Friday, March 12, 2010, 9:37am PST | Modified: March 12, 2010, 9:43 AM

Why the Sustainability Center is not sustainable business

by John Charles
Cascade Policy Institute

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Oregon is known as a place for dreamers. This is clearly the case with the proposed Oregon Sustainability Center, or OSC, a mixed-use high-rise on the edge of the Portland State University campus. The current estimated price tag for the OSC is $120,929,000, for 222,800 gross square feet of space.

This is not remotely feasible with standard debt or equity financing, so the proponents are planning to subsidize it through various sources such as Congressional earmarks, tax increment financing, tax credits and grants. The largest source of committed funding is $80 million in revenue bonds from the Oregon University System. In order to pay back these bonds from rent income, the OSC will have to charge at least $32 per square foot, roughly a 27 percent premium over Class A office space currently available in Portland. Moreover, they would have to get this or higher rent for 35 years in order to break even.

What happens if revenues fail to cover operations and debt service? Oregon taxpayers will be on the hook. And the risk of failure is high. The Moyer tower was halted last year in mid-construction even with 50 percent pre-leasing; the OSC has little or no space pre-leased.

One reason the cost of the project is high is that the advocates plan on meeting The Living Building Challenge, which requires that all energy and water needs be met from the on-site footprint of the building. But this goal, and the whole net zero obsession, is silly. It ignores one of the most important insights in the history of economics: the idea of comparative advantage, popularized in 1817 by David Ricardo.

The Living Building Challenge stipulates that all building materials be sources within a certain radius of the project in order to reduce impact from transportation. But comparative advantage dictates that in any given circumstance, a product or service will not be efficiently produced (if it can be produced at all) from on-site or nearby resources. It is in everyone’s best interest to focus on producing things that each person does exceptionally well — the individual’s comparative advantage — and import goods from places where others have their own special skills. This process drives technological innovation and reduces production costs.

In the context of the OSC, there is no inherent reason why the building should be designed to produce its own water and energy. More than 100 years ago, local leaders decided that the most efficient way to provide clean drinking water for Portland would be to build several storage facilities in the Bull Run watershed, and use gravity to pipe it down to Portland. That system continues to make sense today.

The Pacific Northwest also has some of the cheapest, cleanest energy in the world through the Columbia River hydropower system. Trying to generate electricity from solar energy on a Portland building will be extremely expensive and unreliable. The OSC proponents know this because they anticipate at least $3.5 million in tax credits and grants to help finance the photovoltaic array. They would be better off just purchasing power from external sources and trusting that in every case, the provider already has market and regulatory incentives to be as efficient and non-polluting as possible.

Despite all the hype, the OSC is just a proposed building. There will be no benefits for those of us forced to pay for it through higher taxes. In fact, it will create a net loss for the community; any subsidized project destroys economic wealth by shifting capital from higher-value enterprises to those deemed uneconomic by the market. If this strategy were applied on a mass scale, it would reduce us all to poverty.

By definition, that is not a sustainable business model.

John A. Charles, Jr. is President & CEO of Cascade Policy Institute, a nonprofit policy research center based in Portland.