Pretty Funny-Looking Financing

[September 28th, 2005] The dysfunction of a major city initiative aimed at helping poor neighborhoods looks even worse than previously reported.

Two weeks ago, the Portland Development Commission announced that its Portland Family of Funds (PFF) offspring wouldn't seek more tax credits from a federal subsidy designed to attract investment to troubled neighborhoods.

In a Sept. 6 memo, new PDC director Bruce Warner explained to his board that the deals PFF was considering are "difficult to finance, have inexperienced and financially challenged project sponsors/developers and have experienced long delays to get underway."

The announcement, first reported by The Oregonian, that PFF would not seek additional credits has puzzled observers.

That's because PFF was successful in acquiring $100 million worth of the federal New Markets Tax Credits in 2004. And in a city with plenty of depressed neighborhoods, passing up what amounts to another round of free money is an admission of failure.

Among those puzzled at PFF's inability to put its tax credits to work is Mike Andrews, the Housing Authority of Portland's director for community revitalization. Last summer, the housing authority, which like PDC is a city agency, sought $13 million worth of tax credits to help fund its New Columbia project for lower-income residents in North Portland. HAP got just two responses. Neither of them came from PFF. "We were thinking we'd get a proposal from them," says Andrews.

PFF board chairman Carl Talton says he isn't sure why his board failed to compete for the housing authority's business. "We talked with them early on, but the discussions didn't go anywhere," Talton says.

Portland Family of Funds has a short but eventful history. Back in 2000, PDC decided to rely less on "tax-increment financing," paying for development by borrowing from future tax revenues the development hoped to generate. The city agency's reliance on that mechanism had drawn increasing criticism.

In 2001, then-PDC director Don Mazziotti hired Norris Lozano, a Texan with a checkered résumé (see "Coming Clean," WW, Nov. 26, 2003) to find different financing methods via a new spinoff known as Portland Family of Funds. Lozano's first deal to use tax credits was the $28 million conversion of the Pearl District's historic Armory into a new home for Portland Center Stage (see "The Great White Hoax," WW, Jan. 7, 2004).

Although Lozano executed the Armory deal while still on PDC's payroll, state law required that PFF become independent of PDC. But Lozano and his team of 12 also remained yoked to the development commission because the city agency must approve any use of the tax credits PFF acquired from the feds.

PFF retained another connection to PDC: It owed the development commission $870,000 for seed money and another $180,000 in working capital. In January 2005, PFF agreed to repay $189,700 annually.

The agreement didn't last long. On June 8, in one of his last moves as PDC director, Mazziotti recommended waiving the payments until additional tax-credit deals were closed. That recommendation came although the first payment wasn't due until January 2006 and PFF had just closed two deals. "Changing the schedule...avoids having PFF default on the promissory note," Mazziotti explained in a memo to his board.

On its face, the change made some sense because PFF gets paid for the tax credits only when it closes a deal. But the debt holiday also created a loophole because PFF is free to pocket the money it earns separate from employing its tax credits.

For instance, Talton acknowledges the firm is earning fees on at least two local projects: the downtown Meier & Frank remodel and the Stadium Place development on West Burnside Street. PFF is also prospecting for other advisory business in California and the Southwest, Talton says. He adds that when PFF agreed to repay the debt, its only source of income was the tax credits it held.

Doug Blomgren, PDC's longest-serving commissioner, says he was unaware PFF has other sources of income. Blomgren says since PFF owes its existence to PDC, "it ought to be seriously considered whether those funds should be used as a source of repayment."

Although PDC and PFF work together on tax credits, relations between the two are strained. "We must make peace with PFF to achieve the goals we set out to achieve or we should cut our losses now return the credits and get out of the [tax-credit] business," wrote PDC deputy director Wyman Winston in an Aug. 9 email to his new boss, Warner. "I don't believe PDC and [PFF] can issue $60 million in [tax credits] by 9/30/07."

The September 2007 date is the deadline for PFF to commit the remainder of its original allocation of $100 million in tax credits. "We have not met one of the project dates over the past year," Winston added. "We don't reward for getting projects done, we reward for churning lots and lots of projects."

Despite its lack of interest in the New Columbia project, PFF has had so much difficulty finding suitable investments that earlier this year it proposed to use $25 million of tax credits to finance land purchases instead of developing projects.

Among the parcels under discussion, according to Warner's memo, are the land associated with the Burnside Bridgehead project, the Convention Center Headquarters Hotel and the financially ailing Interstate Firehouse Cultural Center in North Portland.

Land acquisitions would allow PFF to use tax credits quickly-which would both allow PFF to get paid and to beat the expiration deadline on the credits.

But creative ideas can't mask a fundamental problem: tax-increment financing hasn't diminished, and PFFs deals threaten to make things worse:

"The amount of TIF [tax-increment financing] resources has not been reduced, but in some cases actually increased," Warner wrote in his Sept. 6 memo. "This phenomenon is due to the lack of financial feasibility of the projects."

Despite all the problems, everybody involved agrees that New Markets Tax Credits are too attractive to forsake.

Two recent changes suggest that PDC and Mayor Tom Potter want greater influence in making sure they are put to good use.

Warner, Potter's choice to replace Mazziotti, has insisted on formalizing the joint PFF/PDC Committee that is supposed to oversee tax-credit investments. And beginning last month, PDC Commissioner Mark Rosenbaum, a close ally who chaired Potter's mayoral campaign, joined PFF's board.

"We want to signal that we're getting serious about getting these tax credits into the community," Warner says.