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FAR.V2Floor area ratio – commonly referred to as FAR – is the ratio of a building’s floor area to the size of the parcel on which the building is situated.  The higher the FAR the bigger the building.  A maximum FAR limits the size of the building on a parcel and many jurisdictions, including the City of Portland, have maximum FAR standards that place limits on how large a FAR is allowed within different zones (see City Code 33.510.200).

Portland, however, like many jurisdictions, allows FAR beyond the maximum otherwise allowed by transferring FAR from one parcel to another under certain circumstances.  Generally, how this works is a parcel with a maximum FAR the owner doesn’t intend to use, can transfer the “excess FAR”, i.e., the difference between the amount of FAR the property owner intends to use, and the maximum that otherwise is allowed on the owner’s parcel, to another parcel.  The receiving parcel would then be able to “add” this additional FAR to the otherwise maximum FAR allowed on the receiving parcel and develop a bigger building.  A bigger building generally brings more value to the “receiving” parcel and the “donating” parcel will likely expect some consideration for the transfer of the excess FAR, as the “donating” parcel will enter into a covenant that runs with the land that restricts development on the donating parcel to a FAR less than the maximum otherwise allowed.

The West Park Avenue (“WPA”) Parcel, commonly known as the hole in the ground west of Nordstrom in downtown Portland, was the recipient of excess FAR.  In 2010, Fox Tower, LLC (“Fox Tower”) the owner of property next to the WPA Parcel and including a parcel now known as Director Park, transferred FAR that would otherwise be available to the Director Park Parcel to the WPA Parcel.  The transferred FAR was the difference between the maximum FAR the City Code would allow on the Director Park Parcel and the amount of FAR that was actually being used for the development of Director Park.  The Park is basically hardscape with little building development, so there was a significant amount of excess FAR that was not used.  By adding the amount of excess FAR from the Director Park Parcel to the base FAR for the WPA Parcel, the WPA Parcel was able to achieve 354,000 square feet of floor area, i.e., a building significantly larger then would otherwise have been allowed on the WPA Parcel.

But the City Code in addition to allowing transfer of FAR from one parcel to another also allows “bonus floor area options” (City Code 33.510.210 C.), i.e., a parcel can have “Bonus FAR” if it does certain things including providing a “water feature or public fountains.”  Director Park has a water feature.  The City Code also allows additional FAR when a parcel provides bicycle parking and locker rooms, i.e., a “locker room bonus option” (to encourage bicycling).  The Director Park Parcel did not have any bicycle parking and locker rooms, however, Fox Tower, the previous owner of the Director Park Parcel had reserved an easement on the Director Park Parcel for underground parking.   That easement would allow for the construction of bicycle parking and locker rooms – creating additional FAR opportunity for the Director Park Parcel.

Clearly, the Director Park Parcel did not need additional FAR,   although the WPA Parcel could use more FAR and the Director Park Parcel had those “bonus floor area options”.  By now the Director Park Parcel was owned by the City of Portland.   In order for the WPA Parcel to obtain the benefit of the “bonus floor area options” in May of this year, the three parcel owners – WPA, City of Portland and Fox Tower – entered into an amendment (the “Bonus FAR Amendment”) to the 2010 Agreement that transferred the excess FAR from the Director Park Parcel to the WPA Parcel.  The Bonus FAR Amendment resulted in the City transferring the Bonus FAR available to the Director Park Parcel because of the water fountain to the WPA Parcel.  This “Water Feature Bonus FAR” qualified the WPA Parcel to get an additional 10,000 square feet of FAR.  The Bicycle Parking and Locker Room Bonus FAR, Fox Tower, owner of the subsurface easement on the Director Park Parcel agreed to allow WPA to construct bicycle parking and locker rooms within the easement resulting in a Bonus FAR of an additional 50,000 square feet for the Director Park Parcel, which the City as the owner of the Director Park Parcel transferred to the WPA Parcel.

As mentioned above, additional FAR has value and consideration, which is typically paid by the receiving parcel for the additional FAR.  The WPA Parcel was receiving a significant increase in FAR from the Director Park Parcel and in return, although Fox Tower did not get any of the Bonus FAR, Fox Tower agreed to pay the City $100,000 to be used in maintaining and improving Director Park (Fox Tower and WPA are related entities- with the President of each entity being the same person).

