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Developed with Denise Mejia for USP 423 at Portland State University. Case study report of Graham Street Lofts, a mixed-use project in Northeast Portland. Developed in tandem with a formal report (see other document in collection).
Citation preview
GRAHAM STREET LOFTSCASE STUDY
Denise MejiaAaron Ray
USP 423 Monday 1 June 2009
TA B L E O F C O N T E N T S
Mejia & Ray / 2
Project Initiation 3
Developer Profile 3
Site Selection, Acquisition & Control 4
Recent Area Investments 6
Development Program 7
Market Analysis 9
Market Comparables 10
Socioeconomic Analysis 11
Design Development & Floor Plans 12
Public/Private Agreements & Approvals 15
Construction Plan & Capital Budget 16
Marketing & Leasing 17
Current Unit Leasing 19
Management Plan & Operating Budget 19
Economic Analysis & Profitability 20
Forecast A pro forma 21
Forecast B pro forma 22
Critique & Evaluation 23
Works Cited 25
P R O J E C T I N I T I AT I O N
In June 2007, work began to construct the Graham Street Lofts development, located on
the corner of Martin Luther King, Jr., Boulevard and Northeast Graham Street, situated in
Portland's Eliot neighborhood. Graham Street Lofts is a mixed-used commercial and residential
building, originally intended to be sold as condominiums. Problems encountered during
construction and the initial sales period
forced the developer to temporarily shift the
project to a leased property, although it is
still the developer’s intent to sell the units as
condominiums at a later time.
The project comprises 12 residential
and commercial units, including some large
units approaching 2,000 square feet in size, as
well as retail storefront and commercial live/
work space. Although other projects nearby
also contain a mix of residential and
commercial use, Graham Street Lofts is the
only project in the immediate area that
specifically addresses the live/work market.
D E V E L O P E R P R O F I L E
The developer and architect of Graham Street Lofts is Hilary Mackenzie, principal of
Mackenzie Architecture, based in Portland. Mackenzie Architecture is intentionally a small
firm providing a full range of architectural and planning services to clients in the Pacific
Mejia & Ray / 3
FIGURE 1. Location of Graham Street Lofts in relation to the PSU Campus (Google Maps).
Northwest. She has a diverse portfolio which includes single family residences, multifamily
apartments and studios in urban and suburban settings.
She has extensive experience designing retail and commercial space in a variety of
urban and rural settings. Her firm emphasizes energy efficient structures uses innovative
materials and techniques. Some of the firm's work can be seen in Washington Park, Portland
Heights, Spring Street, and Lake Residence. Although she has developed speculative single-
family projects in the past, Graham Street Lofts is the firm's first speculative, mixed-use
development.
The developer agreed to meet with us twice in May 2009 to discuss the project and its
development, and to tour both the residential and commercial spaces. The developer interview
yielded much of the data in this case study.
S I T E S E L E C T I O N , A C Q U I S I T I O N & C O N T R O L
The project is located on Martin Luther King, Jr., Boulevard in northeast Portland, a
major north-south route. Daily traffic volumes are about 29,000 cars per day, more than most
other city streets and much higher than in many residential or business districts. MLK is
classified as a Major City Traffic Street and a Major Transit Priority Street, and such, the street
carries a significant amount of cargo and commercial traffic (Bureau of Planning &
Sustainability).
The developer acquired the Graham Street Site in1991 as part of a larger land purchase
which included adjacent lots to the west and north of the development site. As shown in Figure
2, she continues to control these lots, although lots to the north and east of her holdings have
been redeveloped, and include retail, restaurant, commercial office, and residential uses. Prior
to the construction of Graham Street Lofts, the site contained a surface parking lot.
Mejia & Ray / 4
Lots immediately adjacent to Graham Street Lofts include the Standard Dairy building, a
mixed-use redevelopment of a historic industrial property, the former American State Bank
building which has recently been occupied by a fitness center, studios and production facilities
for Portland Community Media, and some limited street-level retail storefronts to the north and
south of the building along Martin Luther
King, Jr., Boulevard. A structure on the lot to
the north has been renovated and currently
houses the developer's offices. The developer
has decided to offer the lot to the west for sale,
but indicated that she would seek to control
the development of that site through a build-
to-suit agreement or other sale provision in
order to preserve the views of downtown
currently enjoyed by residents in the upper
half of the building.
Mejia & Ray / 5
FIGURE 2. Lot map showing developer holdings and adjacent parcels (PortlandMaps.com).
