Pop Blocks Development Restarts on Sandy Boulevard, Minus 33 Affordable Apartments

The Oregon Department of Justice objected to tax-exempt funding that would have created the units sooner rather than later.

If Portland needs one thing right now, it’s affordable housing.

Last month, Mayor Ted Wheeler rolled out a five-point plan to house the homeless and get tents off the city’s sidewalks. The most ambitious plank is to build 20,000 subsidized units in 10 years. Most of that must be done by private developers, Wheeler says, because all those units will cost $9.8 billion, and the city can’t afford it.

Recently, one developer bent over backward to build affordable housing. What happened is a cautionary tale for Wheeler as he seeks private partners in his quest to end homelessness.

Security Properties, a firm from Seattle, is building a mixed-use, mixed-income complex on Northeast Sandy Boulevard called the Pop Blocks, where the old Pepsi bottling plant stood. The developer’s original plan was to include 44 subsidized units for renters earning 60% or less of the area’s median income. Those apartments would be included in the first phase of the project, a $112 million tower called Splash.

Security Properties worked on the deal for months, clocking hundreds of hours with legal counsel, to ensure it complied with the rules of a byzantine tax-exempt bond program that developers use to build affordable units. Everything was on track until last October, when Oregon regulators said the development didn’t conform to the program’s rules (“Flat Pepsi,” WW, April 13).

The objection stopped the earthmovers in their tracks. Security Properties had to start from scratch on the financing. The project resumed in July, with machines digging a vast hole for the parking garage. Now, Splash is expected to open in August 2024, eight months late.

From the outside, Splash won’t look any different. But a few crucial things are missing: 33 of the promised affordable units. Now, Splash will have just 11.

“We had to completely recalibrate,” says Michael Nanney, senior director of development at Security Properties. “But the loss wasn’t on our side. It’s Portland that’s missing out.”

The 33 subsidized units weren’t going to be cramped studios. The state mandates affordability by the bedroom, and Security Properties chose to build many three-bedroom units because the only thing in shorter supply than low-income housing is family housing, Nanney says.

Better yet, Security Properties had sprinkled the affordable units throughout Splash so that tenants of various incomes could be neighbors, a goal of most housing experts.

Security Properties had a self-interested motive, too: The developer wanted access to the tax-exempt bonds and tax credits that would have made financing cheaper. But a mixed-income project is much harder to build than a market-rate one.

“We kept walking through the broken glass,” Nanney says.

Then they hit a wall. The Oregon Department of Justice weighed in on the project just before Security Properties’ bankers were going to post details of the bond sale for the public. DOJ lawyers raised questions about what percentage of Splash’s common areas were being paid for with tax-advantaged money.

It was a fair inquiry because the tax-exempt bonds and credits are a public subsidy. Security Properties separated ownership of Splash, putting the affordable units in one LLC and the market-rate ones in another. Then, it allocated the costs of building common areas like the garage and hallways based on the rentable square footage in each LLC.

The formula came recommended by Oregon Housing and Community Services, the state agency that helps finance affordable housing, Nanney says, and it had been used for other projects. That didn’t sway DOJ, though, and the deal died in February.

“The attorney general strongly supports more affordable housing options throughout Oregon,” DOJ spokeswoman Kristina Edmunson said in a statement. But tax-credit funding for Splash “was not available because the project did not meet the legal requirements.”

By all accounts, OHCS supported the financing of Splash until the DOJ got involved. “We are doing everything that we can to prevent deals from falling through, but the unfortunate reality is that sometimes they do,” the agency said in a statement.

The kerfuffle was hardly a calamity for Security Properties. Portland zoning laws would still require Splash to have affordable units, but many fewer, and financing buildings that are mostly market rate is a hell of a lot easier, Nanney says.

“Conventional construction lenders lined up very quickly,” he says.

Security Properties picked Bank of the West for the construction loan and lined up MetLife Inc. as an equity investor. Big insurers like apartment buildings because rents are less volatile than returns on stocks and bonds, and they provide steady cash flow needed to pay claims.

One big downside for Security Properties is that interest rates rose sharply during the delay, raising borrowing costs. But beyond that, and some hefty legal fees, the company is fine.

Portland, on the other hand, is out 33 units of family-sized affordable units near the city center. The city will get them eventually because the Pop Blocks must include a total of 80 affordable bedrooms when the whole complex is done. Security Properties had planned to front load them in Splash and get them into the market. Now, they won’t show up for a decade, Nanney says.

The Splash fiasco could reverberate, thwarting the housing plan that Wheeler is floating, if other private developers see what happened to Security Properties and decide the red tape is too much.

“Even if they were wrong from the beginning, the length of time it took for the government agencies to give them an answer is just appalling,” says Margaret Van Vliet, founder of Trillium Advisors LLC and a former director of both OHCS and the Portland Housing Bureau. “These horror stories are Exhibit A for why lots of developers don’t want to build in Portland.”