Housing construction fee waiver comes at a cost for transportation infrastructure

Road users on N Vancouver Ave roll past a new apartment complex. (Photo: Jonathan Maus/BikePortland)

Last week Portland City Council voted unanimously to give developers a three-year reprieve from paying system development charges (SDCs) on residential housing projects. SDCs are fees paid to city bureaus to help pay for infrastructure that supports new developments.

While councilors agreed the fee waiver would help boost badly needed construction of more residential units (Portland produced just 818 market rate units in 2024, the lowest total in 10 years), it’s worth noting that the move represents yet another loss of funding for the Portland Bureau of Transportation (PBOT). The three-year SDC moratorium is estimated to cost the City of Portland about $63 million total.

According to a presentation from the Office of Community and Economic Development shared with City Council, the move will cost PBOT $10 million. This comes on top of a narrowly averted budget crisis, continued uncertainty with federal funding that has put $197 million in project grants in limbo, and an $11 million gap from the state due to the failure of HB 2025.

While 10 councilors (two were absent) voted to support the fee waiver ordinance with hopes it would boost production of 2,500 additional housing units (on top of estimated 2,500 for a total of 5,000), some expressed reservations.

“I’m worried about how much infrastructure funding where we can afford to lose,” said Councilor Candace Avalos, who represents east Portland.

Council President Elana Pirtle Guiney said, “I don’t take lightly the fact that we’re foregoing tens of millions of dollars of revenue for public infrastructure at a time when we have so many infrastructure needs. But I also know that right now, with the tools in our toolbox, this is the single most impactful thing that we can do this year to support housing development.”

The loudest and most eloquent supporter of the SDC waiver is District 4 Councilor Mitch Green. He told members of the PBOT’s Pedestrian Advisory Committee last week that he simply doesn’t like SDCs.

“Because however well-intentioned they are,” Green explained, “They only work when there’s development occurring and they are a marginal cost of development.” Green feels it’s already relatively expensive to develop land in Portland due to our labor and land-use laws, so anything that increases the cost of production just leads to less housing being built. “And if you get less of it, you don’t get as much of a resource for your infrastructure development, which means that latest development, or that last part of the city to come into the boundaries of the city just doesn’t get it, and then you have to compete for a small pool of money relative to the scale of the problem.”

Green sees infrastructure as a “collective problem” and a “public good that spans the whole city,” whereas SDCs only accrue in parts of the city lucky enough to see development. “The unintended consequence of it is you have a situation where neighborhoods have been brought into the city and just haven’t seen any infrastructure development on any meaningful time scale… if you have a family that moves to Hayhurst (in southwest), for instance, their kids are going to grow up and move away before they’re going to get a sidewalk to school. And that’s because we don’t have enough money in the bank for SDCs.”

Key to Green’s outlook on SDCs is that more housing units equals more taxpayers who can ultimately pay into a future PBOT funding pot. Green would rather see a more stable funding source for PBOT and he mentioned several times the city’s current effort to find one.

The ordinance that passed yesterday has set a goal of 5,000 housing units in the next three years. Expect City Council to monitor progress toward that goal and discuss the future of SDCs when — or if — it’s reached.

Jonathan Maus (Publisher/Editor)

Jonathan Maus (Publisher/Editor)

Founder of BikePortland (in 2005). Father of three. North Portlander. Basketball lover. Car driver. If you have questions or feedback about this site or my work, contact me via email at maus.jonathan@gmail.com, or phone/text at 503-706-8804. Also, if you read and appreciate this site, please become a paying subscriber.

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eawriste
eawriste
23 hours ago

Few questions:

