No public funds key to building low-cost housing


PHC Northwest skirts red tape, but obstacles remain

What John Murphy calls his journey through the world of low-income housing started with a jolt. Murphy is president of Portland Habilitation Center Northwest, a long-running nonprofit based in outer Northeast Portland that provides training and job opportunities for developmentally disabled men and women.

Up until 20 years ago, Murphy knew nothing about low-income housing, and he wanted to know nothing about it. But he was starting to experience a turnover rate of close to 40 percent among his 750 disabled employees who contract out on jobs such as janitorial, landscape and clerical work at the Portland airport, among other places.

When Murphy talked to his workers he found housing was the primary reason some were leaving jobs that they desperately needed. Many told him they couldn’t find apartments they could afford to rent, even on the $12 an hour he was paying. Others were suffering episodes of mental illness and getting evicted from apartments they could barely afford. With little savings, some of these employees were living under bridges, finding their lives spiraling downward and eventually leaving their jobs.

Reluctantly, Murphy decided he had to help solve his employees’ housing problem. He spent $14 million to buy seven apartment complexes that had been built using public money and carried contracts that allowed the U.S. Department of Housing and Urban Development to set the rents. Just managing those buildings, Murphy says, became untenable. He insists that he had to spend an inordinate amount of time working to meet all the special federal and local regulations governing the buildings, rather than spending his time maintaining the actual buildings.

Murphy says just to deal with the extra regulations he had to add four employees to the three he already had. And Murphy knew he needed more units.

Buying more subsidized apartment buildings made no sense, Murphy says. And building his own without taking public money and getting bogged down even further in what had become an administrative nightmare, he was told after asking around, was impossible.

“This was the truism in the industry,” Murphy says. “You can’t build affordable housing in Portland.”

Murphy eventually met Rob Justus, who said he could build low-income housing that would last for $70,000 a unit, about a third of what publicly funded apartment buildings were costing. A deal was hatched.

PHC Northwest put up $1.9 million to build Snowberry Apartments at Southeast 151st Avenue and Burnside Street. It was decided rents would start at $625 for studios and run up to $675 for two-bedroom apartments — what Murphy’s employees could afford. For that to happen, Justus would have to stick to the $70,000 per unit cost. So the contract with Justus was written so that if the developer failed to deliver the units at $70,000 at the quality he promised, Justus would have to pay back to PHC Northwest the $1.9 million.

In Murphy’s eyes, the contract incentivized efficiency, the opposite of the effect that occurs when developers use public dollars and get paid in the form of a fee that is 10 percent of the total cost of their projects.

“Rob has risk, and that’s good,” Murphy says.

PHC Northwest loaning Justus money up front allowed the developer to realize tremendous cost savings unavailable to developers with public money, according to Murphy. With money in hand, Justus could move quickly and find deals on materials, and he had bargaining power. Justus wasn’t encumbered by rules that, for

instance, would have required him to buy only a HUD-

certified door.

Even bigger savings, Murphy says, resulted from his not having to meet all the added government rules and regulations. He figures he saved $100,000 on legal costs simply by not taking public money on the Snowberry. That comes to about $5,000 a unit.

Skeptics say Justus must have skimped on materials in order to build so cheaply, and that the Snowberry apartments won’t last. Murphy says they will, and points out the granite countertops, steel stairways and LED lighting fixtures.

Murphy and Justus are planning other buildings, including an 80-unit apartment building at Southeast 171st Avenue and Division Street where the rents will again average $650 a month. Not having to build green or hire only union wage workers makes it possible, according to Murphy.

“Part of it is I’m not part of the housing group, it’s not my thing, and that gives me such an advantage,” Murphy says. “There’s no ideology. I will consider everything on its objective merits, and I can move fast.”

But Murphy and Justus acknowledge that without help, their model can’t be used to build the 12,000 low-income apartments Portland needs. Justus needed Murphy’s upfront financing to be able to move fast and save money, and Murphy’s funds are limited.

The Snowberry did get one public subsidy — a waiver of $350,000 in system development fees by the city in exchange for a commitment that the apartments maintain their low rents for 60 years. System development fees are intended to fund the demand for city services — from road repair to fire department services — generated by a new building.

On a large scale, Justus says, bank loans will have to replace Murphy’s up-front money. But most banks won’t provide the loans, Justus says, when buildings are committed to low rents for 60 years. If the city would come down to a 20-year promise, Justus says, banks would come through with loans so he and others could build $70,000 per unit apartment buildings on a large scale.

But housing authorities such as Jean DeMaster say a 60-year commitment has a purpose that translates into better housing. A developer with a 20-year low-rent knows he can sell his building after 20 years to someone who might raise rents or turn it into some other use, she says.

“You put in more durable materials because you know you’re going to own it for 60 years or more,” DeMaster says. “You want to make sure you can maintain it in a reasonable fashion.”

Justus says he is able to build durable, inexpensive buildings because the greatest savings comes from the legal and accounting fees avoided by not taking public money. He says the biggest obstacle preventing him from building low-income housing on a large scale in Portland is attitudes.

“It’s a threat to how things are done now,” he says.