According to the U.S. Census Bureau, the Portland metropolitan area in July 2015 had an estimated 2.4 million residents. For perspective, that means Portland increased by 111 residents per day over the course of one year. This growth in Portland has come with unique challenges, particularly for the construction industry racing to keep up with housing and other infrastructure needs for new residents.
In October 2015, the Portland City Council unanimously declared a housing emergency, signaling a renewed effort to address homelessness, provide affordable housing options, and bolster laws that protect renters’ rights. At the same time, maintaining Portland’s position as a leader in environmentally-sustainable building practices continues to be a priority for the city.
Last month, the Portland City Council unanimously approved a 1 percent construction excise tax (CET) recommended by the Portland Housing Bureau. The CET – which will be implemented on Aug. 1 – is estimated to generate about $8 million per year and will aid in supporting both affordable housing and homeownership projects in Portland. Earlier in the year, the Oregon Legislature lifted its 17-year moratorium on inclusionary housing laws, such as this one, which paved the way for cities and counties across Oregon to adopt excise taxes like Portland’s that support affordable housing programs.
The revenue generated by the tax will be broken into two categories: residential and commercial. Of the funds generated by residential construction, the state requires that 15 percent be directed to homeownership programs, 50 percent to developer incentives for inclusionary zoning, and the remaining 35 percent toward housing programs. Inclusionary zoning is a policy framework that incentivizes developers to build housing for low- and moderate-means tenants, whether through exceptions to density requirements allowing for more units to be built or by waiving certain timeline requirements so developers can build more quickly. Of the funds generated by commercial construction, the state requires 50 percent to go to housing programs.
Despite broad acknowledgment of the housing crisis in Portland, the City Council’s approval of the CET has brought criticism. Some industry groups have expressed concern regarding how quickly the council moved on approving the tax, noting the unintended, negative effects the tax might have on the cost and pace of development. However, from a functional standpoint, Portland developers already pay plenty of “system development charges” (SDCs) for various reasons, and this CET does not function much differently. The question remains whether it will have a chilling effect on development.
In addition, in February, the Portland City Council adopted an ordinance, including code language, which requires projects seeking a demolition permit of a house or duplex to fully deconstruct that structure if it was built in 1916 or earlier or is a designated historic resource. “Deconstruction” is a way to remove structures that keeps valuable materials out of the landfill, protects health, creates pathways to construction careers, and generates affordable reusable building materials. Only certified deconstruction contractors will be able to perform this work, and at least one person currently employed by a firm must be certified in order for the firm to be certified. Certification requires successful completion of a one-hour skills assessment, an online written examination, and 500 hours of experience in any of 10 core-competency areas.
After the code changes take effect on Oct. 31, 2016, approximately 33 percent of single-family demolitions will be subject to the deconstruction requirement. The city of Portland says the increased deconstruction will divert 8 million pounds (4,000 tons) of materials for reuse (annually), create job opportunities that act as a pathway for construction careers, and increase the likelihood of discovering materials containing lead and asbestos for safe removal and disposal.
Ultimately, the new CET and deconstruction requirements are likely just the first of many changes to come in the Portland construction and development industries, given Portland’s steady growth. Only time will tell how these changes shape the existing housing landscape and whether the goals intended by these shifts are achieved. Developers and contractors should start thinking now about how these measures may affect their immediate business decisions as well as long-term objectives. While the legal implications of these measures may not be readily apparent, knowing that projects are going to cost more will be an important consideration when deciding whether to enter into new projects and in making decisions about risk exposure.
Column first appeared in the Daily Journal of Commerce on July 27, 2016.
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