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-173o37

Department of Housing   and
  Urban Development




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES


        i-I
                              JJHE25,1971
                          COMPTROLLER         GENERAL     OF      THE       UNITED   STATES

                                            WASHINGTON.    D.C.         2054%




B-173037

Dear    Mrs.     Green:                                                                       P&-a 2
                                                                               /
        In   accordance      with         your    request    of May 3, 19,7$, and as
agreed     upon in a meeting               with     you on May 13, 19 /i, we have
examined
be             into
     construceed      the
                        for College          Housing,project
                             ti;k’-“i;‘;;~.~~~~~...‘~~~~e.nt       (CH- re-85 Inc. (D))(pss)to _ _
                                                                Services,
                                                                        /J
a nonprofit        student      cooperative          --with     financing          provided     by
the Department           of Housing         and Urban         Development          (HUD),   to     7g&ls
determine       (1) whether        the amount           paid     for    land     in the
Hollow     area    as the site          for    the project           was re   &
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         is 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.
                                                                                                  ‘7)2-64
         We interviewed        officials         and reviewed     records       of    he 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 project             should    be
economically         feasible,     provided     that   an adequate         occupancy       rate
can be maintained.             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 it     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 19.70.           PCPC’s report          stated    that    a
9.5 acre        tract       of land,      including       the site       of the planned          PSS
apartment         building,        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 review        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          activities          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    is $64,340       less   than     the amount     paid     by PSS, the amount
paid    by PSS is less        than     the appraised        values    of $364,750        and
$450,000       by two independent           appraisors.         These appraisors’          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-
ious possible     alternate       sites    for the location    of the student
housing.     With respect       to the PCPC June 1970 student          housing
report,    which cited      seven sites       suitable  for student    housing,
PSS’s reasons     for selecting         the Goose Hollow area in prefer-
ence to the other sites           follow.

       A PSS official        advised     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 ,  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
          Another         factor        that      reduced         the desirability             of acquiring
n    site    for      the      housing        in    the     Lair      Hill   Park    area      is the areals
present        zoning.             A majority           of the land          in this        area    is zoned
.li- i, nre3ium density                 apartment           development,          and the remainder            is
 zoned for         light         industry.            Under       the land      zoned A-l,          medium
density,          1,000        square       feet      of land         is required         for    each family
riving       unit       built.          Thus in the absence                  of a rezoning            of the
 jarad,    a minimum            of 221,000            square        feet   would     have been required
 f!JT the 221 planned                   housing         units.          We were advised           by both    an
ssp:rt     of PSS and the director                          of the Portland             Development        Com-
 ja?ission     that       it would          have taken            considerable          time     and money
 ho al:quire          such a tract              of land         in the Lair        Hill       Park area
without        condemnation               authority.

        PSS officials            advised        us that     they    did not attempt            to
r.ave land      in the Lair           Hill      Park area rezoned          because        (1) the
land    in the area was held                  by numerous        owners    and, under          Port-
iand city       zoning       rules,        a request      for    a change     in the zoning
3f a tract        of land must be accompanied                      by a petition          signed
k<y the owners         or contract            purchasers       of not less         than     50 per-
s-ent df 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
;tzted     that,     because    of the close     proximity     of the Goose Hol-
low area       to the University,        the best     use of the area was for
~tudcnt      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
::eek to find      ways to solve          student    housing      needs.     Later       the
same year     PSS made a survey             of students.        The survey      showed
thar 9 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
21 years      of age or older        or married,        which   indicated         a need
for  primarily      nondormitory        housing.        The survey       showed also
that   over half     of the 4,300          students     who provided        their    own
housSng     were dissatisfied          with     the price,    location,        or qual-
ity  of their     housing,       which     indicated     a substantial         housing
need to be met.

         PrPCps June 1970 report                 stated      that    it appeared             inevi-
nable     that     housing      must be provided,              through       some method,
~gr; t:;e vicinity         of the University.                The report           stated       also
that* ; if housing           were not given           consideration            soon,       the land
that     was available          might     well     be developed          for      some use
other     than housing          and thus       force     students        to    li-ve     some dis-
tance     from     the campus.          The report         stated      further         that      provid-
ing close-in          student      housing       would     meet an obvious               need in re-
placing       the present,         rapidly       diminishing         supply.

         In March    1971 a HUD market            analyst       stated      that      there     was
no question       but that       a need existed          for    additional          housing
rn 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,         particularly           in
the area     around     the University,           and that        housing        in the low-
and moderate-price            ranges    was especially            scarce      and was par-
Tzicularly     needed     for    the student        population.

         With respect         to financial          feasibility             of the PSS housing
project,        HUD’s regulations            require        that      the project’s               net
revenues        pledged     for   repayment         of the loan must be sufficient
to cover        the average       annual       debt     service         (the      required         payment
of principal          and interest         on the loan)             by at least             1.25      times.
The regulations           indicated        that     this      margin,         although          providing
for     some latitude         in estimated          versus        actual        net revenues,
should      permit      an orderly       buildup        of the required                 l-year        debt
service      reserve      over    a period        of about          4 years         and,      there-
aft @” $ the accumulation              of a reserve             for     extraordinary              repair
and replacement           costs.       The debt          service        ratio       for     the PSS
project       loan    is 1.26.