  1. Does this proposal maintain inclusionary housing requirements?
  2. Since quite a few apartments are mixed use, and SDCs are exempt for only the residential portion, will this have an unintended consequence of promoting residential-only buildings even on commercial corridors?
  3. Are there any solid economic estimates on how this will affect the number of build units (i.e., is the goal of 5k apartments based on any study)?
Lyndon
Lyndon
22 hours ago
Reply to  eawriste
  1. This has nothing to do with inclusionary housing. The affordable units required by inclusionary housing are already exempt from SDCs and also don’t pay any property taxes for quite a few years.
  2. Developers are already allowed for the next several years (under a previously-passed ordinance) to build housing-only buildings even on “main street” commercial corridors where usually ground-floor commercial is required. And there are plenty of commercial corridors where that has always been allowed. And we arguably have too many retail spaces already, creating a glut of unused, vacant ground-floor commercial when it is built. We should stop caring so much about whether a building is purely residential or not. We need mixed-use neighborhoods, not necessarily mixed-use buildings. In any case, I doubt this will really change the calculation of developers on whether or not to include commercial. If commercial is actually lucrative in a given location, it will be worth it even with the SDCs. It’s in the housing space that SDCs have become such a big percentage of each unit’s cost to be a clear barrier.
  3. The 5000 number seems to have just been invented as an arbitrary goal, but that’s fine. You gotta start somewhere! Obviously, the SDC waiver alone won’t entirely account for all 5000 units (some would be built anyway), but there has been so little in the way of housing permits lately, I think this will make a difference.
maxD
maxD
24 minutes ago
Reply to  Lyndon

Lyndon, I realize this has nothing to do with IZ, but the developers I know say that the IZ is what is limiting development of new housing, not SDCs. What is your take on that.

To go one step further, why is the City one limitation to building housing SDCs) and not others (IZ)

Sean Edging
Sean Edging
22 hours ago
Reply to  eawriste

Hi there – housing land use expert here. I can speak to your questions

1. Nothing in the proposal changes the city’s current inclusionary housing policy to my knowledge.

2. It might have a potential effect but that disincentive actually exists right now. The mixed use buildings we have seen over the last decade or so (ie wood framed apartments above a concrete commercial podium) basically don’t financially pencil in the current market because of their higher costs and softer retail and rental demand. Maybe this provision will further incentivize residential only, though maybe not! It’s hard to say for certain.

3. I am not aware of a city specific analysis, but the state completed a pretty comprehensive analysis of SDCs a couple of years back. The takeaway: SDCs are an important source of revenue for cities but are charged in a manner that’s regressive and disincentivizes smaller, less expensive housing. Here’s the link! https://www.oregonlegislature.gov/citizen_engagement/Reports/Oregon%20SDC%20Study_FinalReport_121522.pdf

eawriste
eawriste
21 hours ago
Reply to  Sean Edging

Thanks Lyndon and Sean. Very helpful!

maxD
maxD
21 hours ago

Are they going to pause the inclusionary zoning requirements, too?

bbcc
bbcc
21 hours ago

IMO it’s not true that this will cost PBOT $10M. That’s how much SDC revenue they’ll lose out on given we remove the fees & developers actually start building again. 10% of 0 is 0. If nobody’s developing, PBOT doesn’t get any SDC revenue either.

PS
PS
40 minutes ago
Reply to  bbcc

It was news to me that they have had a 2 year zero interest delayed SDC payment program in place since 2023, which would ostensibly allow for a project to be stabilized before SDC’s are due, and that has had no impact to the pace of development.

Jay Cee
Jay Cee
21 hours ago

Ain’t nobody gonna be investing in new developments in Portland while Dump is doing his best to screw up the economy, sending the military to occupy blue cities, and we have more houses for sale than buyers. It has nothing to do with fees, they would willingly pay the fee and start building tomorrow if they thought there was a good return on investment

SolarEclipse
SolarEclipse
20 hours ago
Reply to  Jay Cee

Funny, I saw new apartment buildings and single family homes under construction in Bend recently so obviously there are much friendlier places than Portland that developers are making money building.

Robert Gardener
Robert Gardener
19 hours ago
Reply to  SolarEclipse

Funny, I saw new apartment buildings and single family homes under construction in Portland recently so obviously that is a friendly place for developers to make money building.

david hampsten
david hampsten
16 hours ago

Could someone please explain how this move is going to increase sidewalk coverage in Southwest Portland? I don’t see the connection.

Duncan
Duncan
13 hours ago
Reply to  david hampsten

I took Mitch Green’s comment about sidewalks as an example of how SDCs are not solving known infrastructure problems in areas that don’t have much development to generate the charges for system development. SDCs are justified as offset the extra load on the city infrastructure caused by the development, not to correct past decisions to develop some neighborhoods with infrastructure that prioritizes cars, as much of southwest seems to have been developed.

