Mr. Tess

Boutique Hotels

Meier & Frank: How Oregon's Largest Building Became a Boutique Hotel

By John Tess, President & CEO, Heritage Consulting

In the day, Portland, Oregon's downtown was home to a cluster of downtown department stores. With names as Rhodes, Olds, Wortman & King, and Lipman, Wolfe & Company, these were the local versions of retail giants as Gimbels, Macy's, Carson Pirie Scott and Marshall Field. The retail concept was simple - they sold everything and anything that customers would buy. Clothes, shoes, toys, sporting goods, furniture - even boats and bagels! They marketed themselves as THE destination for the 20th century woman including style shows, tea rooms and special events. Thanks to American ingenuity, women in this era enjoyed new found leisure but American family values did not permit entrance to the workplace.

In Portland, the grand dame of the genre was the Meier & Frank Store. It was a conglomeration of three buildings on a single block: The first built in 1909, the second in 1915 and the third in 1932. The first unit was patterned after Chicago's Carson Pirie Scott with a glazed and elaborate white terra cotta exterior. The second unit featured technological innovations as the first escalators on West Coast. The final unit featured "destination" amenities as a Georgian Revival tea room, a Pine Room men's grill, and a two-story auditorium with mezzanine for shows and events. The building was massive: eleven acres of floor area (each floor nearly an acre itself), a million bricks, and one thousand plus windows. At 650,000 square feet, it was the largest building in the State of Oregon and remained so until the 1970s. For this reason, the Meier & Frank Building was listed on the National Register of Historic Places in 1982.

But over time, department stores became white elephants. The automobile redefined how department stores function. Price and selection became the focus of marketing - not destination. New auto-friendly stores were opened in malls and at the perimeters of the city with ample parking. Unprofitable product lines disappeared and the merchandising floors shrank until the stores themselves first consolidated with national brands and then closed.

By the 1990s, nearly every city had at least one major department store that had closed and many had two or three. And each closing had a multiplying negative affect on the downtown.

Such was the story of Meier & Frank. Locally owned and thriving, it opened a second store in the 1950s in a nearby mall. By the 1990s, they were an anchor in nearly every major mall in the city. These newer stores, more streamlined and smaller, became more and more profitable while the downtown store became less and less. Merchandising shrank, first the space on each floor and then entire floors.

The City of Portland was concerned. According to Ross Plambeck of the Portland Development Commission (PDC), "By location, size and heritage, the Meier & Frank Store played a defining role in the future of our downtown." PDC commissioned dozens of studies to explore re-use. These included rental housing, condominiums, office - and hotel. None of the uses proved to be viable exclusively. Nor was the Meier & Frank Company prepared to leave sell the building.

After nearly a decade of public and private discussion, PDC shepherded a development project that involved "right-sizing" Meier & Frank as a modern retail store, condomin-imizing the building, and adapting the upper floors as a 300-room hotel. The Meier & Frank Store would occupy the lower six floors while Sage Hospitality adapted the upper eight floors as a hotel with the addition of a roof top restaurant.

Sage Hospitality proved to be the catalytic force in the project. Based in Denver, Colorado, the national firm has 300 properties in 39 states and the District of Columbia and includes most major brands. It is focused on two primary functions, hotel management and business development. In this later function, Sage develops from concept to completion, often working with historic properties. Since 1992, when Sage acquired its first urban asset in a blighted neighborhood of Denver, the company has had an affection for urban neighborhoods with projects as far ranging as Rhode Island, Illinois and California. The firm's ability to approach each project uniquely allowed the contemplation and conceptualization of a hotel atop a major department store and to see the opportunities there.

Portland's retail market supported a strong and efficient department store. At the turn of the century, Portland was the 29th largest metropolitan region in the United States and considered one of the country's most livable cities. Its population was far exceeding projections, attracting a strong segment of the well-educated middle and upper income groups. That was reflected in the City having the highest general merchandise per capita expenditure in the country. Retail analysts projected a potential of $722 million in projected sales downtown - with dining being a major component.

More to the point, Portland's downtown had a strong hotel market. Its reputation for livability, temperate climate, and access to mountains and the ocean makes it a popular convention, meeting, and tourist destination. A surge in hotel development in the late 1990s nearly tripled the number of rooms, driving down occupancy rates to the 60% level but not significantly depressing room rates. Within ten years, the market absorbed the growth with both surging occupancy and income per room. In particular, Portland's character seemed to lend itself to the boutique hotel market.

