The Pop Blocks on Sandy Are in Limbo After a Fight With the State That Only Kafka Could Love

The dispute means that a city desperate for affordable housing will get much less.

On paper, the Pop Blocks project on Northeast Sandy Boulevard is an urban development dream.

It would turn what was once a collection of aging Pepsi warehouses into a 4.7-acre, mixed-use, mixed-income complex with shops and a tree-lined plaza. It would even have a “woonerf.” That’s Dutch for a street shared by pedestrians, bicycles, slow-moving cars, and kids at play.

Best of all, Pop Blocks would have 44 subsidized apartments for renters earning 60% or less of area median income. The developer planned to put all of those in the first phase, called Splash. In a city that’s desperate for housing, it may be a drop in the bucket, but it’s a welcome one.

But Splash is on hold. The giant excavator hasn’t moved in more than five months, and the rock crusher is idled. The graceful arches on the beloved old bottling plant stand like a skeleton.

The project is stalled because Oregon officials ruled in February that the developer could not use a tax-exempt bond program and low-income housing tax credits to finance construction of the affordable apartments.

The rejection came as a total surprise, says Michael Nanney, senior director of development at Security Properties, the Seattle-based developer. Teams from his firm and the state met every Thursday for months, he says, hammering out the project’s finances. Investors, construction lenders, and various lawyers joined the calls, and everything appeared to be on track. Until it wasn’t.

“All of a sudden, the tablecloth got yanked out from underneath us,” Nanney says. “No one involved in this transaction has ever seen anything like this.”

Oregon Housing and Community Services, the state agency that helps finance affordable housing, seemed gung ho about the project, Nanney says. After some debate about how Security Properties would meet new requirements for diversity and inclusion, OHCS’s Housing Stability Council voted unanimously to approve Splash’s state funding, according to a video of the meeting held Oct. 1, 2021.

Then, on Oct. 21, out of nowhere, the Oregon Department of Justice arrived on the Thursday call with new objections.

The dispute means that a city desperate for affordable housing will get much less from Splash. The monthslong fight could also spook developers who thought many of the issues Security Properties encountered had precedents that offered solutions. A project that once seemed charmed has detoured into a bureaucratic morass worthy of Kafka.

The Justice Department’s advice appears extraordinary. An OHCS spokesperson says the agency is unaware of any other project seeking the kind of bonds Security Properties wanted ever being rejected for failing to meet legal requirements.

Observers say it’s outrageous. “We continue to make it ridiculously hard to build affordable housing,” says Margaret Van Vliet, founder of Trillium Advisors LLC and a former director of both OHCS and the Portland Housing Bureau. “This project seems like a case study for what’s not working.”

The site in question has been part of Portland’s industrial history since 1940, when Pepsi built a state-of-the-art bottling plant on Northeast 27th Avenue, just off Sandy Boulevard.

Americans guzzled sugary drinks in the postwar era, and in 1961, Pepsi hired high-end architects Scott & Payne to build a $100,000 addition to the plant using bow trusses that gave the new building its sloping, midcentury-modern look. Eventually, Pepsi took over 4.7 acres of land at the Sandy location, blocking off a section of Northeast Pacific Street.

Security Properties got involved in 2017. It bought the site for $27 million and leased the property back to Pepsi until May 2020.

“We got a great price,” says Security’s chief development officer, John Marasco.

To finance the affordable units, Security Properties planned to sell $12.9 million in tax-exempt bonds and entice investors by offering them valuable federal tax credits.

Developers have been using this mechanism to build affordable housing since 1986, when the federal government created it. The low-income housing tax credits, as they are known, are gold for corporations and wealthy investors. Unlike a deduction, which just lowers the amount of income to be taxed, the credits cut tax bills directly.

The big concern for state officials who administer the program is that the bonds and tax credits be used only for affordable housing, not market-rate units, because the bonds and tax credits are a subsidy.

The Splash project is more complicated than some because the affordable units are to be interspersed with the market-rate units. Such mixing is preferred by housing experts, Security Properties says.

“If you go to an affordable housing conference somewhere in America, all you hear is, ‘How do we integrate housing?’” Nanney says. “How do we integrate neighborhoods?”

Security Properties thought it had the answer, and to keep the accounting separate, it created two legal entities—one to own the affordable units and one to own the market-rate units. Altogether, phase one would cost about $112 million, but the $12.9 million from the tax-exempt bonds, and all the tax credits, would be used only for the affordable units. Nanney says OHCS steered Security Properties toward the two-entity structure, as it had other developers.

For months, everything went according to plan. Security Properties won approvals required by state agencies, including the Oregon Housing Stability Council. The governor’s office signed off on plans to issue the bonds and offer the tax credits, Security Properties says.

“We had picked up our building permit and had begun demolishing buildings,” says Splash project manager Gus Baum, who played trumpet for the Decemberists before taking a circuitous trip into real estate development. “We had shoring steel delivered and were getting ready to dig a big hole.”

Then, in October, one day before Security Properties was going to post details of the bond sale for the public, the Oregon Attorney General’s Office said it had a legal issue with Splash. (Disclosure: Oregon Attorney General Ellen Rosenblum is married to Richard Meeker, the co-owner of WW’s parent company.)

The DOJ and OHCS followed the warning with a stream of emails questioning Splash’s finances. Department lawyers asked about a range of issues that Security Properties thought had been settled.

Among them, Security Properties says, was the firm’s “developer fee,” the amount a developer gets paid for its work and for the risk of taking on the project. The state objected to Security Properties taking an 18% fee for its work on the affordable units, Security Properties says, even though OHCS’s own rules allow such a fee and a 2015 paper on the subject by Meyer Memorial Trust said the higher developer costs were justified.

The DOJ also raised questions about the percentage of the building’s common areas were being paid for with tax-advantaged money. Security Properties had allocated the cost of corridors and other common areas to the two entities based on the rentable square footage of the affordable units as a percentage of the total.

DOJ didn’t buy it, Security Properties says.

“The most effective way to kill a mixed-income development is to make a developer eat the affordable share of all the common elements,” Nanney says. “No market-rate development in the world can build everything it needs for itself, plus the corridors, elevators and stairs for the 25% of the project that has virtually no income.”

On Feb. 2, deputy attorney general Lisa Udland wrote a three-paragraph email to Security Properties, sticking a knife in Splash.

“I can assure you that OHCS and the Attorney General strongly support more affordable housing opportunities in our cities,” Udland wrote. “Unfortunately, after consultation, OHCS has determined that the proposed Pepsi/Splash project…fails to meet the necessary statutory criteria to qualify for the requested funding.”

DOJ referred WW’s questions about Splash to OHCS. The agency’s spokeswoman, Delia Hernández, declined to make officials available for interviews. In an email, she said Splash didn’t have a large enough percentage of affordable units to qualify for OHCS funding under Oregon law. (Security Properties says OHCS’s stance ignores the two-owner structure that the agency had blessed earlier in the process.)

“To OHCS’s credit, they are trying to find ways to make projects go,” says Van Vliet, the agency’s former director. “DOJ lawyers have long had a reputation in the industry for being overly conservative.”

That said, the system needs an overhaul, Van Vliet says. “The way we finance housing is crazy and complicated and really needs to change if we are to overcome this housing crisis.”

The Security Properties team is trying to push the project forward without the tax-exempt bonds and credits. In the meantime, the developer is spending $220,000 a month to keep the project alive.

If Splash does go forward without public financing, phase one will have just eight affordable units, not 44.

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