That said, my question is this: Without the SDCs, how does Mitch or the rest of the unanimous council propose the city pay for the necessary system improvements to support the 5000 additional residences?

Robert Wallis
Robert Wallis
6 hours ago

Waiving SDCs makes absolutely no sense and is nothing more than a knee-jerk reaction to the problem of affordable housing.  It will in fact result in less investment in active transportation.

SDCs are in fact an essential tool in the management of public infrastructure. SDCs exist to generate revenue for the lost capacity of infrastructure that results from growth so that it can be expanded to accommodate more growth in the future.  By waiving SDC’s, Portland will have to rely upon existing rate payers to pay the cost of added capacity as the City grows in the future.   

How absurd for Green to mentioned that SDCs are not the solution to infrastructure funding.   They are the solution to providing the capacity needed to accommodate growth, not a solution for existing infrastructure deficiencies. If a City does not grow, they do not need the revenue from SDCs because they do not need more capacity.   

By waiving SDCs, existing homeowners are subsidizing the cost of growth.  It is that simple.  I doubt that the majority of Portland’s citizenry support subsidizing growth, but perhaps they do.

david hampsten
david hampsten
4 hours ago
Reply to  Robert Wallis

The way PBOT (in reality City Council) has used transportation SDC funding over the last 30 years has been problematic. The vast majority was used to subsidize downtown projects, more than double what downtown generated in SDC funding – nearly every neighborhood in the city ended up “subsidizing” downtown development with the exception of inner NE which broke even (it took in roughly the same SDC funding as it generated.) In most years, there was always a huge surplus in SDC funds sitting in the bank, even when PBOT was making vast cuts in budgets and personnel, because the city can only use the funds for certain previously-listed projects (the list is reviewed every 10 years), and only those that add capacity, based on state rules. It’s neither a stable funding source nor very flexible – I can fully understand Mitch Green’s frustration with it – but PBOT doesn’t have any good alternatives that are both stable and that City Council can’t grab with their sticky fingers to use elsewhere. The ULF was supposed to be that ideal funding source (for repairing cut-up streets), but less than 5% now goes to PBOT; gas tax and parking revenue continue to shrink; vehicle registration is poorly enforced; federal grants are incredibly political; and the state…

PS
PS
4 hours ago

Hate to say it, but Mitch is spot on. SDC’s are estimated to be $20k per unit on average, a traditional 4 or 5 story stick built apartment building on a concrete podium runs between $350k-$500k per unit in all-in costs here in Portland (assuming close in infill location). A marginal 4-6% reduction in cost does not move the needle for a new project to move forward and certainly should not be used as the assumption that it will somehow double the number of units expected to be built in the next three years. Until interest rates materially improve (not going to happen without major softness in the economy), lending gets a lot easier (not going to happen because lenders are seeing massive losses from deals done in 2021-2023) or the cost of equity goes down dramatically (unlikely without economic softness) development is likely to be very slow especially when developers bake in to their analysis that Portland has some of the most tenant friendly rental laws in the nation, it just makes sense to allocate effort and capital elsewhere.

quicklywilliam
quicklywilliam
4 hours ago

Mitch Green gets it. The City (and PBOT in particular) hasn’t had a sustainable revenue strategy for decades. Their cobbled budget largely consists of misappropriated taxes and poorly aligned fees, and the overall revenue picture is one of decline and decrepitude.

Of course removing SDCs will have adverse affects on transportation unless it is matched with new sources of revenue (and/or cost savings). This is going to be a much bigger political lift, but it is refreshing to at least be starting from a clear-eyed assessment of the problem. In the meantime, let’s hope this at least helps jump-start housing development.

qqq
qqq
3 hours ago

SDCs have always had some dubious logic behind them, especially when applied to urban projects.and infill.

It’s hard to argue that a new subdivision or shopping center built on farmland won’t place new demands on roads, schools, parks, sewers, etc. so should be required to pay something for upgrades to offset the new impacts.

It’s murkier to say that an in-city, infill housing project should pay, when the project may only be bringing density back to levels it was when the original infrastructure (that’s still there) was built. The new housing there may even have positive impacts on transportation infrastructure just by virtue of it being built there.

I’m not anti-SDCs, just saying if any type of project is going to be exempted from them, you could do a lot worse than to choose urban infill housing projects.