Parcel currently o!ered for sale by developer.
Graham Street Lofts parcel
Parcel owned by developer, location of developer o"ces
Adjacent lots not owned by developer; recently redeveloped
FIGURE 3. Transit classifications for streets located near Graham Street Lofts. Red Star indicates property location (PortlandMaps.com).
Major freeway ramps located near the project provide access to I-5, I-405, and I-84. The
neighborhood has extensive bus transit service, and MAX light rail is located along Northeast
Holladay Street, less than a mile away from Eliot’s southernmost boundary. TriMet buses run
along MLK every 15 minutes or better daily (TriMet).
The MLK Corridor is designated as a Main Street in the Metro 2040 regional land use
plan. Densities in the area are double those found citywide, at 11.0 people and 4.6 households
per acre (Bureau of Planning & Sustainability). The building is near two significant employment
centers -- Legacy Emanuel Hospital to the west, and the Lloyd District to the southeast.
There are two elementary schools and various private or specialized education facilities
within walking distance of Graham Street Lofts, including Irvington and Boise-Eliot
Elementary Schools and the Harriet Tubman Leadership Academy. The Matt Dishman
Community Center is a short walk from the property, as are Irving and Unthank Parks. The
Boise-Eliot Community Garden is also within walking distance.
Over the past ten to fifteen years, the surrounding neighborhoods have made significant
progress attracting new investment. Selected recent developments are shown in Figure 4, and
include new residential, commercial, and retail properties. The decision to build Graham Street
Mejia & Ray / 6
FIGURE 4. Map of recent area investments and developments. Red star indicates location of Graham Street Lofts (Google Maps).
Lofts emerged from the developer's observations of these improvements: as residential prices
and demand continued to increase, she assumed that the neighborhood would support new
residential and retail development well into the future. Moreover, she saw an opportunity to
address the emerging market for live-work space, which had not yet been offered in the area.
D E V E L O P M E N T P R O G R A M
For Graham Street Lofts, the developer envisioned creating a mixed-use, highly-efficient
building that matched both the scale and what she perceived as the evolving needs of the
neighborhood. At the time, there was a lack of multi-family housing in the neighborhood that
was sized to accommodate young, growing families.
On the ground floor, the developer opted to include four Live/Work spaces, a relatively
new and emerging use in Portland designed to meet the needs of small businesses, particularly
artists, in need of a small residence immediately adjacent to a small work or storefront space.
Recent building code changes have enabled developers to build these mixed residential-
commercial spaces, but even with these changes, the code regulations governing these spaces
remain complex. Where these types of units have been built, they tend to be much more
expensive than "pure" residential or commercial units (Smith).
The building is a demonstration project using an alternative building material called
Performwall, a lightweight and versatile alternative to reinforced concrete walls made of
recycled polystyrene pellets mixed with cement. Recycled materials comprise 85% of each
panel (Trilogy Materials, Inc.) The building is the first mixed-use, multi-family unit in Portland
to use Performwall, although the material has been used in similar projects in Europe for some
time.
At Graham Street Lofts, 10-inch Performwall is used on the building exterior as well as in
walls between each unit, which can be finished either with a direct stucco application or with
Mejia & Ray / 7
more conventional drywall finishes.
Performwall offers superior seismic strength
and has a four hour fire rating, and provides
excellent heat and noise insulation. In our on-
site walkthrough with the developer, we found
the ground-floor units to be very quiet with
minimal traffic noise, despite being in very
close proximity to busy traffic on Martin Luther
King, Jr., Boulevard.
On-site parking was also envisioned to
encourage sustainable practices by supporting
transit and alternative-fuel vehicles. Ten spaces
of parking are available on-site, yielding a ratio
of 0.8 parking spaces per condominium unit.
Limited on-street parking is also available nearby. One space is provided with each live/work
and two-story residential unit; owners of one-story units can optionally purchase one of the
two remaining spaces. Electric car charging outlets are also provided in the lot. Stormwater
runoff from the lot and the building's roof is collected and treated in on-site bioswales and dry
wells.
Despite the building's highly sustainable design, the developer opted not to pursue
LEED certification. In the developer's view, LEED certification is oriented towards
demonstrating improved traditional building techniques in larger development projects, and is
not as relevant to innovative building materials and techniques, especially in smaller projects
such as Graham Street. The developer estimates that the project would immediately qualify for
LEED Silver, and perhaps LEED Gold certification; she also estimates that ongoing energy use to
be "very competitive" with more renown LEED-certified projects in the region.
