Skip to main contentThree weeks ago, Portland's five city commissioners unanimously voted to salvage a 19th-century building in the Pearl district and turn it into a new home for the city's largest theater company, Portland Center Stage. Looking out at the crowd in the council chambers, Mayor Vera Katz heralded the creation of a new "icon for the arts."
Katz and her colleagues backed their lofty words with more than $15 million of public funds (see charts, page 19).
In some respects, this project is what you expect in one of America's most livable cities.
Few would deny that preserving the Armory, a historic structure, and promoting the development of Portland's cultural life are worthy goals
But interviews with developers, appraisers, fundraisers and arts professionals, coupled with a look at Center Stage's financial history, make it clear that the city hasn't done its homework; that officials' eagerness has clouded their judgment; and that the deal could potentially leave taxpayers on the hook for a project that benefits the city's ritziest neighborhood.
Casting a glance across West Burnside Street to the city's refurbished-but-debt-ridden PGE Park, some even think the city's agreement to help convert the Armory is but the latest chapter in a continuing saga of a city hall whose intentions are far better than its judgment.
Even one of the Pearl District's largest property owners, Joe Weston, who will probably benefit from an influx of affluent theatergoers into the neighborhood, is raising red flags. "This deal stinks," says Weston, a partner in Hoyt Street Properties. "You'd think the city would be smarter after PGE Park."
Developer Robert Ball, who specializes in renovating historic Pearl District buildings, echoes Weston's concern. "It's a very expensive project," Ball says. "If I were in the city's shoes, I'd be nervous about the level of debt."
At the center of the city's newest public-private partnership is the First Regiment Armory Annex, a 113-year-old brick and basalt shell located a block north of Powell's Books. Cracked and rust-stained, the 20,000-square-foot annex (the main Armory was demolished years ago) is held together by antique timber arches and newer steel support rods propping up the walls.
The building once housed horses and howitzers, but today there are only puddles and construction debris inside. Starting next spring, however, if all goes to plan, Portland Center Stage will construct a world-class performance facility featuring a 546-seat main stage and a smaller 253-seat theater in the round.
Saving the Armory is a joint production of Center Stage and the publicly funded Portland Development Commission. Using a cocktail of tax credits, city-backed bank debt and urban-renewal funds, the agency will create the city's first major new performance space in more than 15 years.
PDC, which has a $307 million annual budget, specializes in complicated real-estate transactions. Its dark-suited staffers resemble bankers and developers more than city bureaucrats and have financially engineered projects ranging from Pioneer Square to the Classical Chinese Garden.
The impetus for relocating Center Stage from the city-owned Newmark Theatre on the South Park Blocks was a study done in October 2002. Produced by Keewaydin Advisors of Minneapolis, the study found that among the ballet, opera, drama and classical-music groups competing for performance space, it would be cheapest to find a new home for Center Stage.
The leader of the search for new digs was Bob Gerding, 66, an avuncular former biochemistry professor turned real-estate developer. Gerding and his business partner, Mark Edlen, had performed a near-miracle on the five Pearl District blocks they acquired from the Stroh Brewing Company in 2000 for $19.5 million.
Despite a crippling recession, the two incorporated many of the architectural features of the Blitz-Weinhard brewery complex into new eco-friendly buildings and recruited tenants ranging from the Art Institute of Portland to Whole Foods. "Given the timing and the scale of the Brewery Blocks, they pulled off one of the gutsiest deals ever done in this city," says Bob Ames, a Pearl District property owner and former bank president.
The half-block holding the Armory is the only parcel in the Brewery Blocks that remains undeveloped. Gerding, who is the vice chairman of the Center Stage board in addition to co-owning the Armory, saw an opportunity in the Keewaydin study.
In the past four years, potential tenants, including 24 Hour Fitness and REI, had considered and rejected the Armory. Running out of options, Gerding suggested converting the space into a theater. His idea proved popular with the Center Stage board and a key supporter, Mayor Vera Katz, who mentioned the possibility in her State of the City address last April.
Gerding acknowledges that his dual roles as seller of the Armory and Center Stage board member gives the appearance of a conflict of interest. "I recused myself from both sides of this project four or five months ago," he says.
