WILLAMETTE WEEK
In a city where affordable housing is desperately needed, state and local governments play a delicate game: make affordable housing financially attractive to developers, but keep them on a delivery timeline.
By Sophie Peel November 09, 2022
Excerpts:
5733 NE MLK Car Wash (Mick Hangland-Skill)
Address: 5733 NE Martin Luther King Jr. Blvd.
Year built: 1995
Square footage: 2,832 square feet (car wash); 0.37 acres (entire lot)
Market value: Purchased for $1,005,000 in 2020
Owner: George Schmidbauer
How long it’s been empty: Since 2015
Why it’s empty: No financing and no taxes
The derelict car wash tucked behind a Kentucky Fried Chicken on Northeast Martin Luther King Jr. Boulevard [5721 NE Martin Luther King] gives no indication it’s about to become housing, unless you count the tents.
For nearly seven years it has sat fallow. Tarps are strung across the stalls, heaps of junk have been known to spill onto nearby properties, and people with nowhere else to sleep live in tents pitched in the concrete shells of the car wash stalls.
The owner of the property, 28-year-old California timber heir George Schmidbauer, says it will be another two years before construction on a low-income apartment complex begins—and that’s only if he gets more financing from the state.
Meanwhile, he pays no property taxes.
The city of Portland says he doesn’t have to. That’s because Schmidbauer is reserving the land for affordable housing and has brought in a nonprofit to manage daily operations of the project. According to the Portland Housing Bureau, there’s no limit on how long Schmidbauer can sit on the tax-exempt lot before shovel hits dirt.
In a city where affordable housing is desperately needed, state and local governments play a delicate game: make affordable housing financially attractive to developers, but keep them on a delivery timeline.
The car wash along MLK lies in the middle of that balance—and appears stuck. Schmidbauer quickly hit speed bumps. “I’m a young guy and this was my first project,” Schmidbauer says of the 2020 purchase. “I want to get this one in Portland done first, but it’s proving challenging enough. It needs to get done, and it’s tough to hold on to property with no end in sight.”
He’s applied for affordable housing loans from the state—specifically a low-income housing tax credit and a loan program called Local Innovation Fast Track, or LIFT—for two consecutive years. No luck. Schmidbauer’s project received relatively low scores on its LIFT application this year and was elbowed out by other projects, according to scoring documentation provided to WW by Oregon Housing and Community Services. But in 2023, Schmidbauer will have no chance at all of getting LIFT funding.
That’s because, WW has learned, OHCS and Metro this spring backfilled the budgets for affordable housing developments created by the 2018 Metro housing bond. A number of those projects are behind schedule and further burdened by high construction and labor costs due to stubborn inflation.
In an attempt to keep those voter-approved projects on track, they quietly rerouted all of the available Portland-area LIFT funding for the upcoming year—which is reserved for housing that will serve low-income people of color—to projects under the bond. In other words, the state decided to backfill projects from the housing bond with $20 million that was supposed to subsidize new projects.
That’s never been done before in the history of LIFT.
“Metro’s top priority is ensuring that the region and each jurisdiction will be successful in following through on the timeline and production commitments, in spite of significant shifts in the landscape due to [private activity bond] volume cap and cost escalation pressures,” an internal Metro memo from September reads. “Unprecedented cost escalation is creating new risks that will require significant contingency planning moving forward.” That was money Schmidbauer was expecting. “That’s what I’ve designed this project for,” Schmidbauer says. “Now it’s gone.”
Meanwhile, as Schmidbauer watches his state funding dry up, he has no incentive to move quickly. He doesn’t have to pay property taxes. That’s because of a tax exemption, overseen and approved by the Portland Housing Bureau, for nonprofits that provide affordable housing. It also grants the exemption to property owners so long as they reserve the land they own for affordable housing, and so long as they work with a nonprofit to manage the future development.
A list provided to WW by Multnomah County Assessment & Taxation shows 717 properties enjoy the same tax exemption as Schmidbauer’s car wash, though most currently provide housing. Most of the properties are owned or operated by either the city or well-established nonprofits like Human Solutions and Rose Community Development Corporation.
WW asked the Portland Housing Bureau why there’s no expiration for the exemption, even if a property owner is sitting on vacant land for years with nothing but a promise to build housing.
“While this has been identified as an issue for further consideration, in general, if projects have the funding available, they will move forward as soon as possible to bring units to market,” says bureau spokeswoman Martha Calhoon. “It can take years, however, for nonprofits to line up financing for a particular project, and an additional hurdle like an expiring tax exemption could put a whole project in jeopardy.”
Schmidbauer says he’s not exploiting the tax exemption or being complacent about the development. The city says that so long as the intent to build affordable housing was genuine, an owner who sells the property doesn’t have to pay back taxes.
Schmidbauer says he’s now considering selling the land if he can’t find another financing.
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Comment:
How can anyone be certain that Schmidbauer or any land holder is genuine in his intention to develop a site for below market rate housing? Meantime, the Housing Bureau appears lax about holding accountable landholders who promise future development of affordable units.