Mejia & Ray / 8
FIGURE 5. Close-up view of Performwall material, showing recycled polystyrene pellets mixed with cement.
Certification costs are often estimated to be up to 3.3% of total development cost for LEED
Silver projects, or 5.0% for LEED Gold projects (Nicolow). Using these rates, the cost to certify
Graham Street Lofts would be estimated between $102,000 and $155,000, too high a cost
considering the return, according to the developer.
M A R K E T A N A LY S I S
The building includes a total of twelve units: four live/work units on the ground floor
and eight residential units on floors 2-4. Residential units vary in size from approximately 1,050
square feet to nearly 2,000 square feet, with two basic designs: two bedroom units on one story
and three-bedroom units on two stories. Live/work spaces are generally 1,150 square feet. The
arrangement and size of each unit is shown in Figure 6.
It is difficult to compare Graham Street Lofts with other developments because of the
innovative design, materials, and diverse neighborhood. Another complicating factor was the
inclusion of live/work space, a relatively new product that has not yet developed a true
standardized meaning in the marketplace, particularly due to differing levels of finishing in
various live/work units in the area. As a result, we were able to find reliable live/work
comparables for leased property, but not for property sales. Discussed later in greater detail, the
unanticipated switch from condominium units to leased units further complicated the
development of true comparables
for comparison.
We examined comparable
residential and commercial units
on both a for-sale and leased basis,
to address the mix of sold and
leased space within Graham Street
Mejia & Ray / 9
4th Floor
3rd Floor
2nd Floor
1st Floor
Unit 91,927 ft2
Unit 101,786 ft2
Unit 111,769 ft2
Unit 121,769 ft2
Residential
Unit 51,198 ft2
Unit 61,065 ft2
Unit 71,065 ft2
Unit 81,065 ft2
Unit 11,170 ft2
Unit 21,137 ft2
Unit 31,150 ft2
Unit 41,150 ft2 Live/Work
FIGURE 6. Diagram showing unit sizes and locations of di!erent uses at Graham Street Lofts.
during its interim leasing period. These comparable properties are shown in Figures 7 and 8. For
the live/work spaces, we have chosen to base our comparison on other street-level commercial
space in the area, because the live/work space within Graham Street Lofts is roughed out only,
similar to other commercial space in the area. Additionally, we have attempted to reflect
Graham Street’s emphasis on sustainability and efficiency in our selection of comparable
properties, although there are few projects in the area that have employed similar innovative
building materials and techniques.
Mejia & Ray / 10
FIGURE 7. Live/work and residential lease comparables for Graham Street Lofts.
Comparable Type
Location Rent/ mo.
Size (ft2)
Rent/ ft2
Dist. (mi)
Comments
Leased CommercialLive/Work
3934 NE MLK Blvd $2,475 1,650 $1.50 0.6 Triple net lease
5265 NE MLK Blvd $1,525 1,104 $1.38 1.6
5400 NE 30th Ave $1,000 760 $1.32 2.2
Graham St Lofts $1,300 1,157 $1.12 Averaged for leasable units
Leased Residential
303 NE 16th Ave $1,150 705 $1.63 2.1
1231 NE MLK Blvd $1,368 1,045 $1.31 0.8 Close to light rail, Lloyd Ctr
1425 NE 7th Ave $1,199 1,000 $1.20 0.8 Close to light rail, Lloyd Ctr
Graham St Lofts $1,700 1,456 $1.17 Averaged for leasable units
Location Sale Date
Sale Price
Size (ft2)
Price/ft2
Dist.(mi)
Comments
4138 N Montana #6 May 2008
$248,500 837 $296.89 1.14 Near Mississippi St, which drives up per-ft2 cost. More compact layout than Graham Street.
Graham St Lofts July 2008
$341,500 1198 $285.06
2645 NE 7th Ave #1 June 2008
$433,030 1677 $258.22 0.2 Not on major street or bus line; 1-bedroom with loft space comparable to two-bedroom at Graham
FIGURE 8. Residential condominium sales comparables for Graham Street Lofts.
Prices at Graham street Lofts are considerably lower on a per-square-foot cost than other
similar developments in the area. We believe this because of the developers urgent need to
generate cash flow and to mitigate losses from the unsold units. Two developments that we
believe to be fairly comparable to Graham Street Lofts are the Sacramento Lofts and 12.5 Lofts.
