Review Of Certain Aspects Of College Housing Project CH-ORE-85(D) In Portland, Oregon B..l73o37 Department of Housing and Urban Development BY THE COMPTROLLER GENERAL OF THE UNITED STATES COMP-i-ROLLER GENERAL OF THE UNITED STATES WASHINGTON DC 20548 B-173037 Dear Mrs. Green* In accordance with your request of May 3, 1971, and as agreed upon in a meeting wl"th you on May 13, 1971, we have examined into the College Housing project (CH-Ore-85 (D)) to be constructed for the Portland Student Services, Inc. (PSS)-- a nonprofit student cooperative--with financing provided by the Department of Housing and Urban Development (HUD), to determine (1) whether the amount paid for land in the Goose Hollow area as the site for the project was reasonable inas- much as the Portland City Planning Commission (PCPC) had re- ported a significantly lower value for the land, (2) whether less costly alternative sites were available and why a site in the Lair Hill Park area was not acquired, and (3) whether the project 1s economically feasible. We also reviewed re- cent land transactions in the Goose Hollow area. On March 30, 1971, HUD made a 40-year loan of $3,193,000 bearing interest at the rate of 3 percent a year to PSS for the project-- a 16-story high-rise apartment building contain- ing 221 units: 112 efficiency apartments, 78 one-bedroom apartments, and 31 two-bedroom apartments. The loan was made under title IV of the Housing Act of 1950 (12 U.S.C. 1749), which authorizes the Secretary of HUD to make loans to insti- tutions of higher learning, nonprofit corporations, to State agencies or public authorities; and to nonprofit student co- operatives for the construction or the purchase of dormitories and other facilities for students and faculty members. We interviewed officials and reviewed records of the HUD Portland Area Office, PSS, PCPC, the Multnomah County Asses- sor's Office, and Portland State University (University). We interviewed also other individuals and examined available rec- ords bearing on the questions raised. In summary, our examination showed that (1) the price paid for the land in the Goose Hollow area for the project was not unreasonable compared with the value of land in other available sites close to the University, (2) a site in the Lair Hill Park area would have required rezoning which would 50TH ANNIVERSARY 1921- 1971 B-173037 have been difficult to secure, and (3) the prolect should be economically feasible, provided that an adequate occupancy rate can be maintalned. Examinations of prior transactions in the various parcels of land contained in the site for the project have disclosed no impropriety. Schedule 1 shows the recent his- tory of land ownership and includes a sketch of the Goose Hol- low site. PROPRIETY OF PRICE PAID FOR THE GOOSE HOLLOW PROPERTY On April 8, 1971, PSS purchased 71,500 square feet (1.64 acres) of land and the decrepit improvements on rt in the Goose Hollow area for $439,840--equivalent to $6.15 a square foot, or $268,195 an acre. This value IS high compared with land values presented in PCPC's report on a University housing study in June 1970. PCPC's report stated that a 9.5 acre tract of land, including the site of the planned PSS apartment bulldIng, had an assessed value of $1,089,304, or an average $114,663 an acre. We were advised by a PCPC official that the value cited In that report was based on 1967 Multnomah County assessments and therefore did not represent the present worth of the prop- erty. Our revrew of the Multnomah County assessment records showed that, at January 1, 1971, the assessed value of the Goose Hollow property was $375,500. A Multnomah County assess- ment official said that the sharp Increase In the assessed value of the property was a reflection of the extensive con- struction and speculative actlvitles In the Goose Hollow area and the proximity of the property to the central business district. Although the 1971 assessed value of the Goose Hollow prop- erty 1s $64,340 less than the amount paid by PSS, the amount paid by PSS 1s less than the appraised values of $464,750 and $450,000 by two independent appralsors. These appraisers' re- ports, according to the broker who put the land package to- gether, were instrumental in getting the Goose Hollow Invest- ment Company, the owner of most of the land In the site, to 2 B-173037 lower its asking price nearly $2 a square foot. A Goose Hol- low Investment Company official advised us that the company's original asking price was $8 a square foot. POSSIBLE ALTERNATIVE SITES Our examination showed that PSS initially considered var- lous possible alternate sites for the location of the student housing. With respect to the PCPC June 1970 student housing report, which cited seven sites sultable for student housing, PSS's reasons for selecting the Goose Hollow area in prefer- ence to the other sites follow, A PSS official advlsed us that five of the seven sites were eliminated from further consideration because they were too costly, were