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Tax break rankles in tight times

Developers' longtime incentive becomes a critic's call to arms

The same week that Multnomah County residents received notices to pay a new income tax, Jim Karlock stood in front of a $840,000 Pearl District condo to make a point about the city's 'dysfunctional' tax system.

He was upset that city commissioners had granted a tax break to the condo's owner allowing him to pay $146 a year in property taxes, or about $9,800 less than one of his neighbors.

'You can't fault somebody for taking advantage of a legal loophole, but I'm suggesting that government shouldn't offer it in the first place,' said Karlock, who soon attracted an audience. 'You could make the argument that had they not given these, we would not have required that tax increase.'

Karlock is on a crusade to end the $163 million in property tax exemptions awarded last year to developers and to put those millions back into local services. He posted a photo of the River District condo on his cluttered Web site, www.saveportland.com, along with 20 other buildings receiving 10-year tax breaks.

City officials and developers argue that the property-tax exemption programs established in 1975 are the only way to create a mix of affordable and market-rate housing in economically needy neighborhoods.

Over the years, however, the dollar amount of property exempted from the tax rolls has skyrocketed and become more concentrated in wealthier neighborhoods.

And as city and state leaders wrestle over declining revenues, Karlock is gaining followers.

Commissioner Randy Leonard and the City Council last month threw a monkey wrench into a tax exemption for an apartment building in the Brewery Blocks development by establishing an annual review.

Leonard is proposing a similar review for all new developments that have been granted tax breaks. Neighborhoods such as the high-end Pearl District, where rents average about $1,800 per month, don't need tax breaks to stimulate development, he said.

'It's just for the Brewery Blocks now,' Leonard said, 'but I am sending a message to developers that this is for all projects. I'm sensing growing sentiment against this type of tax break. It's an important and powerful tool. My goal is more checks and balances. We need to make sure it's not abused.'

The City Council, the city's Bureau of Planning and the Portland Development Commission are midway through a survey of the city's six property-tax exemption programs.

Among other things, the group will look at whether there are some areas of the city that now do not need tax breaks. They could even decide to end the city's most popular tax-exemption program, for new multifamily housing, when they report back to the City Council in 30 days, said senior planner Mike Saba.

'We'd be kicking ourselves in the foot É especially during a down economy that induces housing,' he said.

The city planning commission, meanwhile, has put all tax exemptions on hold until the issue is resolved.

High-end projects benefit

An analysis of the planning bureau records and county tax records found that not only have the number of exemptions rapidly grown in the past six years, but they are largely concentrated on high-end housing developers.

• County tax records show that the assessed value of property given tax breaks grew 300 percent since 1998 from $51 million to $205 million in 2002. Without the exemption, the property owners would have generated another $2.35 million in tax revenue this year. Of that, $543,942 would have gone into the county budget and $732,444 into the city budget, according to the city's tax assessor, Bob Ellis. 'If all of this money is being diverted,' he said, 'it makes the tax issue more difficult. But it means these properties come on the tax rolls later.'

• The City Council, based on the planning commission recommendations, has granted 27 property tax exemptions in its central city program since 1996. The buildings are largely in urban renewal districts and along transit lines. Twelve of the multiunit buildings are in the Pearl District.

• Another 12 projects were granted tax exemptions under the 7-year-old, transit-oriented development program, eight of them in Northeast Portland.

• Two of the exemptions were awarded to Gerding/Edlen Development Co., including the Brewery Blocks apartment building, and developer Homer Williams had seven, most of which were in the Pearl District.

Mark Edlen of Gerding/Edlen predicted that any new oversight would add cost and delays to housing projects.

'I think anytime we do that layering, we're adding on costs,' he said. 'I don't disagree with the concept; no one should make an inordinate profit on these projects. But it's taking some courage on our behalf. Our interest in doing rental versus for sale is part of what makes a neighborhood, and that is having some diversity.'

PDC Commissioner Noell Webb first raised objections two years ago about the length of tax abatements, which average 10 years. That prompted the agency to look at a project's rate of return, or how well the money it invested is working, and vary the length of the abatement.

'I wanted to make sure we were meeting the letter of the law,' she said this week.

Developers take the carrot

The central city's property-tax exemption program started in 1975, with the idea of providing tax breaks as incentive to developers to build housing in economically troubled neighborhoods.

Once developers apply, the PDC studies the projected income stream from the building, then makes its recommendation to the planning bureau. If the project is projected to exceed a 10 percent rate of return, the tax abatement is not justified, city planner Saba said.

A project's rate of return can be manipulated by hiring more staff or making maintenance improvements, he said, 'so we're trying to search for a way to track the performance and provide council justification for continuing the abatement.'

City planners then review the proposed tax break for its public benefit and send it to the City Council for final approval. Without it, PDC studies show that developers could not be persuaded to build housing downtown or in urban renewal areas. About 13 percent of the city or 12,147 acres has the urban renewal classification.

The program was split in two in 1996, when the state Legislature created new transit-supported residential or mixed-use development. Until then the City Council had approved about one tax-exempt project a year.

This year, five projects would get 10-year tax breaks, including the $59.5 million Brewery Blocks apartments in the Pearl District; the $29.7 million Hoyt Avenue apartments at Northwest Ninth Avenue and Hoyt Street; and the $28.1 million Multnomah Street apartments at Northeast Wasco Street and Third Avenue.

And there are two applicants who have been to preliminary meetings about tax-exempt programs, which could set a new record.'It's been high because of the booming housing market,' Saba said.

With the new South Waterfront redevelopment moving forward, Saba predicted that there would be a flow of applications for 2004 tax exemptions. About 2,700 housing units are planned for the former industrial yards along the Willamette River.

Cascade Policy Institute's John Charles faults the PDC for being too eager to hand out tax exemptions to favored developers.

'They know how to play the game,' he said. 'One developer laughed because they are shoving money into their pockets to do projects. If they are worth doing, they should do it without the tax breaks. That is revenue everyone else has to pay. The question is, 'Why do people in Laurelhurst have to pay more?' '

Peter Fry, an independent planning consultant who works with the PDC, agrees that the tax-exemption programs have gone beyond the original intent.

'We're now giving tax breaks to very profitable developers,' Fry said. 'We haven't looked at performance of these buildings or the prices they are getting on these condos. Developers don't have as much risk. The idea that we need tax breaks to spark development is no longer supportable in the Pearl.'

Edlen said that given the cost of construction, high rents and underground parking, developers will not build downtown housing without tax breaks.

'If the public wants that project to come forward, they have to plunk the money down or build something cheaper,' he said.

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