But that is not the only consideration that was provided under the parties “Bonus FAR Amendment” as this Amendment provides if WPA elected to contract for security and janitorial services at its building that it would only contract “with contractors whose employees that directly perform security and janitorial services …. are represented in collective bargaining by a labor union” and “if the WPA employs persons directly to perform such work, WPA shall remain neutral during any union organizing campaign directed at security and janitorial employees …. and shall recognize the union as the representative of such employees upon a showing of majority status by the union through cards signed by such employees authorizing union representation.”

 As stated above FAR has value and it is common when FAR is conveyed from one parcel to another that consideration is paid.  In this case the City as the owner of the donating parcel is receiving consideration in the form of $100,000 to maintain Director Park.  The other consideration granted was the above obligation of the WPA owner to use union labor.  An obvious question is “why” was this included in the Bonus FAR Amendment?   Was this an effort to obtain some assurance that those affected employees might receive a livable wage?  Another question is “how” did this consideration end up in the Bonus FAR Amendment?  Was it proposed by the City?  The answers to these questions are not known, but there is an answer to “who” is benefitted by this consideration.  The “who” is organized labor.

It must have been an interesting negotiation

Understanding the myriad of options available for structuring the construction and design aspects of project development at an early stage in development can give an owner or developer maximum flexibility in setting up the project in a way that will maximize that project’s success – success being defined as consistency with the owner’s expectations and needs.  These options are generally referred to as project delivery methods, or systems.  Some of these methods go well beyond just construction, and may encompass project planning, design, financing, operations, maintenance, and other aspects of the development and completion of a particular facility.  There are often three primary delineations:

(a) where privity (contractual relationships) is established,

(b) how risk (and potentially reward) is allocated, and

(c) the timing of involving key players.

In addition to these differences, there can also be differences in the payment provisions.  One contracting method may be used in conjunction with a variety of payment options, although some methods more typically use certain types of payment arrangements.

This series of postings will discuss some of the more common methods for project delivery and their advantages or disadvantages, starting first with design-bid-build, the focus of this posting.  The next part will discuss design-build and engineer-procure-construct, and the third part will discuss construction manager at risk contracting.

Design-bid-build is generally recognized as the most traditional delivery method.  In this approach, the owner contracts directly with the architect.  After completion of design, the owner then enters into a construction contract.  The architect might or might not have any involvement once the project entered the construction phase. This method is generally very sequenced, which impacts the timing of completion.

The owner is the primary point of privity with the architect and, separately, with the contractor.

This type of scheme can give the owner a great deal of control. For example, it oversees the design and can dictate what the final product should be to a very finite level of detail if it so desires. The owner is responsible for financing the project and, after construction, maintaining and operating the facility (although the contractor would typically provide certain warranties for a limited period of time following completion of the project).

However, with control comes risk.  In most jurisdictions, these contractual lines dictate some amount of risk and liability.  For example, in many jurisdictions, the contractor cannot sue the architect directly for economic losses suffered by the contractor as a result of the architect’s design – instead, the contractor must seek recovery against the owner under the rights and restrictions set forth in the construction contract.  The owner can then decide whether to try to pursue recovery of any amounts it pays the contractor from the architect.  Under the particular law in a jurisdiction, the standard which the owner must meet vis-à-vis the contractor may be greater than the general standard of care owed the owner by the architect.

One of the most common payment methods for design-bid-build is referred to as lump sum or stipulated sum.  Because the design is complete (or should be complete), the contractor can provide set pricing for the construction.  This puts both the risk and reward on the contractor of unexpected costs.  The contractor may not recover additional costs simply because it cost more than planned; conversely, if the contractor is able to do the work for less than anticipated, the contractor gets to keep those additional profits.  The contractor is typically paid draws throughout the construction based upon the percent of the work complete and irrespective of the actual costs incurred during that payment period.

Alternatively, the contractor might be paid based on the cost of the work.  Unless capped, this puts the risk of increased costs on the owner, but also gives the owner the benefit of underruns.

Design-bid-build can be a very effective contracting method when

(a) the owner wants or needs to retain control,

(b) the owner has time for a sequenced approach, and

(c) the owner is comfortable with the standard risk allocations or modifies those allocations by its contract documents.

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