City bets on condos to help pay for district

Projected revenue shortfalls show the money for South Waterfront is no sure thing
JEFF MANNING and RYAN FRANK
The Oregonian

The Portland City Council is expected to officially push the South Waterfront District back on track today with another $43 million in city money.

But what's been lost in the debate so far is that the district probably won't generate as much property tax revenue in its early years as first expected.

Despite a spurt of condo construction, South Waterfront tax revenues will fall 13 percent short between 2007 and 2009, according to new city projections.

Driving the drop: a falling tax rate in Portland and a quirk in state law that depresses the condos' tax values even as Multnomah County's housing market heats up, said Eric Johansen, the city's debt manager.

The anticipated shortfalls are relatively small -- $546,719 over two years -- and city officials say they do not pose a financial problem. Still, the shortfalls illustrate the risk the city took on when it approved South Waterfront's $2 billion redevelopment in 2003, the largest project of its kind in city history.

If the council approves a new funding plan today, taxpayers would be on the hook for $113 million in public improvements -- the tram, streets and parks -- through 2011. The city expects to borrow money for its share, then rely on property taxes paid by new South Waterfront construction to cover its bills. OHSU, a major South Waterfront landowner, is a nonprofit and doesn't pay property taxes.

The city will lean hardest on the posh riverfront condos to pay off its debt. It's a multimillion-dollar gamble that the high-end condo market will continue unabated for five years, even as evidence mounts elsewhere that the market is cooling.

"Most of the (anticipated) improvements in South Waterfront are tax-exempt or are condominiums," said Doug Blomgren, a Portland lawyer and secretary of the Portland Development Commission. "I was alive in 1983. There are times when the condo market has negative growth. Their market value can go down. That's why there's some reason to have some concern."

The good news: South Waterfront's condo market is booming so far.

The bad news: Oregon's tax structure.

Property tax payments rest on a simple formula: a home's tax-assessed value multiplied by the tax rate. With South Waterfront, both figures are moving in the wrong direction.

The first condo towers are expected to be worth a market value of $135 million. But state tax law caps the condos' tax values at a fraction of the market value.

South Waterfront's projections were based on a cap of about 70 percent. That figure has dropped as home prices jumped in recent years.

The cap is set annually based on the ratio of the county's housing tax values to its market values. Voter-approved Measure 50 caps tax values at 3 percent growth annually. But market values have rocketed in recent years, growing by 11 percent this year.

The growing divide between the two has artificially depressed new housing's tax values. In 2007, the divide is expected to drive tax values to just 53 percent of market values.

The result: A $1 million condo would be taxed at $530,000 instead of $700,000. That's a one-quarter drop in tax collections for the city.

On top of the depressed values, Portland residents are paying a lower property tax rate after Portland Public Schools dropped a temporary levy. For South Waterfront, that translates into a projected drop in the rate to $19.37 per $1,000 of tax value in 2007.

The first condo tower, the Meriwether, is expected to help generate $1.25 million in new property tax revenue in 2007, nearly $200,000 less than initially anticipated.

The next year, when the John Ross tower goes on the tax rolls, revenue is pegged at $2.28 million, $349,313 less than first expected.

In 2009, property taxes should surpass initial expectations for the first time.

OHSU's status no help

Another factor adds to South Waterfront's uncertainty: OHSU's status as a tax-exempt public corporation.

OHSU is the third major player in the new neighborhood, along with the city and North Macadam Investors. It envisions the neighborhood as a natural place to expand its campus, which is bulging at the seams atop Marquam Hill.

But most of OHSU's development won't generate property taxes.

That means the city won't see any tax benefit to OHSU's first $145 million South Waterfront building, the Center for Health & Healing.

The impact of tax-exempt properties has already hit the North Macadam urban-renewal district, which includes South Waterfront. Even with the red-hot housing market, the North Macadam district's total assessed value fell by $9 million in 2005 to $270 million.

Two major property transactions drove the decline: Portland State University, which also doesn't pay property taxes, took possession of the former DoubleTree Hotel site on Southwest Lincoln Street. And the Schnitzer family donated 20 acres just south of the Marquam Bridge to OHSU.

City Commissioner Erik Sten voted against South Waterfront's new funding plan in part because of his concern about the tax-exempt land. "There are a number of reasons I didn't support this agreement," Sten said. "One of them is that the city is bearing an inordinate share of the risk."

Deal with developers

Portland Development Commission officials think they eliminated much of that risk.

Under the proposal, North Macadam Investors would guarantee to build five condo towers so the city would have enough tax revenue to pay its bills. If they don't follow through, North Macadam must pay the difference or give its land to the city.

But even with a tax shortfall in the early years, North Macadam Investors won't have to cut the city a check.

That's because the developers are only required to build enough condos to exceed $288 million in market value, a level they will easily meet. If the oddities of Oregon tax law limit the actual tax payments to the city, that's not North Macadam Investors' problem, according to the 2003 deal.

Johansen, the debt manager, said he's not concerned. He said as long as the developers build condos, the city should overcome the depressed tax values and collect enough cash to cover its debt payments.

Trouble comes only if the condo market tanks in the next five years. No one has that crystal ball, but even some of South Waterfront's biggest backers acknowledge some qualms.

"You've got to wonder how much the market will support," said Bob Scanlan, whose company ScanlonKemperBard helped fund North Macadam's construction. "I'm not so worried about the condo demand disappearing. I'm more worried about the condo buyers' ability to sell their house. Therein lies the $64 million question."