located In areas which would require rezon- ing y or were previously optioned to another buyer. The two remaining sites included the one purchased in the Goose Hollow area and one In the Lair Hill Park area. The report showed that the assessed value of land in the Goose Hollow area was $114,663 an acre and in the Lair Hill Park area was $49,281 an acre. As previously pointed out, the cited values were based on 1967 assessed values and do not represent the present value of the properties. A Portland real estate broker having property for sale in the Lair Hill Park area advised us that the 1970 asking prices were about $8 a square foot for property in this area. He also stated that he had two tracts of land for sale in the Lair Hill Park area--one parcel consisting of 33,500 square feet, zoned A-l (medium density apartment development), and another consist- ing of 75,000 square feet, zoned C-Z (general commercial)--and that, on the basis of a March 1968 offer of $225,000 for the smaller parcel, he was asking $8 a square foot for land in both parcels. Also, our review of Multnomah County assessment rec- ords for various lots in the Lair Hill Park area showed that the 1967 assessed land value for these lots was $38,810, but, as of January 1, 1971, the assessed land value for the same property had risen to $464,400. 3 B-173037 Another factor that reduced the desirability of acquiring a site for the housing in the Lair Hill Park area is the area's present zoning. A majority of the land in this area is zoned A-l, medium density apartment development, and the remainder 1s zoned for light industry. Under the land zoned A-l, medium density, 1,000 square feet of land IS required for each family living unit built. Thus in the absence of a rezoning of the land, a minimum of 221,000 square feet would have been required for the 221 planned houslng units. We were advised by both an agent of PSS and the director of the Portland Development Com- mission that it would have taken considerable time and money to acquire such a tract of land in the Lair Hill Park area without condemnation authority. PSS officials advised us that they did not attempt to have land in the Lair Hill Park area rezoned because (1) the land in the area was held by numerous owners and, under Port- land city zoning rules, a request for a change in the zoning of a tract of land must be accompanied by a petition signed by the owners or contract purchasers of not less than 50 per- cent of all property in the area within 150 feet of the tract, which posed a potential problem, and (2) they anticipated pressure from interest groups outside the Lair Hill area if rezoning was attempted. The director of PCPC in a January 22, 1971, letter to PSS stated that, because of the close proximity of the Goose Hol- low area to the University, the best use of the area was for student housing and that the area was the best of several areas that PCPC studied for student housing. ECONOMIC FEASIBILITY OF THE PROJECT A 1969 study by the Portland State University Facilities Planning and Operation Office recommended that the University seek to find ways to solve student housing needs. Later the same year PSS made a survey of students. The survey showed that, of 8,000 full-time students, 4,300 had provided their own housing in the general Portland housing market and that, of these 4,300, over 3,500 (or 82 percent) were either 4 B-173037 21 years of age or older or married, which lndlcated a need for przmarrly nondormitory housing. The survey showed also %hat over half of the 4,300 students who provided their own housing were dissatisfied with the price, locatron, or qual- 1t.y of their houslng, which indicated a substantial houslng need to be met. PCPC’s June 1970 report stated that it appeared lnevl- table that housrng must be provided, through some method, in %he vicinity of the University. The report stated also %hat, If housing were not given consideration soon, the land tha% was available might well be developed for some use o%her than housing and thus force students to live some dls- tance from the campus. The report stated further that provrd- lng close-rn student housing would meet an obvious need in re- placing the present, raprdly drminlshlng supply. In March 1971 a HUD market analyst stated that there was no questlon but that a need exlsted for addltlonal housing in the University area for both students and other relatively low-income groups. He stated also that the market for hous- ing in Portland could be considered as tight, partrcul.arly in the area around the University, and that housing in the low- and moderate-price ranges was especially scarce and was par- ticularly needed for the student population. With respect to financial feasibility of the PSS housing project, HUD’s regulations requrre that the project’s net revenues pledged for repayment of the loan must be sufficient to cover the average annual debt service (the requrred payment of prlnclpal and Interest on the loan) by at least 1.25 times. The regulations indicated that this margin, although provldrng for some latitude in estimated versus actual net revenues, should permrt an orderly buildup of the required l-year debt service reserve over a period of about 4 years and, there- after p %he accumulation of a reserve for extraordinary repalr and replacement costs. The debt service ratio for the PSS project loan IS 1.26. 