We found these developments to be similar because of the materials used, innovative design,
and the niche market that it advertises to.
A disadvantage that Graham Street Lofts has to both of these comparables is that it is
located directly on a highly trafficked street which could be interpreted as unfavorable because
of the noise and low pedestrian traffic for the live work spaces on the first floor -- on the other
hand, what is seen as a disadvantages for some could be an advantage for others. For example,
the Graham Street site offers excellent road and transit connectivity, and is in close proximity to
major employment and commercial centers, including downtown Portland.
S O C I O E C O N O M I C A N A LY S I S
The 2000 Census counted 18,177 people
living in the Northeast Martin Luther King, Jr.,
Boulevard Commercial Corridor (number 2). The
corridor is defined as the area within one-half
mile on each side of MLK Boulevard, stretching
from Northeast Killingsworth Street to the north,
to Northeast Hancock Street to the south. This
area is one of the most ethnically and
economically diverse areas in Portland -- 57% of
residents are ethnic minorities. Housing prices in
the area appreciated at a much higher rate than
in other areas within the city, rising 330% between
Mejia & Ray / 11
MLK Corridor
Citywide
ETHNIC & RACIAL COMPOSITION
White 43% 76%
Black 38% 6%
Hispanic 10% 7%
Native American 1% 1%
Asian 2% 6%
Pacific Islander 1% <1%
Multiracial 5% 4%
AGE DISTRIBUTION
0-17 24% 21%
18-34 32% 29%
35-64 35% 39%
65+ 10% 12%
FIGURE 9. Selected demographic statistics for the MLK Corridor as compared to citywide averages (Commercial Corridor).
1994 and 2004.
Despite this rapid growth, median household incomes remain significantly lower than
other neighborhoods, at $39,334 compared to $52,020 citywide. In addition, there are slightly
more children and slightly fewer elderly residents than the citywide average (Bureau of
Planning and Sustainability). Renters outnumber homeowners by 2-to-1, but this margin has
almost certainly declined as new residents have moved in.
Institutional uses account for a much higher share commercial activity in the MLK
corridor than in other areas of the city. Institutions total 13% of all businesses in the area,
compared with just 4% citywide. Institutional employers provide 28% of jobs in the area, nearly
triple the citywide average and second only to office employment. Retail businesses provide
21% of area jobs, compared to 34% citywide. Total employment per mile in the area is 16% less
than citywide averages, but the average size of businesses in the area is about the citywide
average, with slightly more than 50% of businesses having 1-4 employees (Bureau of Planning
and Sustainability).
The neighborhoods surrounding Graham Street Lofts were areas of disinvestment and
high crime in the 1980s and early 1990s. More recently, crime data indicate that the Eliot
neighborhood had a lower crime rate in 2008 than Downtown, the Lloyd District, or the Pearl,
and a crime rate in line with other areas in inner Northeast and North Portland. Eliot has
dramatically lower rates of person and violent crimes than other areas; in 2008, for example,
there were fewer property and behavioral crimes reported in Eliot than in the Pearl District, the
Lloyd District, or Downtown (Portland Police Bureau).
D E S I G N D E V E L O P M E N T & F L O O R P L A N S
The design of each residential unit includes at least one outdoor patio or terrace, with
built-in design elements intended to provide privacy for each residence's outdoor areas.
Mejia & Ray / 12
Mejia & Ray / 13
FIGURE 10. Floor plans for first and second stories of Graham Street Lofts.
Mejia & Ray / 14
FIGURE 11. Floor plans for third and fourth stories of Graham Street Lofts.
Premium-quality appliances and interior finishes are used to appeal to more affluent buyers
entering the neighborhood. Each unit includes a hydronic radiant heating system built into the
floors, powered by on-demand hot water heaters with a reserve tank. In two-story
condominium units, the upper floors are carpeted, but the hydronic system is combined with a
small in-wall fan for heating. Large windows provide plentiful natural light, further reducing
energy use.
Residences face west, toward the parking lot. There are no internal corridors or common
spaces in the building: access to upper-floor residences is provided by two staircases in the
parking lot, each serving four of the eight residential unit. No elevator is provided, however,
which eliminates access for those with disabilities to the residences.
Live/work spaces face east, toward Martin Luther King, Jr., Boulevard, and also include a
rear entrance facing the on-site parking lot. These units are offered as roughed-in spaces. Floors
(which contain hydronic radiant heating) have been poured, along with one half-width wall
near the midpoint of the unit, but other walls and ceilings are otherwise unfinished. A shower
curb and basic utility hookups are provided. The plan for unit 4, a live/work space on the
ground floor, shows a sample build-out of one live/work space.
