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PORTLAND-The City Council on Wednesday most likely killed the first apartment development in the South Waterfront district by voting down a 10-year property tax abatement for the 319-unit 22-story building. The denial came despite the developer, Trammell Crow Residential, meeting the minimum requirements for the abatement by agreeing to set aside 15% of the units as affordable to people making no more than 80% of this region’s median income.

“We were trying to do what we thought the city was asking us to do, to deliver housing diversity,” TCR’s local executive Robert Hinnen tells GlobeSt.com. “Unfortunately, the city changed their minds; they apparently do not care about that diversity anymore.”

Councilman Sam Adams and Randy Leonard said publicly last week that they were not going to approve the tax abatement regardless of thr proposal, their reasoning being that the project doesn’t deliver enough social benefit. Mayor Tom Potter and Councilman Erik Sten said they would approve because TCR followed the rules established to be eligible for the benefit.

That left Dan Saltzman, who last week said he would approve it if TCR evenly distributed the affordable units types among all the units types planned for the building. That meant he wanted TCR to turn some of the income-restricted units from studios and one-bedroom units into two-bedroom units that would be more appropriate for couples and families.

“The current economics don’t support being able to do that,” says Hinnen. “Construction costs are extraordinarily high so yields are already depressed and depressing them by another 30 basis points is a problem.”

As well, Hinnen says the current economics don’t support being able to construct an all-market-rate apartment development there, either, because the rents necessary to provide investors a decent yield would be too high to attract enough renters to make it pencil. The other option, developing more condominiums, is potentially more profitable but also significantly more risky, says Hinnen.

“There are a lot of other condos under construction in the South Waterfront and elsewhere in the city, so the risk-adjusted return is probably similar,” he says.

The bigger issue, says Hinnen, is whether the city is preparing to get rid of the abatement program altogether. “If they are, it will mean no new supply of apartments in Downtown in the face of rising demand, which will cause a significant increase in rents Downtown which wll further affect income diversity in the area,” he says. On the flip side, he says “existing landlords are well positioned” to benefit from the situation.

The decision is believed to be the first time the City Council hs used its discretion to deny a property tax abatement for a developer who has been eligible for the benefit. As of 2:30 p.m. PST, none of the dissenting councilmembers had returned Thursday morning phone calls seeking comment. An official with the Portland Development Commission, the city’s urban renewal and housing agency, also could not be reached for comment.

Erik Sten, who voted in favor of the property tax waiver, says he doesn’t think it would be a tradgedy if the South Waterfront’s residential component consists of only high-end condominiums and 100% affordable apartment projects, but he would prefer to see apartment buildings with a mix of incomes such as TCR’s proposal.

“The situation in Portland right now is tax revenues are pretty scarce so people are putting a real tough eye on anything that limits possible tax collections,” he says. “But this is somewhast penny-wise and pound-foolish; we will not be getting more condominiums that pay taxes by not supporting this, we will get fewer apartments, and I think that’s not a good step for us.”

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