5 B-173037 The planned maintenance and operating expenses and the debt service requirements for the prOJeCt during the 40-year period of the HUD loan are summarized below. Years of loan First Third Fifth Fifteenth and and through through second fourth fourteenth fortieth Debt service- prlncapal and/or interest (note a) $ 95,790 $141,395 $141,395 $141,395 Debt service reserve fund 35,348 35,348 Repair and replace- ment fund 25,000 Maintenance and op- eratlng expenses 47,240 47,240 47,240 47,240 Total $178,378 $223,983 $213,635 $188 ,,635 “Durlng the frrst 2 years, HUD requrred that only interest on the loan be paid; no payment of prlnclpal IS required. On the basis of the planned costs and the proposed ren- tal rates of $81 for an efficiency apartment, $102 for a one- bedroom apartment, and $125 for a two-bedroom apartment, the project 9 In order to be operated on a break-even basis, must malntaan occupancy rates, as follows: Years of loan First Third Flf th Fifteenth and and through through second fourth fourteenth fortieth Percent of occupancy 71 89 85 75 A number of factors will have an effect on the occupancy rates 9 but the precise Impact of these factors on the rates 6 B-173037 cannot be accurately predicted. The following factors suggest that a high occupancy rate may be expected. 1. A Federal Post Office survey of apartment occupancy In the vlclnlty of the Unlverslty showed that, during March 1970, there was only a 1.9-percent vacancy rate. The survey was made pursuant to an agreement between the Federal Housing Ad- ministration and the U.S. Post Office Department. The HUD 1971 market analysis report pointed out that the vacancy rate reported by the Federal Post Office which services the Univer- sity area would have been much lower except for the poor con- dltlon of much of the housing in the area. The HUD report polnted out also that, according to the oplnlons of officials of the University and PSS, the vacancy rate for standard hous- ing within a reasonable distance of the Unlverslty 1s near zero. 2. On the basis of our survey of rental rates advertised for vacant apartments in the Goose Hollow area during May 1971, the proposed rents for the PSS housing prolect averaged about 20 percent less than those for comparable housing r.n the viclnlty of the University. A representative of a computerized ~ apartment listing service confirmed our survey flndlngs by stating that the proposed rates for the PSS project were sub- stantially lower than those for apartments listed in the area. 3. The summer enrollment of the University 1s about 85 per- cent of the average enrollment for the other three terms, there- fore the seasonal fluctuations are moderate. 4, Since 1969 PSS had gained managerial experience through operating nine leased low-rise apartment buildings contalnlng 437 units, located in the Portland State University Urban Re- newal Area. A PSS official stated that PSS had consistently maintained an average of at least go-percent occupancy in these units. Factors that may have a downward effect on the occupancy rates follow. 7 B-173037 1. PSS? continued operation of the nine low-rise apart- ment buildings could siphon off some of the potential renters of the planned PSS high-rise apartment building. The nine buildings were scheduled for demolition, but, pursuant to a September 1969 city resolution, they have been rehabilitated and now meet all city building codes. There is no indication as to when or if the buildings will be demolished. 2. The site of the proposed PSS high-rise apartment build- ing in the Goose Hollow area is bounded on two sides by free- ways and on a third side by an electric power substation, which may lessen Its desirability. One of the freeways passes between the site and the University, which further lessens the site's desirability. 3. The PSS high-rise apartment building, as proposed, will not be air-conditioned, which lessens Its appeal during hot weather. With respect to college housing project loans, we noted that, as of June 30, 1970, there was only one loan foreclosure from inception of the loan program in 1950. THE HISTORY OF THE REAL ESTATE TRANSACTIONS Beginning in 1966, 10 of the 16 parcels In the Goose Hol- low area comprising the site of the PSS apartment building were acquired piecemeal by the National Hospital Association, a Portland insurance company. In 1968 the property was trans- ferred to the Goose Hollow Investment Company for $128,282, even though it had been acquired at a cost of $172,000. An at- torney for the association told us that, at the time of these transactions, Mr. Glenn Bechtold