PDC: We spent $500,000 and didn’t even get a lousy T-shirt

Yesterday the Portland Development Commission (PDC) voted unanimously to continue its 15-year quest to take over the 13.4-acre site now occupied by the United States Postal Service (USPS) on NW Hoyt Street. They approved the Third Amendment to the Letter of Intent (LOI) and Escrow Agreement for the acquisition of the USPS site, extending the deadline for completion by another 365 days to March 31, 2011.

The most notable feature of this decision is that local taxpayers already have paid the USPS $500,000 out of an escrow account, without any commitment by the Postal Service to close the deal. So if negotiations reach a dead end, taxpayers are out the entire half million.

This is the story of a bizarre vision quest begun by former Mayor Vera Katz, who first urged the USPS to move out of the River District in 1995. The Postal Service ignored that request and numerous subsequent ones. PDC then went over the heads of local decision-makers, bringing Rep. Earl Blumenauer and former Sen. Gordon Smith into the conversation. That forced USPS to the table, but they continue to be an uninterested seller.

The parties finally agreed to a LOI and Escrow Agreement, with an expectation that negotiations would conclude by March 31 of 2009. That did not happen, so the deadline was extended to March 31 of 2010. PDC has again failed to close the deal, so staff went to the Commission yesterday requesting an extension until March 2011.

At first glance it’s a mystery as to why PDC is so obsessed with obtaining this site. It is not “blighted,” the building is not in disrepair, and it is the source of 1,100 well-paying jobs in a downtown that is steadily losing employment. But apparently it represents the “old economy;” it’s not a high-rise, it’s not a mixed-use project, and there’s little glamour in moving mail.

Portland planners think all those federal jobs should be moved out to east Multnomah County somewhere so that we can build more condo towers or a subsidized commercial-retail project. In the words of one PDC commissioner yesterday, the USPS “needs to go” — with no further explanation offered. Apparently, if you have to ask for an explanation, you’re not culturally enlightened enough even to be worth talking to.

However, the PDC obsession is exactly the reason the agency is getting taken to the cleaners by USPS. A fundamental truism of negotiations is that the party most willing to leave the table is the one holding the leverage. On March 28, 2008 PDC approved a Letter of Intent (LOI) and Escrow Agreement, in which cash is transferred on the following timeline:

“¢ $500,000 — upon PDC approval and subsequent execution of the Escrow Agreement. The transfer occurred in March 2008 and is non-refundable.
“¢ $500,000 — upon successful negotiation of an environmental remediation cost sharing agreement between Portland Terminal Railroad and PDC. This transfer has not yet occurred.
“¢ $1,000,000 — upon execution by Seller and Purchaser of a Purchase and Sale Agreement (PSA). This transfer has not yet occurred.

In recent days I contacted three different people with experience in commercial real estate transactions, and they were all aghast that PDC had paid a non-refundable fee of $500,000 without a Purchase and Sale Agreement. In essence, the $500,000 simply provides PDC with the “privilege” of exclusive negotiations with USPS. Since the strategy of USPS has been simply to say “no” for 15 consecutive years, one can only imagine the hourly billing rate of the USPS negotiators. If they billed 100 hours over the past two years for meetings where their only job was to repeat the word “no,” they collected $5,000 per hour.

Unfortunately, it gets worse. PDC has agreed to pay 150% of the average of two appraisals, which both have come in at roughly $46,000,000, with a to-be-determined reduction for environmental remediation of this “brownfield” site. So local taxpayers will pay an above-market price for the land, plus the environmental cleanup costs, which are currently unknown.

Should the deal actually go through, USPS will continue occupying the site for five years after receiving payment.

Meanwhile, we are paying at least $200,000 annually for staff costs at PDC.

At the hearing yesterday, I urged the PDC to cut their losses and move on. After 15 years of lusting after this site, it should be clear that USPS is just stringing them along. More importantly, there is no compelling public purpose for seeking possession. If the USPS ever becomes interested in selling, there are numerous private development firms that would be interested in buying; and all of them would be subject to myriad government regulations, including density mandates, “green building” requirements, mixed-use regulations, and more. Assuming for the moment that there is some public benefit in mixed-use redevelopment, we don’t need public ownership to get it.

Ultimately, this is driven by the institutional imperative of bureaucrats to constantly expand their empire. PDC is an urban renewal agency, and “renewing” their own budget will always be Job One.

John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research center.