Still, Gerding's Brewery Blocks retail tenants will profit from throngs of theatergoers willing to pop for Center Stage's $27 average ticket price. The renovated Armory will add cachet to The Henry, the 15-story condo tower Gerding and Edlen are building--and Gerding is moving into--next door, as well as to a tower of luxury rentals they are constructing nearby. But most immediately, the deal provides a lucrative solution to a seemingly insoluble problem.
Moving Center Stage to the Armory will free up the overcrowded Newmark Theatre and preserve a link to the city's past.
But people who are neither theater buffs nor preservationists question the deal's economics--beginning with the $3.15 million price that PDC has agreed to pay Gerding and Edlen for the Armory. (Over time, Center Stage will acquire the property from PDC.)
Weston echoes several other real-estate pros when he says the price PDC agreed to pay is far too high. "It's not worth that much," Weston says.
There are a couple of reasons: First, it would cost far more to fix the shell than to tear it down and erect a new structure, which makes the Armory building worthless to developers; and second, restrictions placed on the land underneath have significantly diminished its value.
The cost of seismically upgrading the unreinforced masonry structure--estimated at $3.2 million by PDC just to get to the point where interior construction can begin--is prohibitive, which is why nobody has found a commercial use for the Armory. In fact, having exhausted other possibilities, Gerding and Edlen applied for a demolition permit last May. "The building would have come down if we hadn't stepped in," Katz says.
The property also has limited value because--in order to preserve views from The Henry--Gerding and Edlen restricted the height of future development on the Armory site to its current two stories. "They took all the height off that property and put it on The Henry," Weston says.
Don Palmer of the appraisal firm Palmer Groth & Pietka says that in general, land in the Pearl with two-story zoning is worth $50 to $60 per square foot. That would mean that the land alone might fetch $1 million to $1.2 million--far less than the $3.15 million PDC agreed to pay.
It is unclear how PDC arrived at its purchase price. Although the agency agreed to finance the purchase of the Armory in July, it did not have an independent appraisal conducted until mid-September--and the findings of that appraisal remain a mystery because the PDC rejected WW's public-records request for a copy.
Multnomah County property records do not provide much more clarity. In July, when PDC voted for the acquisition of the property, the county assessor's appraisal of its real market value was $2 million--$1.4 million for the land and $600,000 for the shell.
The county subsequently raised its assessment to $3.6 million, in response to information provided by Gerding and Edlen. But the official in the county assessor's office responsible for the new appraisal, when contacted by WW, said she was unaware that the owners had placed a height restriction on the property, which would certainly limit its value.
Norris Lozano, the PDC official directing the Armory transaction, says he is "comfortable" with the price being paid.
Gerding also defends the price and denies he's getting a sweetheart deal. Factoring in asbestos abatement, cleanup costs, financing and other expenses, the developer maintains he's coming out behind on the sale. "We're losing money," Gerding says.
But people in the appraisal business say a developer's investment in a property is less relevant to determining a fair price than other factors. "Cost and value are not necessarily related," says Palmer, the appraiser. "Market value, generally speaking, is a function of comparables, zoning and the income a property can produce."
Nearly as troubling as the Armory's purchase price is PDC's financing package, which includes $8.4 million generated from tax credits intended for use in low-income neighborhoods.
The federal government created New Market Tax Credits in 2000 with a very specific purpose. "Increasing the flow of private capital into low-income areas is the primary objective of the NMTC program," states an explanatory Federal Reserve Bank document.
PDC's Lozano argues that appearances to the contrary, the Pearl District qualifies. It falls inside the census tract that includes Old Town, and, at least in 2000, when the last data were gathered, Old Town's poverty outweighed the Pearl's wealth.
Not everybody accepts that justification. "These tax credits should be used strategically and for their stated purpose," says Shelly Lorenzen of the League of Women Voters, which has urged PDC to focus less on the Pearl and more on Old Town. "It's an extraordinary amount of money dedicated to a project that we don't particularly need."
"There are a lot of struggling businesses in this area and across the city that could benefit from this program," says Fred Sanchez of the Gateway Area Business Association. "The Pearl District seems to be doing just fine."