                                                      5
        The planned      maintenance      and operating        expenses     and the
debr <service     requirements        for  the project        during    the 40-year
:geri~d    of the HUD loan        are summarized       below.

                                                          Years       of    loan
                                        First        Third                Fifth              Fifteenth
                                          and         and               through                through
                                       second      fourth            fourteenth         -    fortieth

Q&c      service-
  nrincipal.
  L                  and/or
   interest         (note    a)      $ 95,790     $141,395             $141,395              $141,395
Deb”, service          reserve
   fund                                 35,348        35,348
Repair      and replace-
  ment fund                                                                 25,000
Maintenance          and op-
   (crating       expenses              47,240        47,240                47,240               47,240

      Total                          $178,378     $223,983             $213,635               $188,635

“During    the first              2 years,    HUD required           that         only    interest         on
  the loan    be paid;             no payment    of principal               is     required.

         On the basis    of the planned         costs    and the proposed                             ren-
tai    rates    of $81 for     an efficiency       apartment,    $102 for                            a one-
J:~fdroom apartment     9 and $125 for         a two-bedroom     apartment,                             the
project,      in order   to be operated         on a break-even       basis,                          must
maintain      occupancy    rates,     as follows:

                                                           Years       of loan
                                        First         Third              Fifth                Fifteenth
                                         and            and            through                  through
                                        second        fourth         fourteenth                 fortieth

Pel-cent.     of   occupancy               71            89                      85                   75

       A number   of factors               will   have an         effect          on    the occupancy
1P;ateS 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 vicinity         of the University              showed    that,     during      March     1970,
there      was only      a l-g-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 HIJD
1371 market         analysis       report     pointed      out that       the vacancy         rate
reported        by the Federal          Post Office        which     services        the Unlver-
sity     area would       have been much lower              except      for    the poor con-
dition       of much of the housing               in the area.          The HUD report
pointed        out also      that,    according        to the opinions           of officials
of the University              and PSS, the vacancy             rate    for    standard       hous-
ing within         a reasonable         distance       of the University             1s near
zero e

          2. On the basis            of our survey            of rental        rates       advertised
for     vacant       apartments        in the Goose Hollow               area during           Ma)
1971,       the proposed         rents      for     the PSS housing            project        averaged
about       20 percent        less     than     those     for     comparable         housing        in the
vicinity         of the University.                 A representative             of a computerized
apartment          listing      service       confirmed         our survey         findings         by
stating        that      the proposed         rates     for     the PSS project             were sui-
stantially            lower   than     those      for   apartments         listed        in the area.

        3. The summer enrollment                    of the University                 is   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       containing
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.
B-173037



         1. PSS’s 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 e 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 acquisition          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 acquired         the remain-
ing four      parcels     for    the site       of the apartment           building      from
various     individual        owners     at prices        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-
gotiated      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
is    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    disclosure          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-     National    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-     National    Hospital                         Hulda Munson           5-20-66
            pany (note a)                                Association    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                         Signe Elde       5-16-66
             pany (note a)                                Association     7-l-68                       $12,500
                                                          (note b)

      5      Goose Hollow Investment             Com-     National    Hospital                         E. A. Weidenkeller              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)                                Association     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)                                Association     7-l-68                       $8,500
                                                          (note b)

      8      Goose Hollow Investment             Com-     National    Hospital                         Helen Phillips--owner                  of
             pany (note a)                                Association    7-l-68                        record,  1963 5-17-67
                                                          (note b)                                     $14,500
      9      Goose Hollow Investment             Com-     National    Hospital                         Stella  Ragen, Nadine               Rich
             pany (note a)                                Association     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    $7,243
     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      Ting il. Lee and family
             pany (note  a)                               lo-l-68  $32,500                             11-30-67  No price  dis-
                                                                                                       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      4-9-64                     John Roberts--owner
             $16,290                                       $13,500                                      of record,    1963
     16      Goose Hollow    Investment          Com-      Wood's Estate        12-l-64                 Dorance and Bertha Woods--
             pany (note   a)                               $32,000                                      owners of record  and con-
                                                                                                        tract  purchaser, 1963
a
    All property    included          in total    package was soid    by the Goose Hollow            Investment       Company      to Port-
    land Srucent    Services,           Inc.,  for $336,950

bAl1 property  included               in total   package was previously  owned by the               National      Hospital       Associa-
 tion and sold to the                Goose Hollow Investment    Company on 7-l-68 for               $128,282.
SCHEDULE 1

               SKEI-CH 01‘ PARCELS OF LAhQ ACQUIRE3
             FOR pss HIGH-RISE APARTMEET BUILDING
                KEYED 10 DENOTE-YKIOR OWNERSHIP