Portland may fail in its inaugural effort to provide homeownership opportunities to black residents displaced from gentrifying neighborhoods north of downtown.

The reason? Hardly anyone wants to live in the tiny, well-appointed condos that government leaders agreed to subsidize.

This spring, the Portland Housing Bureau and regional government Metro approved subsidies of nearly $660,000 for a new development along North Interstate Avenue. The 12-unit project is set to open next year, making it the first opportunity under Portland's newly created "preference policy" aimed at atoning for past urban renewal sins.

But the Jarrett Street Condos haven't resonated with the very people who are supposed to benefit. Units range in size from just 387 to 556 square feet.

"At this point, we're very concerned," said Garner Moody, who is developing the project.

Portland housing officials remain upbeat but emphasize they will recoup city money if the condos aren't sold to approved buyers. Portland has set aside $5 million for other homeownership projects with larger units. Those developments won't open until 2018.

"It is a learning process," said Javier Mena, Portland's assistant housing director. "I wouldn't say that we underestimated or overestimated" demand for the condos. "We didn't know."

City officials' new focus on gentrification in North and Northeast Portland stems from the gradual displacement of black residents in some of the city's historically segregated neighborhoods. Portland leaders allowed urban renewal that razed blocks of homes as far back as the 1950s, then failed to deliver affordable housing promised in 2000 as part of a new Interstate urban renewal district.

But making up for those missteps has proved more difficult than expected.

Two years ago, facing controversy over subsidizing a Trader Joe's grocery store, Portland leaders acknowledged their role in the "destructive impact of gentrification and displacement on the African American community." In the aftermath, officials devised a new housing plan - informally called the preference policy - offering wronged residents a right to return or stay in their neighborhood.

More than 1,000 people applied. Officials set aside 65 spots for the first round of homeownership programs, nearly all of them going to black residents. A qualifying condo buyer can't earn more than about $41,000 a year, individually, or $47,000 for a family of two.

At first, city officials planned to work only with nonprofits Portland Community Reinvestment Initiatives and the African American Alliance for Homeownership. But this spring, officials added more money for the privately developed Jarrett Street Condos.

Portland housing officials don't usually subsidize condos and haven't previously approved so-called "micro units." They initially rejected Jarrett Street but reversed course when the developer scaled back its profit margin, records show.

The project is now rising at the corner of busy Interstate and North Jarrett Street, a three-minute walk to the nearest light-rail stop. A model of density, the three-story building occupies a 3,900-square-foot lot where a small home once stood.

Much of the project has been fabricated at an off-site factory, providing a short construction schedule. That was particularly appealing to city officials hoping to deliver units quickly.

Sales prices are set at about $164,000 to $204,000, roughly half the median price of Portland-area homes. But because the condos are so small, the cost per square foot reaches $425.

"For this project, we are comfortable with the square footage prices," said Andrea Matthiessen, a housing bureau manager, calling Jarrett Street "unique."

What the units lack in size, they make up for in amenities.

City officials have previously touted the project's "high-end finishes," which include quartz counter tops, white tile showers, dark laminate flooring, stainless steel appliances and modern cabinets with soft-close drawers.

Even so, the units aren't popular.

When it came time to tally interest in the city's various housing options by a September deadline, 52 people responded. None listed Jarrett Street as a first choice, records show. Only four picked it as a backup.

Virtually everyone preferred the other projects.

"These units are too small for this pool of applicants," Moody said. "It's not looking likely that we'll be able to sell the units. And that's too bad, too, because it's a swinging deal."

If eligible residents move in, the city's construction subsidy will convert into down-payment assistance for buyers, ranging from about $33,000 to $41,000 off the purchase price. If people don't move in, Moody and his business partner, Michael Coyne, must repay the money.

City officials and Moody say they initially thought the condos would be appealing, despite the small size, based on anecdotal assurances from various nonprofit leaders. They also believed buyers would welcome a monthly mortgage payment equal to, or cheaper than, rent at neighboring properties.

But Cheryl Roberts, executive director of the African American Alliance for Homeownership, said it's not surprising buyers have shown limited interest. Roberts pointed to her own experience as a black homeowner: after raising four children, her grandchildren are now frequent visitors.

Small condos may appeal to some buyers - singles, millennials or empty nesters, for instance - but those aren't necessarily the same people looking for homes through the preference policy.

"When you're talking about targeting the people that were displaced out of Northeast, you're talking about a different folk," she said. "I don't know if that was very well thought through."

At this point, it's not clear what will happen to the Jarrett Street Condos. A decision is expected in the next three months, and Moody may end up walking away from his deal with the city.

"We don't want that to happen," he said.

Moody said he's hopeful 12 buyers may yet emerge from the preference policy. Mena, the deputy housing director, said that remains the goal. But officials already have worked their way through much of the larger 1,000-person list.

If the deal falls apart, Moody must give back the city's nearly $460,000 subsidy. He could also turn down a $200,000 grant from Metro that requires long-term affordability for the condos.

Moody said he could easily sell the units on the open market. In fact, he thinks sales prices could increase by 15 percent.

He's probably right.

A few years back, Portland's urban renewal agency greenlit a nearby condo project with no long-term affordability requirements. Called K-Station, it offers some of the same fancy amenities as Jarrett Street, in a larger building, and it's even closer to light rail.

One condo sold in 2013, for $305 a square foot. It's up for sale again.

The going rate? $491 per square foot.

-- Brad Schmidt

503-294-7628

@cityhallwatch