Here’s the state law:
Each qualified dwelling unit of single-unit housing that qualifies for exemption under ORS 307.651 (Definitions for ORS 307.651 to 307.687) to 307.687 (Review of denial of application) shall be exempt from ad valorem taxation for no more than 10 successive tax years beginning July 1 of the first tax year following approval of the application under ORS 307.674 (Application, approval and denial procedures), as determined under rules adopted by the Department of Revenue.
The exemption provided by this section shall be in addition to any other exemption provided by law for the property. However, the amount of assessed value exempted under this section may not exceed the real market value of the structure determined as of the date that the property is inspected for purposes of making a determination under ORS 307.674 (Application, approval and denial procedures). [Formerly 458.020]
Except as provided in ORS 307.684 (Immediate termination of exemption), if, after an application has been approved under ORS 307.674 (Application, approval and denial procedures), the city finds that construction of single-unit housing was not completed within two years after the date the application was approved or on or before January 1, 2025, whichever is earlier, or that any provision of ORS 307.651 (Definitions for ORS 307.651 to 307.687) to 307.687 (Review of denial of application) is not being complied with, or any provision required by the city pursuant to ORS 307.651 (Definitions for ORS 307.651 to 307.687) to 307.687 (Review of denial of application) is not being complied with, the city shall give notice to the owner…of the proposed termination of the exemption.
The notice shall state the reasons for the proposed termination and shall require the owner to appear at a specified time, not less than 20 days after mailing the notice, to show cause, if any, why the exemption should not be terminated. If the owner fails to show cause why the exemption should not be terminated, the city shall adopt an ordinance or resolution stating its findings and terminating the exemption.
A bill in this session, HB 2069, extends this exemption to 2032.
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Is there any solution to this open-ended process, even if a property owner is sitting on vacant land for years with nothing but a promise to build housing? Is there really no expiration for property tax exemption? Even when the city finds that construction of a single unit of housing was not completed within two years after the date the application was approved?
It’s time that the Housing Bureau, OHCS, and Metro together decide on rules and administration that will tighten up the system. One way to improve the situation is to create an inventory of approved non-profit developers with a proven track record of affordable housing production.
There also need to be restrictions placed on landholders. Here is one possibility: If an option to purchase a property on which a LIFT tax credit application has been accepted by the Oregon Housing and Community Services and has not been verified by an approved developer, the owner of tax delinquent property must resume payment of property taxes. Furthermore, if two years have passed without any progress, the owner should be liable for back taxes.
These are legal injunctions, but it may not be enough. Financial incentives would also help move the process along.
The problem is that Oregon’s current property tax structure is designed to incentivize land holding for speculative gain. The current land market, marked by rapidly rising land prices, further boosts the inclination to delay plans for future development. Why is that? Simply because the taxes on vacant and underutilized lots are exceedingly low. The owner will consider the more financially rewarding option of holding onto a site until the land values reach a point at which selling to a buyer with the highest offer will yield sufficient proceeds to pay any back taxes and return a tidy windfall.
If the property tax system were changed to a split-rate land value tax the incentive would be reversed.
Here is the situation on this derelict car wash site: The size of the entire lot is 16, 080 square feet, three times the size of a typical single family lot. From Multnomah County tax records, the latest (2022) real market value (RMV) is $986,000; the land portion ($556,650) comprises most of the total. In the 2018 assessment, used for a study commissioned by Common Ground – OR/WA*, the RMV was $837,950, the land portion $408,600. During the past two years the tax levy was zero dollars; over the past 5 years the accumulated tax bills amount to $13,862, none of which was paid.
The land value over these past 5 years has increased by $148,050; economists call this land rent. (Why the derelict car wash structure was appraised at a higher value is a mystery; one would think that since it has been deteriorating, the building value would be depreciated.) Nevertheless, the land value appreciation becomes an asset when the property is sold. It becomes evident that land-holding is potentially profitable. If the city deems the owner’s intent to build affordable housing was genuine, he pays no back taxes and pockets the full land rent. If he were required to pay $13,862 in back taxes, he would still reap a balance of $134,638. If he held the property for a few more years he could probably sell for more than he paid for it and walk away with a windfall.
Now, let’s see how a land value tax can diminish the owner’s incentive to hold on to the lot expecting to capture the land rent. If this system were applied across the entire county, properties with a high ratio of land to improvement assessments would see an increase in tax burden, which is the case for this site. A split-rate land value tax would use real market value assessments on all properties, not the limited maximum assessed value (MAV) assessments imposed by Oregon’s Measure 50.
Using figures calculated for the 2018-19 tax year, the levy based on the MAV of $176,510 was $4,286, Mr. Schmidbauer’s tax bill on this underutilized lot. By shifting the tax rate off buildings and onto land, the holding costs would rise. If 90% of the total tax rate on all properties in the county RMV were applied to land value, and 10% to improvement value, the tax levy on this property would now rise to $10,205. By more than doubling the tax burden, the owner would have a greater incentive to develop quickly or sell sooner.
* Note: The study “Land Value Taxation in Multnomah County” by the Northwest Economic Research Center (NERC) at Portland State University is now linked to the front page of the Common Ground OR-WA website at: https://commongroundorwa.org/ NERC website: https://pdxscholar.library.pdx.edu/nerc_pub/36/
Tom Gihring, Research Director
Common Ground – OR/WA
