Portland's development commission is looking to get into operating real estate in a big way, but it does a poor job of making money and protecting city assets on properties it now owns, a new audit shows.

The agency's new real estate strategy is not on track to make the future revenues it's counting on to spur equitable economic growth in the city, an audit released by the Portland Auditor's Office Tuesday found.

The agency pays outside firms to operate most of its properties expected to generate significant income, including a hotel, parking garages, retail spaces and Union Station. But auditors' checks on four of the most significant properties found that the agency failed to get reliable financial information from its contractors, to adequately forecast finances and plan for upkeep at each property.

The market rate for a firm to operate the city-owned Inn at the Convention Center would be $125,000, the audit said, but the commission paid operator Trek Ventures $600,000 for that work in 2016. The city handed Trek Ventures the contract to "babysit" the hotel on a temporary basis 15 years ago and has never sought competitive bids, it said.

Established in 1958 to help drive economic and urban development in the city, the commission for years has used a property tax diversion technique to pay for infrastructure improvements in parts of the city it designates as ripe for upgrades. That funding technique paid for much of the agency's activity, making up 50 percent of the agency's revenue last year.

But that revenue stream is expected to go away in the next 10 years. So the agency has drafted a business plan that relies on increasing its real estate revenue from about $2 million per year to $16.2 million per year by 2031, making real estate the commission's primary source of revenue.

The commission plans to accomplish that by treating its properties as financial investments and setting goals to make returns ranging from 2.5 percent to 6 percent each year, commission director Kimberly Branam said.

But the audit found the agency isn't ready.

The development commission didn't set strategic goals for its existing properties, did not document equity considerations, failed to evaluate each property's risk and did not adequately oversee properties managed by third parties, it said.

The agency, which recently rebranded itself Prosper Portland, acknowledges that its decades of past activity contributed to gentrification and the displacement of African American, Jewish and Italian communities. It pledged to become an "anti-racist multicultural organization" by applying an equity plan to manage all investments as well as how it spends the proceeds.

But it did not actually implement an equity plan for its real estate activities, the audit found. Nor did it document any discussions concerning equity in real estate.

"Staff members said they did not complete equity plans for real estate management decisions because the equity procedure did not apply to real estate decisions," the audit said.

Branam said that the commission requested the audit to get a third party to weigh in on her new strategy. Since Branam started in August 2016, the development commission has hired three new employees with real estate expertise, purchased new software to help track real estate agreements, goals and operations and has started consulting with outside firms to review its real estate policies, she said.

"We asked the city auditor's office to focus their next audit on this so we could have an extra set of eyes scrutinizing how property management has been done in the past," said Chief Financial Officer Faye Brown. "We view this audit as being very helpful to us."

In 2016, the development commission owned or controlled 80 properties ranging in value from $116,000 to $25 million.

It owns lots at Northeast Martin Luther King Boulevard and Alberta Street, parking spaces at Old Town Lofts that it got when a developer defaulted on a loan and the hotel at the Convention Center.

FINANCIAL FAILURES

Last year, the development commission made $5.9 million in gross operating income from 26 properties, at least four of which it paid third-party operators to manage. Its net profits from real estate holdings were just $1.7 million.

Its failure to get accurate records, or in the case of Union Station, records period, contributed to its problems. "In all cases, reports were either inadequate, inaccurate, or operator procedures led us to question the validity of operator reports," the audit said.

Prosper Portland barely monitored the activities of their operators. The commission staff did not go on-site during any of their weekly monitoring. Instead, they conducted "drive-by visits" where they looked at the outside of the building.

The audit found problems at the Convention Center hotel and two other of the city's largest real estate assets in terms of revenue generated.

At Union Station, which generated $1.4 million in revenue but zero profit for the city, the operating agreement was out of date and the development commission did not pay the operator a percent of net profit per the operating agreement. Instead, the city paid the operator for all its costs. The agreement did not require the station operator to give the city financial reports.

The audit said the city should renegotiate the Union Station agreement.

The agency also owns a large parking garage in the Pearl District that has entry and exit gates that the operator called "non-serviceable" and "antiquated," the audit said. When the Station Place Garage had missing revenue in budget reports, neither the city nor the operator looked into it. Parkers were also able to use the garage without paying, the audit said.

Branam and Mayor Ted Wheeler wrote in their response to the audit, "Prosper Portland takes its stewardship of public resources seriously and the audit helps identify areas of improvement that would benefit the agency's operations and delivery of services to the public." Wheeler oversees Prosper Portland.

The development commission's long-term financial stability plan has yet to go before the development commission's board. The board will consider approving the plan in early 2018.

Note: This story has been updated to correct the name of the document that will go before the Portland development commission's board in 2018.

--Jessica Floum

503-221-8306