Dec. 11, 2007 - The hotel above downtown Portland's renovated Macy's store is $15 million over its construction budget and its developers want an infusion of public money to finish.

Sage Hospitality Resources of Denver has defaulted on its construction loan because it can't cover what's now a $133 million renovation. The developer has until Dec. 31 to plug the budget gap.

On Wednesday, Portland's urban-renewal agency, the Portland Development Commission, will consider boosting its low-interest loans by $3 million to $16.9 million.

The rising costs fall primarily into two categories: Unexpected construction trouble and Sage's recognition that its original design wasn't upscale enough.

The construction headaches include a false 14th floor that had to be replaced. They continued when Sage found lead paint on columns obscured by concrete.

The design upgrades include local art, a fancier atrium, nicer plumbing fixtures and stone and glass in the grand staircase.

The new designs would attract more guests and boost revenues, said Ken J. Geist, a Sage executive vice president.

"As with many historic properties, you do not discover things until you start ripping it apart," Geist said.

The Nines hotel is a major piece of Portland's ongoing efforts to revitalize downtown. The 1909 Meier & Frank building on Southwest Fifth Avenue was considered an icon in disrepair for years.

In 2005, the city brokered a public-private deal that called for Macy's to renovate the bottom floors and Sage to put a hotel on the top floors. City officials hoped the renovation would spur other landowners to reinvest in downtown.

Ross Plambeck, a senior project coordinator at the PDC, says the city's extra investment would help Sage build a higher-valued hotel. In turn, that would bring the public benefit of a spruced up downtown and higher property taxes to the city.

Unique challenges

Geist says Sage knew The Nines came with some risk.

Sage builds hotels across the country and has done 12 other historic renovations.

The Nines, though, has some unique challenges.

Sage hired SERA Architects and Hoffman Construction, both of Portland, to help identify risks -- such as lead or earthquake upgrades -- in the historic building. But Geist said Macy's wouldn't allow Sage to demolish part of the building to look inside the walls while the department store tried to sell handbags and sweaters on the floors below.

Consequently, Sage and its consultants had to settle on a best guess on renovation costs.

It turns out that they were off.

Workers discovered the false floor that had to come out.

The walls turned out to be different from the plans and required Sage to redesign its earthquake-safe improvements.

Sage also needs more money to meet the silver environmental rating from the U.S. Green Building Council, required on city-subsidized projects.

The company also had trouble outside the building.

Rising oil prices meant Sage had to pay more to ship furniture from China. "The price of oil just killed us," Geist said.

Switching hotel line costly

Sage's decision to turn more upscale brought higher than expected costs, Geist said.

It first planned to make the hotel a Marriott Renaissance. But Sage switched to the Starwood Hotels & Resorts luxury hotel line so it could market a boutique-type brand unique to Portland, said Plambeck of the PDC.

Sage had never worked before with Starwood's luxury line, which requires nicer finishes, nor had it done such a large, seven-story atrium.

Both contributed to higher costs.

Geist said he thought the Starwood line would cost the same as Marriott. "As we got into the details, we realized it was more expensive," Geist said.

To meet the Starwood standard, Sage added pricier showerheads, shower values and faucets for $125,000, or about $375 a room. It hired local artists to outfit the hotel.

Sage spent $955,000 on design and architectural consultants. Their suggestions brought $200,000 in upgrades to the atrium. Without the changes, the atrium was "just stark, boring, uninviting, uncomfortable," Geist said, "In order for us to be successful, we had to fix them."

Sage also expanded its rooftop lounge into a bigger restaurant that added $1 million to the costs. Sage says the restaurant, called "Departure," will provide a "hook" to attract more guests and food spending.

$16.9 million in city loans

Prudential and JP Morgan Chase will finance most of the hotel.

JP Morgan Chase pledged $8.4 million to fill the cost overrun. Sage plans to put in $2 million. New historic tax credits will attract another $1.6 million in private money.

The Portland Development Commission's extra $3 million loan focuses on environmental and safety improvements. That will pay for dual-flush toilets, storm windows and a high-efficiency water heater. About $810,000 would go to remove lead paint, the single biggest city-funded expense.

Put together, the city's share of the $133 million project would be $16.9 million in loans. Federal tax credits to save historic buildings and aid poor neighborhoods will help attract another $35.5 million in private money for the luxury hotel. (The Nines falls within a low-income census tract so it qualifies for federal aid.)

The PDC's board is scheduled to approved the extra loan at its 1 p.m. meeting Wednesday. The item is on the consent agenda, a time typically reserved for votes that are expected to be easily approved.

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