P U B L I C / P R I VAT E A G R E E M E N T S & A P P R O VA L S
The developer attempted to simplify the development process by avoiding public/
private partnership agreements, and by following design standards already sanctioned by the
city. She has previously served as a member of Portland's Planning Commission, and was
therefore very familiar with provisions and standards set in Portland code, as well as best
practices to avoid the public design review process which can be costly and time-consuming.
The lot is zoned for Central Employment use with a design overlay, designated as zone
EXd by the City of Portland. The zone allows mixed uses and is intended for areas in the center
Mejia & Ray / 15
of the City that currently have predominantly industrial-type development (Portland City Code
Title 33 Chapter 140). Adjacent lots share the same EXd zone designation and are intended to
have compatible land uses, including those on the same block, as well as those across Martin
Luther King, Jr., Boulevard and Graham Street. Buildings in this zone have a maximum height
of 65 feet with FAR of 3:1, with no minimum setback. Ground-level storefronts must meet
Ground Floor Window Standards.
Residential uses are allowed, but are are not intended to predominate or set
development standards for other uses in the area. Other allowed land use activities include
general retail and office facilities, most manufacturing uses, institutional use, and certain
industrial uses. The intended uses for Graham Street Lofts are generally compatible with
surrounding uses, which include low-rise retail, office space, restaurants, institutional use, and
household units. The lot is not within an urban renewal zone, but is eligible for programs such
as PDC Storefront Improvement, Home Buyer Opportunity Area incentives, property tax
exemptions for transit-supportive residential or mixed uses, and enterprise zone benefits.
Although many projects opt to pursue exceptions to design standards through the
design review process, the developer felt that she would have more freedom by staying within
the boundaries of the design standards as set in code, because other elements of the project
would not be up for review and critique. According to the developer, design review constrains
architects to "designing by committee", but by taking fairly simple steps to adhere to design
standards in code, architects can be more creative and ultimately design better buildings, and
do so with less time and administrative overhead.
C O N S T R U C T I O N P L A N & C A P I TA L B U D G E T
According to the developer, the total development cost of the project was approximately
$189 per square foot, yielding an approximate construction cost of $3.1 million, including both
soft and hard costs. Despite the use of highly innovative materials as discussed earlier, the
Mejia & Ray / 16
developer estimates that these materials and techniques added no more than 10% of a premium
to development costs.
The developer reported relatively good relations with city permitting and inspection
officials during the design and construction phases of the project. Although this was the first
time the Performwall material had been used on a project of this scale in Portland, building
inspectors worked with the contractor to develop methods of inspection and verification that
were only minimally disruptive to the project's schedule.
The project suffered an unanticipated delay during construction due to the sudden
death of the prime contractor. Finding a new contractor who was experienced with the
innovative materials in use was difficult, causing an estimated 5 month delay according to the
developer. Originally, completion was anticipated in the first quarter of 2008, but with the
delay, units were not on the market until the start of the third quarter of 2008, as the housing
and credit markets continued their rapid deterioration. Further disputes with the contractor
complicated marketing and leasing after the project was completed.
M A R K E T I N G & L E A S I N G
Units at Graham Street Lofts were placed on the market in July 2008, and two sold
quickly: one residential unit and one live/work unit, at prices that were in line with or
exceeding the market averages at the time. For example, the residential unit sold for $341,500, or
approximately $285.06, nearly 10% more per square foot than a comparable unit at the nearby
12.5 Lofts.
Unit sales were halted soon thereafter, however, due to ongoing contractor disputes
which led to the filing of a contractor lien against the remaining units in the project. The
dispute was resolved in late 2008, but market changes in the interim drastically reduced the
prospects of new sales at the developer's target price. Moreover, lack of cash flow during the
Mejia & Ray / 17
construction delay and contractor dispute seriously harmed the developer's finances.
ShoreBank Pacific, the project's lender, denied initial attempts by the developer to restructure
the project's finances which placed the development in further jeopardy.
The developer claims that ShoreBank Pacific had relatively little experience with
projects similar to hers, and that inexperience complicated her effort to find a solution to the
project's serious financial difficulties. Initial requests to change the focus of the project to a
rental property were denied by ShoreBank Pacific, due to very low loan-to-value ratios of the
project. The lender could have forced the developer into bankruptcy, along with subsequent
foreclosure proceedings on the building, but they recognized that as a type of "mutually-
assured destruction" according to the developer.