was the president of Goose Hollow Investment Company and of the National Hospital Associa- tion. The association was sold at the time the property was transferred to the Goose Hollow Investment Company. The at- torney advised us also that the purchaser of the association did not want to retain any real estate and therefore disposed of the Goose Hollow real estate. Other properties in the Port- land area were also transferred out of the association's owner- ship at that time. 8 B-173037 The Goose Hollow Investment Company, subsequent to its 1968 acqulsltlon of the 10 parcels of land in the Goose Hollow area at a cost of $128,282, acquired two other parcels of land In the same area at a combined cost of $64,500. These 12 par- cels were sold to PSS for $336,950. PSS acqurred the remaln- xng four parcels for the sate of the apartment building from various rndivldual owners at prrces ranging from $5 to $6.51 a square foot. The following table summarizes the Goose Hol- low land purchases. Cost per Seller Square feet square foot Goose Hollow Investment Company 53,167 $6.33 Kolberg et al. 10,000 5.00 Mrs. Odette Watson 5,833 6.27 Magdalena and Gary Bowman 2,500 6.51 The real estate broker, Mr. Linden Bowman, who handled the search for a site for the PSS apartment building and ne- gotrated the purchase of the land in the Goose Hollow area, told us that he was not related to any of the former land- holders and had never conducted any business with them prior to his retention by PSS. A history of recent transactions in the Goose Hollow site 1s set forth in schedule 1. We did not obtain formal written comments from any of the parties involved in the matters discussed in this report. Since dxsclosure of information included In this report may be prohibited by the United States Code (18 U.S.C. 1905), we shall not disclose its contents to the public. That 9 B-173037 statute makes It a criminal offense to disclose the "amount or source of any Income, profits, losses, or expenditures" of any person or firm. Sincerely yours, Comptroller General of the United States The Honorable Edith Green House of Representatives 10 SCHEDULE 1 GOOSE HOLLOW SITE RECENT HISTORY OF LAND OWNERSHIP Parcel Who sold It to PSS First previous owner, Second previous owner, number and price date sold, and price date sold, and price 1 Goose Hollow Investment Com- Natlonal Hospital Bertha Melburn 5-20-66 pany (note a) Association on contract $40,000 from B Melburn 7-l-68 (note b> 2 Goose Hollow Investment Com- Natlonal Hospital Hulda Munson 5-20-66 pany (note a> Assoclatlon on contract $22,500 from H Munson 7-l-68 (note b) 3 Goose Hollow Investment Com- National Hospital Josephine Poore 5-25-66 pany (note a> Association 7-l-68 $10,000 (note b) 4 Goose Hollow Investment Com- NatIonal Hospital Sqne Elde 5-16-66 pany (note a) Assoclatlon 7-l-68 $12,500 (note b) 5 Goose Hollow Investment Com- Natlonal Hospital E. A Weldenkeller 11-66 pany (note a> Association 7-l-68 $14,000 (note b) 6 Goose Hollow Investment Com- National Hospital Paul W Kean--owner of pany (note a> Assoclatlon 7-l-68 record, 1963 2-l-67 (note b) $16,500 7 Goose Hollow Investment Com- National Hospital M. F Bishop 5-17-66 pany (note a) Assoclatlon 7-l-68 $8,500 (note b) 8 Goose Hollow Investment Com- Natlonal Hospital Helen PhIllIps--owner of pany (note a> Assoclatlon 7-l-68 ;gd6 1963 S-17-67 (note b) , 9 Goose Hollow Investment Com- National Hospital Stella Ragen, Nadine Rich pany (note a> Assoclatlon 7-l-68 3-18-68 $14,500 (note b) 10 Goose Hollow Investment Com- National Hospital John and Patty Hallinan pany (note a) Association 7-l-68 l-3-67 $19,000 (note b) 11 Mrs Odette Watson Purchased on contract by Mrs Watson from Mr and Mrs James Ragen 7-6-61 $7,293 12 Mrs Odette Watson $36,600 Ben Gale 1961 $4,500 (Both parcels purchased as (approximate) one package) 13 Goose Hollow Investment Com- Mr and Mrs Elmer Kolberg Tlng D Lee and family pany (note a> lo-l-68 $32,500 11-30-67 No price dls- closed 14 Kolberg et al Francis Lambert 10-7-68 Lambert purchased on $50,000 $39,689 contract from Mr and Mrs. James Ragen g-20-62 15 Magdalena and Gary Bowman John Roberts 4-9-69 John Roberts--owner $16,250 $13,500 of record, 1963 16 Goose Hollow Investment Com- Wood's Estate 12-1-64 Dorance and Bertha Woods-- pany (note a> $32,000 owners of record and con- tract purchaser, 1963 aAll property included In total package was sold by the Goose Hollow Investment Company to Port- land Student Services, Inc , for $336,950 bAll property included m total package was previously owned by the Natlonal Hospital Assocla- tlon and sold to the Goose Hollow Investment Company on 7-l-68 for $128,282 SCHEDULE 1 SKETCH OF PARCELS OF LAND ACQUIRED FOR PSS HIGH-RISE APARl'MFaNT BUILDING KEYED TO DENOTFYRIOR OWNERSHIP --
Review of Certain Aspects of College Housing Project CH-ORE-85(D) in Portland, Oregon
Published by the Government Accountability Office on 1971-06-25.
Below is a raw (and likely hideous) rendition of the original report. (PDF)