is it's really a supply-side issue," said Dwight Unti, president at Tokola Properties, which has done Vertical Housing projects in downtown Hillsboro and Gresham and is planning another in Forest Grove. "There's just not an adequate supply of multifamily housing."

Supply and affordability

Dan Bertolet, who studies Northwest housing issues at the Sightline Institute, a Seattle-based think tank, hasn't looked specifically at Vertical Housing. But he thinks policymakers should aim for affordable units in exchange for tax breaks, in general.

"If the market's already there, the tax break doesn't make any sense if you're not getting any affordability requirement out of it," Bertolet said.

After he helped steer a 10-year extension of the Vertical Housing Program through the Oregon Legislature last year, Rep. Phil Barnhart (D-Springfield) claimed it would result in "some additional low-income housing that otherwise would not have gotten built."

There is indeed a second tier of the Vertical Housing Program breaks, giving even greater bonuses for including affordable housing. But it has rarely been used, and the state's enforcement measures are murky, in any case.

Enacted by state lawmakers in 2001, the Vertical Housing Program allows – but does not require – Oregon cities to offer property tax breaks in exchange for mixed-use residential development. To accomplish that, local officials establish Vertical Housing "zones," which are typically near a historic downtown area in need of revitalization. The Oregon Housing and Community Services department has administered the program since 2005, when it took over from the state's economic development agency.

To qualify for the break, a developer would need to build a mixed-use project in one of the zones. The ground floor must contain commercial uses – retail or a restaurant, for instance. Above the ground floor, the property owner gets a 20 percent property tax break for each floor dedicated to residential use, up to 80 percent. The incentive lasts for 10 years. Developers can win an additional property tax exemption on the underlying land if they include units affordable to those making 80 percent of the area's median income.

Advocates of the program deny that the program affects locations that would have been developed, anyway.  

"These are areas that have remained underdeveloped for years – and, I mean, years – or have development challenges," Beaverton Mayor Denny Doyle told state legislators last year during hearings about extending the program. There are two Vertical Housing proposals in Beaverton's development pipeline.

In the program's early years, cities in southern and eastern Oregon, including Grants Pass, Central Point and La Grande, used it to attract development to their downtowns. But the only six projects to remain certified under the program in the past decade are in the Willamette Valley – in Milwaukie, Gresham, Springfield and Hillsboro.

Springfield's project, owned by the nonprofit St. Vincent de Paul Society of Lane County, is the only one of the six to take full advantage of the additional exemption for including affordable units. It provides 33 one-bedroom apartments that are affordable to those making 50 percent of area's median income. Milwaukie's North Main project takes partial advantage – a combination of 33 market-rate townhouses and 64 more affordable apartments.

Terry McDonald, executive director at the St. Vincent de Paul Society, said he understands why private developers don't often opt to include affordable units.

"Think about where they're building it," McDonald said. "If you're in a hot market, you're going to be building things that are market-rate."

The Vertical Housing tax break for him wasn't so much about helping finance construction, but decreasing the cost of operating the St. Vincent de Paul building after it was built.

Oregon Housing and Community Services monitors the Springfield and Milwaukie projects every three years to make sure they are compliant with rent requirements in connection with the federal low-income housing tax credit, which helped finance the buildings. So, as a practical matter, the projects are regulated.

Spurring market-rate development

These days, a 585-square-foot apartment with one bedroom goes for $1,500 a month in the Platform District's Hub 9 building, which opened last year along the MAX Blue Line. That's well above the $1,142 you'd have to pay for an average one-bedroom apartment in Hillsboro, according to the rental industry group Multifamily NW. With demand for apartments surging, the building filled up quickly – Holland leased five apartments in seven days during one stretch last July.

When the Platform District was being planned, the economy was still struggling and the rental market was anemic. But Hub 9 opened last year, at the peak of the rental and development boom, and another Platform District building opened months later. A third is slated to hit the market this summer. All, in addition to a fourth building built beforehand, are eligible for the tax breaks. They total more than 900 units of housing in the area surrounding Orenco Station.

Tony Gonsalves, marketing director at Holland Partner Group, said in an email that the development company believes "the best way to address the affordable housing crisis is to increase supply and alleviate the housing scarcity that is driving up rents." The Platform District would have been impossible without Vertical Housing incentives, he added.