Eventually, a compromise was reached which allowed for the project to be temporarily
leased with long-term plans to return units to the condominium market once conditions
improved. ShoreBank agreed to refinance the project's debt, although they provided only a one-
year note to the developer, at a rate that the developer did not disclose but which is likely to be
significantly higher than previously-planned financing.
Mejia & Ray / 18
FIGURE 12. Photograph of two-story residential unit interior.
Leasing began in January 2009,
and as of May 2009, all residential
units and all but one live/work
unit had been either sold or
leased. The developer signed one-
year leases with tenants,
providing some flexibility to
renew or cancel leases after a year
depending on future market
conditions. As shown in the
rental comparables identified for
the project, leases are lower than
the market averages, reflecting
both the larger size of these units, as well as the urgency of the developer to secure tenants and
generate revenue as quickly as possible.
M A N A G E M E N T P L A N & O P E R AT I N G B U D G E T
The intention for Graham Street Lofts was for units to be sold as condominiums, so there
was no long-term management plan or operating budget envisioned as part of the project's
development. The developer is currently the owner and property manager for the all of the
units except for the two units that had sold initially when they were being sold as
condominiums.
As mentioned earlier the units are being leased and only for a one year period. At the
end of the year period the developer will re-evaluate the demand for condominiums, and
depending on the market, the units may be marketed for sale, most likely on a rolling basis to
Mejia & Ray / 19
Unit #
UnitType
Size (ft2)
Lease Price or Sale Amount
1 Live/Work 1,170 Not Leased (Asking $1,300)
2 Live/Work 1,137 Sold July 2008 for $245,000
3 Live/Work 1,150 Leased: $1,300
4 Live/Work 1,150 Leased: $1,300
5 2 Bedroom 1,198 Sold July 2008 for $341,500
6 2 Bedroom 1,065 Leased: $1,400
7 2 Bedroom 1,065 Leased: $1,400
8 2 Bedroom 1,065 Leased: $1,400
9 3 Bedroom 1,927 Leased: $2,200
10 3 Bedroom 1,786 Leased: $1,900
11 3 Bedroom 1,769 Leased: $1,700
12 3 Bedroom 1,769 Leased: $1,900
FIGURE 13. Current lease/sales status of Graham Street units.
secure positive stable cash flow even during longer than usual vacancy periods that may be
required to prepare the units for sale.
E C O N O M I C A N A LY S I S & P R O F I TA B I L I T Y
In our economic and profitability analysis we constructed two unleveraged pro forma
forecasts reflecting two different potential outcomes for the project, in a sort of best case and
worse case scenario. Our objective was to see which plan would yield a higher internal rate of
return and to determine which scenario would be the most viable for the project. These pro
formas are shown as Forecast A and Forecast B in Figures 14 and 15, respectively.
The first scenario, Forecast A, is an unleveraged pro forma that spans a period of five
years and assumes that the developer will return units to the condominium sales market as
current leases expire. In year zero we have a outflow of equity that sums a total of $3,06,678.
This outflow includes an assumed acquisition cost as well as construction costs of $3,100,000.
Our construction cost includes hard and soft costs.
We developed an assumed lot acquisition cost because the developer built Graham
Street on a lot that she had held over the long-term. Our assumed acquisition cost estimates
what the lot would have sold for just prior to the start of construction in 2007, and is based on a
comparable lot sale made at approximate the same time in the same neighborhood: a 13,699
square foot lot located at 3500 NE Martin Luther King, JR. Boulevard which sold in April 2007.
In year one there was a sale of two units that gave us a inflow of cash equaling $586,500,
and a base rental of $84,400 from leasing revenue of the other 10 units for a period of six
months. We have assumed a 2.5% increase in rental units for the following 4 years to reflect
inflation and we also have assumed that the condominium market will begin to stabilize at the
begging of year three including the sale of several units. That is accounted for in years three
through five. With condominium sales we also have a inflow of HOA fees.