Nonetheless, adapting a 650,000 square foot building is not without its challenges - not the least was financial. In total, the project cost was about $140 million. To be viable, it required New Market Tax Credits, Federal Historic Preservation Tax Credits, Oregon's Special Assessment for Historic Properties, and a variety of loans from PDC.

New Market Tax Credits were created by the Community Renewal Tax Relief Act of 2000. Intended to be a benefit to low-income communities, the tax credit aimed at business development and may be applicable in most urban cores. Unlike some tax credit programs, it operates through a federal allocation. In 2002, the Treasury Department awarded $2.5 billion in projects with another $12.5 billion in credits over the next five years. Somewhat convoluted in its structure, the New Market Tax Credits nonetheless, allow investors to secure credits against their investments.

The New Market Tax Credit works with the more familiar Federal Historic Preservation Tax Credit program. This program allows a developer to receive a federal tax credit (not deduction) for one-fifth of all qualifying expenditures. It requires the building be certified as a historic structure (most often defined as being listed on the National Register of Historic Places) and that the development adhere to the Secretary of Interior's Standards for Rehabilitation. In its most simple terms, the intent of the Secretary's Standards are that the building retain those features that make it historic.

Many states have a similar historic preservation tax credit that functions seamlessly with the federal program and can be applied as a credit against state taxes. The State of Oregon however has an alternative incentive called the "Special Assessment for Historic Properties". Rather than a state tax credit, this incentive allows a developer to freeze the assessed value on the property at a predevelopment level for a 15-year period, thereby substantially reducing the annual property tax levy.

Even so, this tool box did not prove sufficient in making Meier & Frank happen. The project faced timing issues relating to financing. Here the Portland Development Commission was able to facilitate the project with an assortment of seismic, bridge and mezzanine loans.

As the project unfolded, the Meier & Frank Store owned and operated by Federated Department Stores, would retain ownership of the lower six floors of the building, including the basement, and a portion of the subbasement. Sage Hospitality would own the remainder of the building, as well as the exterior facade.

Once the projects financing fell into place, design development became a challenge. Located at the center of Portland's retail core, the Meier & Frank Store building is bounded by the City's light rail on the south and transit mall on the north. Local traffic and development regulations made the addition of parking impossible. However; studies demonstrated that aggressive valet parking could mitigate this limitation.

The second major design challenge was the buildings 40,000 square-foot floorplate. It was necessary to carve out an atrium in the core of the three independent buildings to create interior room windows for the hotel. This atrium became a particular problem as it forced the demolition of the auditorium and tea room on the tenth floor; these spaces were considered historically important and their loss threatened the historic preservation tax credits. The solution was found through negotiation with preservationists to allow the complete documentation of the existing resource, the salvage of select features, and the re-establishment of a new comparable room on the lobby floor.

The third challenge was making the building earthquake proof without destroying the character of the building. The typical approach is to strengthen the building's structural system through shear walls. This technique would have proven both fiscally and physically devastating. The solution was an innovative "viscous-damper" strategy applied to the steel-frame that essentially allowed the building to sway while keeping it intact.

The final challenge was construction management for an enormous and complicated project. The mass transit located on the three sides meant all construction equipment had to be massed and operated from the north side. Additionally, the Meier & Frank Store was to remain open throughout construction. For the store's purpose, they would tackle one floor at a time, shuffling merchandise, and displays through the six floors as each was competed. Meanwhile the demolition and construction for the hotel had to manage not to devastate the Meier & Frank shopping experience, with select work targeted for very specific time windows.

At the end, the new Meier & Frank Store will incorporate 200,000 square-feet of modern merchandising, and the upscale hotel will contain 300 luxury rooms; representing a symbiotic success for Portland taking its downtown mantra of "live, work, and play" to a new level.

John M. Tess is President of Heritage Consulting Group, a firm that assists property owners, attorneys, accountants, financial institutions and investors maximize the value of historic real estate assets through the use of federal tax incentives and other tools. Heritage has represented projects totaling more than $1 billion. Heritage specializes in linking developers with corporate and institutional investors active in historic tax credits. Heritage Consulting Group is headquartered in Portland, with offices in San Francisco and Washington, D.C. Mr. Tess can be contacted at 503-228-0272 or jmtess@heritage-consulting.com Extended Bio...

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