oversight

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)

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
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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
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        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
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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
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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
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        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
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        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
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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
                                         --