Mejia & Ray / 20
Our operating expenses are 25% of our leased unit revenues. At the end of year 5 all the
units have been moved from rental/ leased units to condominiums sales. This gives us a
internal rate of return of 9.351%
In our second scenario, Forecast B, we also ran an unleveraged pro forma, but in this
specific scenario we assume that the building will remain a rental property over the next ten
years, at which time it will be sold. At the beginning of year four we adjusted the rate rentals by
a 5.3% to remedy the current below-market rents being charged. Each year also includes a 2.5%
CPI adjustment. We maintained the same initial investment of $3,06,678 in year zero, as well as
the sale of the two units in year one. We kept a operating expense of 25% from gross leased
revenue. At the end of 10 years we have a reversion value of $1,580,865 assuming a
capitalization rate of 10%. At the end of year 10 we have a internal rate of return of 0.97%
Mejia & Ray / 21
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5Rental Revenue $84,400 $189,600 $123,600 $46,800 $0Sales Revenue $586,500 $0 $1,267,243 $1,548,392 $735,000Other Income (HOA Fees)
$756 $3,075 $10,347 $18,933 $23,113
Potential Gross Income
$671,656 $192,675 $1,401,190 $1,614,125 $758,113
Turnover Vacancy $0 -$18,960 -$18,540 $0 $0General Vacancy $0 -$28,440 -$12,360 $0 $0E!ective Gross Income
$671,656 $145,275 $1,370,290 $1,614,125 $758,113
Operating Expenses -$21,100 -$47,400 -$30,900 -$11,700 $0Net Operating Income
$650,556 $97,875 $1,339,390 $1,602,425 $758,113
Equity -$206,678Construction Cost -$3,100,000Property cash flow -$3,306,678 $650,556 $97,875 $1,339,390 $1,602,425 $758,113
Internal Rate of Return
9.351%
FIGURE 14. Forecast A pro forma analysis, showing projected profitability if units are returned to condominium market in the short-term.
The calculated internal rate of return of 9.351% from the first scenario firmly
suggests that the investment most certainly would be most profitable if the developer
was able to sell the units as condominiums and avoid keeping them on the market as
leased/ rental units.
Mejia & Ray / 22
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Ren
tal Reven
ue
$84
,40
0$18
9,6
00
$200
,028
$205,0
29$210
,154$215,4
08
$220,79
3$226
,313$231,9
71$237,770
Sales Reven
ue
$586
,500
$0$0
$0$0
$0$0
$0$0
$0O
ther In
com
e (H
OA
Fees)$756
$3,075
$3,075
$3,075
$3,075
$3,536$3,536
$3,536$3,536
$3,536
Po
tential G
ross
Inco
me
$671,6
56$19
2,675
$203,10
3$20
8,10
4$213,329
$218,9
44
$224,329
$229,8
49
$235,507
$241,30
6
Tu
rno
ver Vacan
cy$0
-$18,9
60
-$20,0
03
-$20,50
3-$21,0
15-$21,54
1-$22,0
79-$22,6
31-$23,19
7-$23,777
Gen
eral Vacan
cy$0
-$7,80
0$0
$0$0
$0$0
$0$0
$0Effective G
ross
Inco
me
$671,6
56$16
5,915
$183,10
0$18
7,60
1$19
2,314$19
7,40
3$20
2,250$20
7,218$212,310
$217,529
Op
erating
Exp
enses
-$21,100
-$47,4
00
-$50,0
07
-$51,257-$52,539
-$53,852
-$55,198
-$56,578
-$57,99
3-$59
,44
2
Net O
peratin
g
Inco
me
$650
,556$118
,515$133,0
93
$136,34
4$16
0,79
1$14
3,551$14
7,051
$150,6
39$154
,317$158
,08
6
Equ
ity-$20
6,6
78D
evelop
men
t C
ost
-$3,100
,00
0
Reversio
n V
alue
$1,580
,86
5P
rop
erty cash
flow
-$3,306
,678
$650
,556$118
,515$133,0
93
$136,34
4$16
0,79
1$14
3,551$14
7,051
$150,6
39$154
,317$1,738
,951
Intern
al Rate o
f R
eturn
0.9
7%
Assu
med
C
apitalizatio
n
Rate
10.0
0%
FIGU
RE 15. Fo
recast B p
ro fo
rma an
alysis, sho
win
g p
rojected
pro
fitab
ility if un
its held
as rental u
nits in
the lo
ng
-term.
C R I T I Q U E & E VA L U AT I O N
The Graham Street Lofts project is quite different from some other properties that we
have examined in the course this term. Its scale, design, uses, and financial circumstances make
it a challenging, yet interesting case to evaluate. In many ways, the project stands at a
crossroads today, facing financial constraints and a difficult real estate market as the clock is
ticking towards an upcoming refinance of its interim financing later this year.
