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PORTLAND-Looking to cut its losses, the Portland Development Commission will be relocating its 170-person offices to an historic seven-story building in Old Town that it master leased in 2001 in hopes of attracting more creative services firms to the CBD.

In cooperation with the PDC, the building’s owner, Kalberer Co., spent more than $1 million to have Venerable Properties turn the raw warehouse into a wired office building. In return, the PDC inked a 10-year, top-of-the-market master lease for the building’s 57,000 rsf. The negotiated lease rate is about $20 per sf per year, or just over $96,000 per month, not including annual increases.

At the time, the city thought it would be able to achieve sublease rents in the high $20′s per sf per year, full service, which is why it essentially gave the third floor to the not-for-profit Oregon Creative Services Alliance, renting them 675 sf at a cost of $1 per year and letting them keep all the rental income from leasing the rest of the 8,500-sf floor.

Then came the economic downdraft, which stole the city’s potential tenants and beat up market rates, knocking them down into the mid-to-high teens. As a result, until recently, the only tenants in the building were on the third floor, which means the city has received little to no rental income while having paid well more than $2.5 million in rent and another $250,000 in tenant improvements (estimated based on 12,500 sf finished at $20 per sf).

The Creative Services Alliance has since vacated their space in the building, and as a result the city began receiving the third-floor rental income the alliance had been receiving. In February of this year, the Regional Arts and Culture Council signed a five-year, 5,052-sf lease for spaced in the building that commenced on May 1. Under the agreement, the RACC is paying $4 less per sf per year than the city is paying to master lease the building.

Now the city has asked all tenants to leave by April 15 so that it can move into the building, which will save it about $4 per sf per year compared to its existing lease rate at 1900 SW 4th Ave., a city-owned building in Downtown Portland. The PDC says it is paying about $750,000 per year, or about $24.19 per sf, to lease 31,000 sf in the building. The PDC also leases another 29,000 sf elsewhere in town for which lease rates were not available. The PDC claims it will save between $8 million and $10 million over the next seven years by relocating to the Old Town Building.

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