Metro's role Metro has been a key partner for the Vertical Housing Program in the Portland area, contributing millions in transportation-oriented grants and other subsidies to the projects in Gresham, Hillsboro and Milwaukie. But the regional government is changing the way it awards transportation-oriented development grants, putting a greater emphasis on affordability rather than luxury. The shift could raise questions about how Vertical Housing projects will be financed in the future. "We definitely want to be in a position where we're able to respond to changing market conditions," said Megan Gibb, director of Metro's transit-oriented development program. In hot markets, Metro will no longer provide the grants, Gibb said. But in places like downtown Gresham – home to two Vertical Housing developments – the agency "still can't get a regular market-rate project to pencil out," she added, and Metro will continue to consider providing assistance. Here are Metro's contributions to Vertical Housing projects over the years: • $685,335 to the Beranger Commons in Gresham • $430,000 to the Third Central apartments in Gresham • $465,000, in addition to helping purchase the land, to the 4th Main apartments in Hillsboro • $700,000 to the Platform District in Hillsboro • $560,528 to the North Main Village development in Milwaukie

"With the [Vertical Housing tax] credits, there are over 500 additional units in the district, where individuals can walk to public transportation, taking cars off the road," Gonsalves said. "In addition, over the useful lives of the buildings, the city and state will receive over $200 million in higher tax collections from the significantly more robust development that the [tax breaks] enabled."

Nearby, it's fair to say that nobody saw today's rental market coming in 1998, when city officials and Metro bought the downtown Hillsboro site now home to Tokola Properties' 4th Main property. The site sat empty and polluted for years, contributing nothing to the tax rolls. Meanwhile, the city's historic core foundered as areas to the east such as Tanasbourne thrived.

The market-rate 4th Main building opened in 2014 with the help of an estimated $58,000 Vertical Housing property tax break that will continue for nine more years, in addition to more than $2.2 million in other subsides from the city and Metro.

The project has been a success. It filled up quickly with renters, has garnered awards such as the state Parks and Recreation Department's "Best New Building" and leased ground-floor space to a brewpub, McNally's Taproom. And 4th Main's rents – perhaps because of the location in still-recovering downtown – are actually closer to the area's average than other market-rate Vertical Housing projects in the region.

But two years after opening, the other two ground-floor retail spaces are still not operational. An information technology company is getting ready to open, and a potential lease is being negotiated for the third space, pub owner Jim McNally said – but for a long time, they sat empty.

That, along with housing affordability concerns, has worried some residents in Forest Grove, where Tokola has set its sights on redeveloping the former Times-Litho printing plant. City officials there have already spent more than $1.2 million preparing the site for development.

"Two-plus million dollars to a developer so they could make a lot of money... was a really poor use of public money," said Tom Beck, who has chaired the Forest Grove Planning Commission for 15 years, referring to 4th Main. He helped approve the Times-Litho proposal's design but as a private citizen testified against the project at a Forest Grove City Council meeting.

Unti said Vertical Housing projects wouldn't pencil out without the program. At the developer's Vertical Housing project in downtown Gresham, called Third Central, rents are way above average – $1,605 a month for a two-bedroom, two-bathroom unit, compared to a Gresham-area average of $990.

The cost of construction in farther-out areas is the same as it is in downtown Portland, Unti said, but the areas haven't historically commanded nearly the same rents. Lenders, therefore, are wary when a developer is the first to try and revitalize an economically depressed area.

"The reality is, when you deal with your lenders and your equity investors, it's all about, 'What are the conditions on the ground today and what tools does it take?'" Unti said. He said nobody "could have projected the current market conditions" when 4th Main was being planned.

Would development have happened anyway?

During a committee hearing on extending the program last year, state Rep. John Davis (R-Wilsonville) wondered why Vertical Housing was needed in light of a booming market for apartment construction and historically low vacancy rates. He eventually did vote in favor of the extension.

"Most developers I know... are trying to get multifamily up as quickly and with as much abundance as possible," Davis said.

Randy Tucker, representing Metro, answered that in the metro area, the program was intended for suburban communities rather than Portland, which hasn't adopted it.

Barnhart, who chaired the committee, said this week in an email that "there are sustainability/environmental benefits to building vertically." He also shared Tucker's view that "it is harder for multiple-story buildings to pencil out" in suburban or smaller metropolitan areas.

Armer, the Orenco neighbor, said she would have been more supportive of the Platform District had it included units for low-income people. The nearby Orchards at Orenco project, built to strict energy efficiency standards by Portland-based REACH Community Development, is affordable to those making half the area median income, for example.

She worries about all the new residents in buildings that aren't paying taxes to support area services.


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Mark Ross

For Mark Ross, founder of Ross NW Real Estate and professional real estate broker, real estate has always been the career of choice. During his 25+ years in the industry, Mark has gained experience in....

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