Developer may pay fee rather than build affordable housing

Starting in 2017, all new apartment buildings built in Portland with more than 20 units must dedicate a portion of their units to low and moderate-income housing. But some developers are choosing to pay a penalty instead of creating affordable housing. The developers of the new Ritz-Carlton building downtown may be paying more than $7 million. Portland Business Journal reporter Jonathan Bach has been following Portland’s inclusionary zoning efforts and joins us to explain.

This transcript was created by a computer and edited by a volunteer.

Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. Since 2017, all new apartment buildings built in Portland with more than 20 units have to dedicate a portion of their units for low or moderate income housing, but some developers are choosing to pay a penalty instead. The people behind the new luxury Ritz-Carlton building downtown may end up paying close to $7 million in lieu of putting in cheaper units. Portland Business Journal reporter, Jonathan Bach, has been following Portland’s inclusionary zoning efforts and he joins us to explain. Jonathan, good to have you back.

Jonathan Bach: Thanks for having me on.

Miller: Can you remind us more fully how the city’s inclusionary zoning law is supposed to work?

Bach: Yes. The main point of the rules is essentially, you laid them out perfectly just now, but the point of them is to get more mixed income housing, especially in places like the downtown core where rent prices can be pretty expensive. This is a move to try and essentially bring a mix of incomes into a wide variety of real estate developments.

Miller: What would this mean for the Ritz-Carlton Tower that is nearing completion right now downtown?

Bach: So there’s been back and forth for really close to more than a year now, I would say, on will they or won’t they put those affordable units in the Ritz-Carlton Tower? So I spoke with Walter Bowen, the CEO of BPM Real Estate Group, which is the developer last year and he was noncommittal in that interview where you’re walking around downtown talking and he sort of hadn’t answered the question of if they’re going to pay this fee or if they were going to actually put the affordable housing units inside. He was, however, super frustrated with the prospect of having, it seemed, to do either.

Miller: Even though it’s not a new rule at this point, it’s been in place since 2017. So, where do things stand now? What have you heard either from the developers behind this project or from the city?

Bach: Since I did that interview last year. . .I should also shout out to the Oregonian, which before that–I think in February 2022–had done this big story as well in a similar vein. I really just wanted to answer the question, okay, what are they going to do? So, I reached out to the city’s Portland Housing Bureau and essentially asked that question and they told me that it seemed that they were moving towards paying the fee instead of having the affordable housing units inside the development. Now that fee, which will come due soon–around the time that the units are sold if they do end up paying it–is about $7.7 million.

Miller: What is the timeline for the building right now, and we should say this is a building that includes both a hotel, restaurant and spa and offices and residences, but when might the first condos be sold?

Bach: So the condos are being actively marketed right now. In fact, the sort of broker who’s in charge of this has said that there’s essentially been a lot of interest. There are about 100 and 30 units total, many of them multimillion dollar condos. And they are actively being marketed. It’s unclear if any have actually sold yet.

Miller: At what point would the city levy that nearly $8 million fine?

Bach: Yeah, that’s a great question. So the city told me that essentially, once all of the anticipated inclusionary housing units are sold and the affordability requirements haven’t been met, that’s when PHP can start to enforce that noncompliance penalty. But they, I will say, PHP said that they expect the penalty to be paid before that time, essentially, once the project gets  what’s called a temporary certificate of occupancy and sales are allowed to close. So they’re expecting it a little bit sooner than that.

Miller: What would the city do with that money with that nearly $8 million in fines?

Bach: That’s a really good question. The money that the developer pays - and this is also sort of good for other developers to know - goes into essentially an affordable housing fund that is supposed to pay for or support future affordable housing projects. So the thinking goes, okay, we didn’t get the affordable units in this building, but we can levy this fine, and we can try and help support affordable housing elsewhere. The thing is, though, that affordable housing is really complicated and super expensive to build. It’s a little bit different than private market developments. That was one of the reasons that they were, I think, trying to include affordable housing units in these market rate developments.

Miller: And isn’t part of the idea behind even just the word inclusionary zoning, that there is a societal benefit in having a mix of income levels in the same building?

Bach: Yes. That is definitely what proponents would contend. And going back to the earlier point, not just having a mix of incomes in a particular building, but bringing folks downtown, bringing people who may not otherwise be able to afford downtown rents into the downtown core.

Miller: Assuming that what seems like it’s going to happen does happen and developers pay this money instead of putting units in their new luxury condo tower, there’s no guarantee the city could then put similar affordable units right near there.

Bach: Yeah, that doesn’t have any clarity on where exactly those supported units via the fund would actually go, that’s a really great question.

Miller: The Ritz-Carlton Building has been a high profile project for a number of reasons. One that we’ve talked about over the years, among other reasons. The fact that there used to be a beloved gigantic whole parking lot full of food carts right there, but it’s just one project, how common is it for developers to opt to pay this fine as opposed to adding affordable units?

Bach: I had that very same thought last week, and I actually think my editor and I were having a similar conversation. So I reached out to the Portland Housing Bureau, asked them for a rundown of how many developers have gone the fine route instead. Actually, I just got an email right before this from the spokesperson because I bugged them this morning again and she said that she completely missed my email. So she’d try and get that info.

Miller: In other words, we don’t know yet.

Bach: We don’t know yet.

Miller: Okay, well maybe it’s actually hard for you to answer this next question, but you have done reporting about some confusion around some of the numbers over the last few months. I mean, it’s been more than six years since this rule went into effect. In the big picture, is it working?

Bach: I don’t know that there is a hard and fast answer on that and not to go completely both sides-ism, but this is a really hotly debated question. A lot of the arguments around either incentives or regulations, when it comes to housing production, are counterfactual and what that means is, but for the incentive or the regulation, would we have more housing?

So this came up last year at a housing conference at Portland State University. There was an economist, Joe Cortright, very famous economist in Portland, who essentially was saying that IH has created really strong incentives to not build housing and to underbuild housing in locations that would support more density. Remember that there’s that 20 unit limit. After 20 units, you have to have inclusionary housing, but the city official who was at the same conference sort of fired back, “We can’t count units that aren’t there. I don’t have a crystal ball to tell you how many units would have been built without inclusionary housing.” She kind of went on and said, “There has to be something in place and it’s not a perfect program. We’re still working on it.”

Miller: Jonathan, thanks so much. We will talk again.

Bach: Thanks a bunch.

Miller: That’s Jonathan Bach, staff reporter for the Portland Business Journal who joined us to talk about inclusionary zoning and in particular, the idea, that seems likely at this point, that the luxury Ritz-Carlton Condo Tower going in downtown Portland is not going to include affordable units.

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