The Armory financing isn't the first attempt at a creative use of federal funds on a Gerding and Edlen project in the Pearl.
In 1997, PDC officials helped the ad agency Wieden & Kennedy seek a $10 million HUD grant intended for low-income workers. They planned to use the money to help Gerding and Edlen convert a warehouse into new headquarters for W&K. Public outcry--led by rookie City Commissioner Erik Sten--eventually derailed the play.
Despite similarities between the Armory and Wieden & Kennedy deals, Sten voted to back the Armory. Portland controlled the HUD funds considered for W&K and had more pressing uses for them, he explains, while the PDC purchased the New Market Tax Credits specifically for the Armory transaction.
PDC executive director Don Mazziotti adds that the Armory isn't depriving projects in poor neighborhoods of tax credits because there are no current projects in such neighborhoods ready to finance.
Roy Jay, chairman of the African American Chamber of Commerce, doesn't buy that argument. "That's ridiculous," Jay says. "The reason there are no projects ready is nobody knew PDC had any of these credits."
Greg LeRoy, the director of Good Jobs First, a Washington, D.C., nonprofit that focuses on accountability in development, says the Armory is an inappropriate use of tax credits. "Somebody is sharpshooting the rules here," says LeRoy, who visited the Pearl in October while in town to give a speech. "The purpose of these credits is to reverse true blight and bring the private sector back to a place that is too risky to invest, not to ice the cake when it's already baked."
To pay for its new home, Portland Center Stage plans to more than double ticket sales and to raise money from donors in three different ways: a three-year, $17 million capital campaign; a subsequent, additional $10 million operating endowment; and annual giving from donors averaging $2.8 million.
Center Stage does have experience at fundraising. The company won a three-year, $1.35 million grant from the Meyer Memorial Trust in 2001 and attracted nearly $700,000 in subsidies from the city and the Regional Arts and Culture Council in the past five years. Last fall, it also raised $2 million to begin paying for the Armory.
But no local arts organization except the far older and larger Portland Art Museum has ever raised anywhere near the kind of money Center Stage needs. "It's extraordinarily ambitious," says former City Commissioner Mike Lindberg, now a consultant and fundraiser for the arts. "When I first saw their plan, I said, 'Wow, that's a big number.'"
A feasibility study, prepared in November by consultants E.D. Hovee and Company for PDC, concluded Center Stage's goal is "aggressive, yet achievable" but highlighted numerous risks.
Hovee compared Center Stage to seven similar theater companies nationally and also looked at the local fundraising climate. He found that the Armory will be more expensive than any project attempted by comparable theaters and that Center Stage's plan calls for raising more money faster than any of the companies have done. "There appears to be no clear precedent--at least from most of the peer facilities reviewed to date for this assessment," Hovee wrote.
The flip side of Center Stage's fundraising prowess is that the company, which spun off from Ashland's Oregon Shakespeare Festival in 1988 and became independent in 1993, is far less adept at selling tickets than similar groups.
While theater attendance has risen over the past five years nationally, Hovee found, Portland Center Stage's audience has shrunk. From 2000 to 2002, attendance dropped 32 percent.
For 2001-2002, the last year for which figures are available, Center Stage generated operating revenues of $1.6 million on the sale of 58,200 tickets. Expenses were $3.7 million. The company filled the gap with donations but was left in the most perilous position of the theater companies Hovee examined: Only Center Stage ended last year with negative unrestricted assets--in other words, it possessed no reserves and owed more money than it had.
Steve Reischman, a member of the advisory board for the Portland Center for the Performing Arts, which runs the Newmark, Arlene Schnitzer Concert Hall and other city-owned theaters, says launching a $28 million project in the face of such an operating history makes little sense. "Why are they tackling this when they've proven they can't sell tickets?" asks Reischman, a concert promoter for 23 years. "If you're struggling, it seems as if you'd be better to hunker down and prove yourself rather than expand."
