Over the last decade Portland’s redevelopment agency has loaned developers, private companies, and organizations $125 million, more than half of which was at interest rates below the annual inflation rate.
You won’t find many similar deals from banks or credit unions, and for good reason. Lending below the inflation rate is essentially paying someone to borrow your money, something Portland Development Commission (PDC) spokesman Shawn Uhlman calls a “mischaracterization.”
Of course, banks and credit unions are in the business of seeking financial returns on their investments, whereas the PDC has other criteria for measuring success.
The Portland Development Commission’s stated mission is to “bring together resources to achieve Portland’s vision of a diverse, sustainable community with healthy neighborhoods, a vibrant central city, a strong regional economy, and quality jobs and housing for all.”
To achieve its mission, the PDC promotes, finances, and arranges housing projects, economic development, and urban renewal. That includes loans to private parties.
PDC conducts what it calls “gap financing,” a sort of lender of last resort to fill any missing pieces for projects and businesses. Filling in the “gaps” requires flexible loan terms to ensure the best chance of success for borrowers, the PDC claims.
Between November 2001 and October 2011, the PDC completed 422 loans worth $125 million. The average loan amount was just above $70,000, and loans ranged from as little as $20 to as much as $8.6 million.
Of the 422 loans, 148 had interest rates below the annual inflation rate of the origination year. Those 148 loans totaled $78.3 million, or 63 percent of the total money loaned over the last decade.
Zero Interest Rates
More than a quarter of those loans had a zero interest rate. In other words, nearly one out every five dollars the PDC has loaned over the last 10 years does not cost the borrower anything in interest, and financially speaking it is not just free money, they are paid to borrow it.
The weighted average interest rate for the entire loan portfolio was 2.66 percent, only 16 basis points above the average inflation rate of 2.5 percent, and less than half of the average 30-year fixed mortgage rate of 5.88 percent for the same period.
The long-term Treasury composite rate was 4.55 percent, almost two percentage points above the PDC average. Long-term Treasury bills are considered to be the safest investment in the world. Theoretically, if entities were to borrow money below the Treasury rate, they could exploit the arbitrage and get an almost guaranteed return.
Similar deals were given to banks by the Federal Reserve during the bailouts.
Uhlman says that lending practices and policies are taken from the banking industry, but they “have the flexibility to work with business owners.”
Such flexibility includes setting interest rates and payment structures.
Market Rates Too Pricey
When asked why the PDC does not charge market interest rates, Executive Director Patrick Quinton said that would risk making projects too expensive.
“If you make it so expensive that the project can’t go forward, we are really not serving our mission,” he said.
Quinton acknowledges interest rates influence risk behavior but says he does not believe it has a direct correlation to how people choose to spend the loan.
“Sure, there are some incentives out there that we create by having lower cost money, but I think we are far more attuned to that than we have been in the past.”
Millions in Losses
Interest rates are not the only aspect of loans where the PDC diverges from traditional lenders. Approximately four percent of the $125 million has been written off as losses so far, resulting in $5.1 million in losses.
When asked how the PDC loan rate losses compared to those of traditional lenders, Quinton said, “Our losses are higher than what you would find at a bank. A bank wouldn’t be able to have these kinds of losses.”
Uhlman says the PDC generally takes on riskier projects and at times makes loans to business that are “struggling to get their last piece of financing and are operating in areas that traditional banks may not be willing to.”
Quinton says the risk is part of their goal. They make loans to businesses to which banks would not lend.
The largest single write-off was for $688,500 to Caplan Landlord, LLC, which filed for bankruptcy in August 2010. Caplan, owned by developer Bruce Wood, renovated a seven-story office building downtown at 500 S.W. Fifth Ave.
The loan was for 19 months at a 3 percent interest rate and was originated in March 2008. More than two years later, the loan was written off by the PDC for the same amount, without a single dollar paid down on the balance by Caplan.
Many of the loans written off by the PDC experienced similar payment progressions as the Caplan loan. Of the total 46 loans written off to date, 19 loans never had their balance reduced. If balance reductions of less than $50 are excluded, the total rises to 27. In other words, 27 of the total 422 loans made over the last decade, or 6.4 percent, received essentially zero payments on principal.
Jacob Szeto ([email protected]) is an investigative reporter for Oregon Capitol News, a project of the Cascade Policy Institute in Portland, Ore. Used with permission.