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PORTLAND-With condo sales slowing to a trickle and apartment vacancy in the low single digits, the developers of a 323-unit condominium project nearing completion in the South Waterfront district here have converted the project to rentals and are recapitalizing the asset in “a $145-million transaction” set to close in August. The development group includes locally owned Gerding Edlen Development Co. and Williams & Dame Development among others.

Come August that group will include Multi-Employer Property Trust, a union benefit fund (aka Taft Hartley fund) whose investments are managed by Seattle-based Kennedy Associates Real Estate Counsel. The announcement by Gerding Edlen did not say how much of the $145 million MEPT would be putting up or what percentage of the project it would get in return, only that MEPT would be the “primary joint venture partner.”

The transaction value is less than the project’s total development cost, according to the project’s construction lender. How much less was not immediately known, however, and neither Gerding Edlen principal Mark Edlen nor Kennedy executive vice president Preston Sargent could be reached Thursday morning for comment. A source with Gerding Edlen declined to provide the total development cost but alluded that, when “avoided costs” related to selling the project as condos are accounted for — such as marketing expenses and sales commissions — the total development cost may be at or below the transaction value.

In a prepared statement, Williams & Dame principal Homer Williams says the investment by MEPT is a “show of confidence” in Portland and the South Waterfront while Sargent says Kennedy and MEPT are “enthusiastic about the Portland market and the opportunity to invest early in South Waterfront” because the city “has great quality of life, continues to attract new residents and create jobs, and has a strong apartment market with very low vacancy rates.” Sargent calls the development a “long-term asset” for MEPT.

The project, 3720 Bond, also its address, is located one block from a riverfront greenway running along the west side of the Willamette River, in an in industrial area just south of the Downtown core that is being redeveloped with a mix of uses. A majority of the area has not yet been redeveloped, meaning there are as yet very few amenities in the immediate area, but the high-rise lifestyle provides for spectacular views of the region and proximity to the greenway gives residents immediate access to 40 miles of paved trails.

Regardless of whether it costing more than $145 million to complete, the per-unit value of the transaction is nearly $500,000, which is very high for the Portland area for an apartment building. In addition to the units themselves, which average 1,083 sf, the development also will generate revenue 17,000 sf of retail and a 380-slip parking garage.

The only recent sale comparable is the 16-story Louisa Apartments in the city’s tony Pearl District, which has 37,000 sf of street-level retail and apartment rents of approximately $2.60 per sf. Also developed by Gerding Edlen, the project sold last summer for approximately $300,000 per unit or $73 million – at least that was how much was allocated to the property, which sold as part of a three-block, $292-million sale. The units rent for approximately $2.60 per sf.

Both projects were built to achieve a high level of certification from the US Green Building Council. And while Louisa was built as apartments from the start, Gerding Edlen says 3720 Bond was designed to be either. With condo sales slowing to a crawl in the neighboring condominium towers and vacancy rates in downtown class A apartments tight — in the 3% range, according to some first quarter reports — the need for the switch was obvious.

Gerding Edlen says 3720 was designed to be either condos or apartment depending on market conditions. Corus last spring said it and the developers worked together for nearly a year to underwrite the $113-million construction loan, however Corus Bank SVP Dwight Frankfather tells GlobeSt.com he never anticipated the development being an apartment building and that as part of the MEPT deal Corus’ loan will be paid off in full.

“From a lender’s point of view, the building is not worth as much as an apartment building as opposed to a condominium building, so the risk is up, and it’s a pioneering area down there,” he says. “But these guys were brilliant in finding a buyer who is paying them a great price.”

That having been said, Frankfather says MEPT is buying at less than cost and is holding long-term, “so they’ll be there when the next wave comes and can convert to condos any time they want.”

Leasing at 3720 will begin next month via an on-site leasing office, with the first residents taking occupancy in August 2008. The building is scheduled for final completion in November 2008.

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