But Center Stage is confident that moving from the Newmark--which is heavily subsidized and the cheapest facility among the eight Hovee reviewed--to the Armory will solve its financial problems. The company projects a stunning transformation. Even though ticket sales dropped by nearly a third from 1998-99 through last year, the company projects that sales will rise 132 percent by 2011.
Center Stage officials referred questions about feasibility to board chairman Greg Ness, an executive at Standard Insurance. Ness says fundraising targets are achievable and ticket sales will increase with a greater number of productions. "The thing that allows you to do that is control over space," he says. "Right now, we have negotiate dates a year in advance."
But Reischman, who owned the Aladdin Theater from 1993 to 2001, is skeptical of the "if we build it, they will come" approach. "I can't believe the city is willing to risk money on those numbers," he says. "What businessman would cosign that deal?"
Hovee found that the biggest advantage that Center Stage enjoys over its peers in other cities--heavily subsidized rent--will evaporate when the company moves to the Armory. That change is also contrary to the directive of the pivotal Keewaydin report, which suggested Center Stage find a "lower-cost, less formal facility."
Despite all the potential pitfalls, proponents say bringing theater to the Pearl is worth the risks. "We think it's a net economic and social benefit to the area," says PDC director Mazziotti.
On Dec. 15, just two days before the City Council took the unprecedented step of guaranteeing $10.6 million in bank debt for Center Stage, Mayor Katz announced that the city was severing ties with Portland Family Entertainment, which owed nearly $2 million in rent to the city and even more to creditors.
When the City Council signed a contract with PFE to operate Civic Stadium in 1999, it placed its trust in a group that included several leading Portland businessmen and an impressive management team. PFE projected 30 percent annual returns but lost big money from day one.
When Lozano, Ness and Center Stage artistic director Chris Coleman appeared before the council on Dec. 17, the script--and apparent lack of council skepticism--was a virtual repeat of the council's embrace of PFE leaders four years ago.
Commissioners Jim Francesconi and Sten tentatively inquired about pitfalls, and Katz provided the answer.
"I asked how risky this is and got the answer from Ken [Rust, the city's finance director] and Norris [Lozano] that this will not be a risk," the mayor told her colleagues.
None of the commissioners seemed too concerned about what happens if renovation costs exceed budget, ticket sales lag or fundraising fails. Beaming at Ness and Coleman, Katz said, "I know you'll be able to do it."
Katz says that after she leaves office a year from now, she'll help raise money for it herself. "This isn't like PFE," she says. "The private sector made decisions that made that deal fail. We've got more control this time."
Gerding echoes the mayor and Francesconi when he says even in the worst-case scenario--Center Stage defaulting on its loans--the city gets a $28 million theater for $15 million. He's confident that won't happen, however. "I intend to make a major contribution to the campaign," Gerding says. "And I don't invest in things that are big risks."
Gerding may get a little extra spending money from the city: This week, PDC will award a contract to oversee the renovation of the Armory, and his firm is one of the two finalists.
Using urban-renewal funds, PDC is making two loans to the Armory project: a $2.6 million loan at 3 percent interest and a $2 million loan at no interest. No payments are due for seven years.
Gerding/Edlen Development contributes generously to City Council campaigns. The firm has given $5,000 so far to Commissioner Jim Francesconi's mayoral bid.
Last April, Gerding and Edlen asked the PDC for a $2.4 million loan to repay a mortgage and an investor, offering the Armory as collateral. The commission, which in 2000 granted the two $8 million in loans and grants to build a parking garage under the Brewery Blocks, said no.
Gerding and Edlen's partner in the Brewery Blocks acquisition was lumber baron Peter Stott, who paid $1.5 million for a 7.69 percent stake. Stott was also the a leading investor in Portland Family Entertainment.
Both Mayor Vera Katz and Commissioner Jim Francesconi say they were unaware that a certificate of occupancy for The Henry was tied to the Armory's fate when they agreed to support the Armory's purchase.
The chairman of the board of the affiliated nonprofit PDC set up to buy the Armory is Ed Jensen, a former vice chairman of U.S. Bank. Jensen's wife, Marilyn, is a board member of Portland Center Stage. The Jensens co-sponsored the company's recent production of the play Bat Boy.
WWeek 2015