EXHIBIT A

REPORT AND RECOMMENDATION TO CITY COUNCIL

Application of Raven Apartments, LLC for a 10-Year Property Tax Exemption for Transit Supportive Residential Development (Chapter3.103)

Background

On April 24, 2003 (complete application materials received as of July 11, 2003), the Raven Apartments, LLC applied for a Property Tax Exemption for New Multiple Unit Housing for the Raven Apartments. The Raven Apartments, LLC is affiliated with WRG Design, Darren Welborn, principal.

The project is located within the Gateway Plan District Light Rail Area, located at 332 SE 148th Avenue. City Code Chapter 3.103 specifies that the Portland Development Commission shall review the application for public benefits and a lack of financial feasibility without the property tax exemption. And within 80 days thereafter recommend to the City Council that the application be approved, denied or approved subject to conditions

The limited property tax exemption, if approved by the City, exempts the value of the Project’s residential improvements from taxation for a period of up to ten years. During this time period the property owner continues to be liable for property taxes on the value of the land. (stabilized budget indicates $31k per annum (escalating at 3% per annum), land only taxes are $2100.)

Project Description

Having started construction this year and now 90% completed, the redevelopment of this site included the demolition of an existing single family home and the construction of 36 2- bedroom/1-1.5 bath rental apartments in six 2.5 story buildings. Each building contains two 2-bedroom 1-bath flats and four 2-bedroom 1.5 bath townhomes. The project provides roughly 32,400 square feet of residential floor area total, and 900 square feet per apartment average. A total of 48 parking spaces are proposed, providing a parking ratio of 1.33.

In response to a query as to why the project waited so far into the construction process to apply for the abatement, Mr. Welborn (principal) explained that after multiple pre-application meetings he was comfortable that the project satisfied all the code requirements to obtain the exemption and consequently gained confidence in the process. A delay also elevated confidence in the costs and financials submitted.

The project is confirmed by the City of Portland’s Office of Transportation to be located within one-quarter mile of the site, and granting access to the MAX by both city walkways and bikeways. Transportation also notes major transportation improvements in the Transportation System Plan in the next 6-10 years for 148^th Avenue from Burnside to Foster, which are classified as pedestrian improvements such as sidewalks, curbs, and ADA ramps.

Lease-up is expected to begin in July 2003.

City of Portland Office of Transportation

After review of the application brought forth by Raven Apartments, LLC and the Title 2, section 3.103 Property Tax Exemption for new transit supportive residential or mixed use development, the Office of Transportation agrees that all requirements have been met, granting approval for the tax exemption.

Public Benefits

The Project will provide the following additional public benefits, as required by the City Code (Chapter 3.103.040):

Rental Rates. The project will include twenty percent of the units affordable to households earning 60 percent or less of the area median income. The expected rent levels for the units are expected to be approximately $650 to $660 per unit. These rent levels are well within the allowable rent for a family of 3 (2 bedroom unit size at 60% of MFI is $889 per month per HUD) at 60% of MFI plus a utility allowance. This affordability requirement runs the duration of the exemption period. Essentially all of the units will meet this affordability test as demonstrated by the proposed rent schedule.

The proposed level of affordability meets the city code requirement §3.103.040(B) of at least 20 percent of the units for rent at rates which are affordable to households earning 60 percent or less of the area median income.

Rent per square foot for the project is $0.73; fitting well within the range of average new construction rental ranges of $0.66 - $0.88 per square foot for the area. Appraisals are not submitted as part of the tax abatement application process, so it is difficult to evaluate market rents. A proxy for area rents derived from Millette & Rask and Norris & Stephens brackets Southeast Portland rents for units of this type between $718 and $760(2b1ba)/$883(2b1.5ba.)

Family oriented recreational facilities for the children of project residents: A play area will be available to the children of residents of the project. This meets the second level test city code requirement from a selection of options in §3.103.040(E)

The Project will be located within a quarter mile of light rail, which is called for in Section 4.3(B) of the Comprehensive Plan: “Establish development patterns that combine residential with other compatible uses in mixed-use areas such as the Central City, Gateway Regional Center, Station Communities, Town Centers, Main Streets and Corridors.

Financial Feasibility

The total development budget for the Project is $2.5 million. Project financing will be provided by a private loan, and developer equity. Raven Apartments, LLC has submitted proformas to support their assumptions. The 10-year income projections derived from the proformas show:

1.  the financial performance of the Project with the tax abatement, and

2.  the financial performance of the Project without the tax abatement.

3.  the financial performance of the Project with the rents necessary to achieve feasibility without the tax abatement.

As shown in Scenario 1, the Project’s internal rate of return is negative 3.3% during the 10-year period of the abatement. This is far below the 10% threshold applied with the program in accordance with the 1999 PDC Financial Products Manual, as amended.

As shown in Scenario 2, the Project’s internal rate of return without the tax abatement is negative 19.7% during the 10-year period. According to materials submitted with the application, the per unit annual property tax is estimated by the developer at $860 per unit per annum based on similar properties in the area. The developer’s estimate of per unit taxes was used here and confirmed as the correct range by the Multnomah County Assessor’s Office. The resulting negative internal rate of return renders the project entirely infeasible on an IRR basis without the abatement.

Even with the abatement, the IRR is negative, which may be offset by the fact that the developer will also be managing the property, for which a fee is earned. If all of that fee were restored to cash flow, the best possible IRR outcome under the proposed rent structure is 6.6%.

As shown in Scenario 3, in order to achieve even the anticipated negative 3.3% internal rate of return associated with the abatement, rents without the abatement would need to be an average of 11%, or $73 a month, higher. This increase would begin to approach market rate rents of $718 - $760(1ba)/$883(TH 1.5ba) for the area ($655 plus $73 = $728.)

These negative IRR results cause some concern as to flexibility of the rent structure. The developer does have room to bump rates on the townhouses to $800, for example, and still come in at less than a 10% IRR with the abatement (9.9% in this case.)

New construction cost per square foot in ranging $80 -$82 in hard costs per square foot in the vicinity of this area, with the per square foot development costs of this project at an exceedingly modest $41.64 hard cost and $75.79 per square foot cost all in.

The estimated ten-year value of exempted tax revenue is approximately $221,668 in today’s dollars (See Attachment B) assuming a 7 percent discount rate, a three percent annual assessment increase and $20.03 per $1,000 mill rate.)

Therefore, staff concludes that the project would not be feasible without receiving the tax abatement.

RECOMMENDATION:

Staff recommends that City Council approve the limited property tax exemption for this development subject to the following conditions:

1)  The individual apartment units in the development must be maintained as rental housing and not converted to condominiums or other ownership arrangements during the ten-year term of the exemption.

2)  The development must comply with all applicable standards of Title 33, Planning and Zoning, as well as all conditions of approval of any land use and design review.

3)  The development must comply with all applicable provisions of Titles 17, 24, 32, 33, and 34 of the City Code, as well as conditions of approval of any land use and design.

By: C. Siobain Beddow