We found the building design to be appealing and inviting, and probably appropriate in
light of the market and neighborhood conditions that existed at the beginning of the project.
The building is innovative and fresh, and was probably very attractive to buyers in the market
at the time that it was completed, as exhibited by the quick sales that ensued.
Although the developer could not have anticipated the sudden death of her prime
contractor during the project, we found that lack of experience by perhaps both the developer
and the lender contributed to the project’s unfortunate and catastrophic delays. Even the
developer commented that her biggest lesson learned was that spending more up front to
secure the expertise needed could have allowed her to minimize the delays stemming from the
unexpected contractor switch.
We’re also puzzled to an extent by the lender’s hesitance to allow leasing to begin
considering the very poor market conditions in late 2008 and the project’s desperate need for
revenues to cover debt service. Better decisions in both of these cases may have shortened the
delays in bringing these units to the market, but they would not have eliminated them, nor
would they have effectively avoided the financial difficulties encountered by the project as the
real estate market imploded.
In our view, this property vividly illustrates how changing perceptions of risk and
return dramatically impact real estate values, and how projects once seen as good investments
can quickly change to be unacceptable risks in the eyes of lenders. In Forecast B, for example,
we assume a capitalization rate of 10%, well above the rates of 6% or lower that were seen just a
Mejia & Ray / 23
few years ago. At a 10% capitalization rate, our project’s internal rate of return is less than 1%. At
a 5% capitalization rate, however, the project returns nearly 6% – a low return, to be sure, but in
better economic times, Forecast B could be a viable alternate plan in the case of market failure. I
today’s market, however, both forecasts call for the project to lose money over the long term, as
the rates of return in both cases almost certainly fall below the borrowing costs being incurred,
particularly considering the short-term financing that was hastily arranged while the project
was in deep distress.
This project also calls into question the viability of live/work commercial space, at least
as it was envisioned by the developer. Live/work space became a popular idea locally that
aimed to provide low-cost alternatives for artists and small, creative businesses to legally live
and work in the same location. Although code changes have legitimized this arrangement, the
costs of these spaces are prohibitively high for startup companies or budding artists. The
roughed-in space at Graham Street Lofts is unlikely to be affordable for many potential tenants
because of additional costs to finish the spaces prior to occupancy, under codes that apply the
stricter standards of commercial and residential spaces. These units, in fact, may turn out to be
the most expensive class of commercial spaces to purchase and prepare for occupancy.
The result, unfortunately, is a relatively dead street face along Martin Luther King, Jr.,
Boulevard in front of Graham Street Lofts. There are no true retail storefronts in the building –
indeed, only one live/work tenant even has a sign posted to advertise his business. The
characteristics of the busy MLK corridor certainly play a factor here, but we suspect that more
conventional commercial/retail space may have been more attractive to the market, and may
have provided a more active streetscape that would further improve the surrounding area.
Graham Street Lofts is likely to play a positive role in the neighborhood’s continued
improvement into the future, although it is unlikely to be an exceptionally profitable project.
Still, we believe that the project illustrates important lessons of anticipating and mitigating
complicating factors throughout the course of real estate development.
Mejia & Ray / 24
W O R K S C I T E D
Bureau of Planning and Sustainability. (2004). Portland Commercial Corridors Study: NE MLK
Jr. Blvd. City of Portland. Retrieved February 16, 2009, from http://
www.portlandonline.com/planning/index.cfm?c=38607&a=82947.
Nicolow, J. (2008). Measuring the cost to become LEED certified. Building Operating
Management. Retrieved May 31, 2009, from http://www.facilitiesnet.com/green/article/
Measuring-The-Cost-To-Become-LEED-Certified--10057.
Portland Police Bureau. (2009). CrimeMapper. City of Portland. Retrieved from http://
www.gis.ci.portland.or.us/maps/police/.
Smith, K. (2006, August 22). Does live-work work in Portland? Daily Journal of Commerce.
Retrieved May 31, 2009, from http://www.allbusiness.com/north-america/united-states-
oregon/4077785-1.html.
Trilogy Materials, Inc. (2005). Performwall Panel System. Retrieved May 31, 2009, from http://
www.performwall.com/product.sstg.
TriMet. (2008, October). Facts about TriMet. Retrieved April 7, 2009, from http://trimet.org/pdfs/
publications/factsheet.pdf.
Mejia & Ray / 25