The city of Portland is preparing to offer developers $7 million in incentives to convert vacant office space into multifamily housing.

Prosper Portland will administer the pilot program, which was first announced in May. It’s one part of the city’s strategy to reduce its massive stock of vacant office space, which totaled more than 9 million square feet during the third quarter, according to CBRE.

Mayor Keith Wilson, in remarks given during a Multifamily NW event on Oct. 16, said the funding would likely go to only a few office-to-housing conversion projects.

“We’re not going to spread that peanut butter thin,” Wilson said.

Funding may be awarded in the next four to six weeks, Prosper Portland spokesman Shawn Uhlman said Monday.

Funding for the pilot program is expected to come from the Portland Clean Energy Community Benefits Fund (PCEF) through an intergovernmental agreement with Prosper Portland.

Limited available funding, approximately $7 million, will support two to three pilot projects, Elliott Kozuch, the city’s spokesman for community and economic development, stated in an email.

City officials are looking for projects that are ready to go.

“The initial pilot projects are expected to both be development-ready and provide access to detailed project data … and participate in an embodied carbon study with PCEF and Prosper Portland,” Kozuch stated.

The conversion incentive grew out of recommendations from the Multifamily Housing Development Workgroup that was convened by Wilson and Gov. Tina Kotek in the spring.

The City Council still must agree to an adjustment to the PCEF’s Climate Investment Plan to allow the funding to be used, and to increase the allocation beyond the pilot phase.

Prosper Portland’s board approved guidelines for the program on Oct. 8.

“Portland faces the dual challenge of historically high office vacancy rates and a shortage of affordable and middle-income housing,” Prosper Portland Executive Director Cornell Wesley wrote to the board.

Public officials have lauded office-to-residential conversions as a solution to empty urban office space, but getting those projects to construction has proved difficult. Conversion costs are significant: Building codes require stronger seismic protection in residences. Floor plates designed for an office can poorly suit an apartment building. And features including staircases, windows, heating and cooling systems, and elevators may need to be rethought or relocated.

Sarah Zahn, director of development for Security Properties and a member of the governmental work group, said it makes sense to give large amounts of funding to a few projects.

“It’s good they recognize it’s going to take a substantial investment to do a project like this,” Zahn said.

The program should interest developers, said Ezra Hammer, a shareholder at Portland-based law firm Jordan Ramis.

“Is free money good?” he said. “Yes, free money is good.”

A successful conversion project could spur more of the kind, Hammer said.

“The real value is you get the projects going, but you prove the concept in the market,” he said.

The incentive will be structured as a forgivable 10-year loan at 2 percent interest. One-tenth of the principal balance of the loan would be forgiven each year. Rents must remain affordable to renters at 60 percent to 120 percent of area median income. The affordability requirement will make apartments available to a broad swath of renters but could limit developers’ potential upside.

“This targeted investment not only accelerates the delivery of new housing units but also advances Portland’s climate action and housing production goals in tandem,” Wesley told the Prosper Portland board.

So far, prior to the incentives taking effect, two conversion projects have moved forward in Portland. A project team plans to convert the Oregon Casket Building, at 403 N.W. Fifth Ave. in Old Town, into a 25,000-square-foot mixed-use building with 34 residential units and retail space.

The second conversion project involves the Falcon Building, at 321 N.W. Glisan St. It previously held 85,500 square feet of office space and is on track to become 59 units of middle-income housing.

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