The obscure nonprofit was founded two decades earlier to hook up Morrow County schools and hospitals to the information superhighway. Suddenly, it found itself providing the same service to Amazon.
Amazon has spent more than $8 billion over the past 10 years building four hulking, windowless server farms along the Columbia River at the Port of Morrow. Civic officials lured Amazon with tax breaks worth nearly $50 million a year, a bonanza for one of the world’s wealthiest companies from a community with just 12,000 residents.
And a bonanza for a few of the public officials, too, as it turned out.
As Amazon solicited elected leaders time and again for tax breaks to fuel multiple expansions, that tiny nonprofit quietly sold its now potentially very lucrative fiber-optic business.
The buyers? Some of the same leaders who had negotiated the tax deals for Amazon – including two of the nonprofit board’s own members.
Some are now crying foul. With new tax breaks, Amazon promises to expand, requiring more fiber-optic services. Some of the very people who negotiated with Amazon now stand to profit from the increased business.
“They set themselves up for a windfall,” said Morrow County Commissioner Jim Doherty. “I have absolutely no doubt in my mind that we would have crafted stauncher deals to begin with had it not been for three or four of these folks who were working these deals, and working these deals behind the scenes.”
Amazon’s arrival in Morrow County, wedged against the Columbia River where Interstate 84 bends south, brought hundreds of jobs and hundreds of millions of dollars in local construction spending. That has been broadly popular.
And yet Amazon also triggered years of bitter recrimination among the small county’s residents and elected officials, playing out in angry exchanges at public meetings and on social media.
People are upset the local utility wants to condemn farmland to make way for Amazon’s power lines. They are angry the generous tax breaks mean less revenue for local schools. And now residents are fighting over what agency should respond when someone calls 911.
Thousands of Amazon computers are guzzling power, forcing a community once sustained by clean hydroelectricity to draw upon dirtier electricity from fossil fuels.
The company’s presence in Morrow County illustrates how unusual Oregon tax breaks from the 1980s now primarily benefit large tech companies, who openly play small communities off one another to maximize their tax savings.
The insider deal for Amazon’s fiber-optic provider is an extreme example of how those giveaways warp the dynamics in a small town. The nonprofit sold the business without seeking any competing bids, using an analysis with disputed assumptions and unusual features that reduced the purchase price.
Neither the nonprofit nor the buyers of the fiber business would discuss the transaction in detail. Amazon declined to answer written questions about whether it was aware that its fiber-optic provider was owned by some of the same port and county officials with whom it negotiated its tax and land deals.
Amazon said only that it acted ethically in negotiating its tax breaks and in its dealings with the fiber-optic provider and local officials: “Any suggestions to the contrary would be false,” Amazon said in a written statement.
And yet Amazon is benefiting mightily from the deals it cut with local officials, including some of the same officials who now own Amazon’s provider. Likewise, its continued expansion in Morrow County will enrich some of those same public officials who helped arrange the land sales or negotiated the tax breaks.
Insider Deal
Morrow County sits about 160 miles up the Columbia River from Portland. It’s mostly farmland, with fields stretching south through rolling hills that are now populated with acres upon acres of windfarms whose turbines spin gently in the country breeze.
Geographically remote, Morrow County nonetheless plays an essential role in city life downriver. A natural gas plant at the Port of Morrow generates electricity for Portland General Electric, Tillamook Creamery has a massive cheese factory there, and a landfill in Boardman is the final destination for most of Vancouver’s garbage.
And then there are Amazon’s data centers. The computers inside stream music and movies to homes throughout the Northwest and store reams of electronic data for Amazon Web Services’ corporate customers.
Morrow is Oregon’s second-largest port, trailing only Portland. It’s a major economic hub and a growing source of controversy. The Oregon Department of Environmental Quality fined it $1.3 million in January because wastewater applied in nearby farms contained excessive nitrates, potentially posing a health risk to nearby residents.
While Morrow County is expansive, more than 2,000 square miles, it has just 12,000 residents. Many people play multiple roles in making the community run. Boardman’s police chief, for example, is also the assistant city manager and president of the port commission.
Such overlapping roles are at the heart of the issue with Amazon’s tax breaks.
Two decades ago, civic leaders in Morrow County launched a nonprofit called Inland Development Corp. to bring high-capacity fiber lines to government offices and health care agencies.
Later, Inland expanded to serve private businesses, too, and eventually Amazon – which opened its first data center at the Port of Morrow in 2011 and needed the fiber to connect its computers to the internet. To preserve its nonprofit status, Inland created a subsidiary – Windwave Communications – to serve private businesses.
State records show that Windwave’s revenues soared as Amazon expanded, rising from $3.1 million in 2013 to $9.8 million in 2017. The records don’t show how much of that business came from Amazon.
Then, in 2016, Inland’s board of directors began planning to sell the Windwave business. Rather than put it on the market to fetch the best price, they voted to sell it to people they already knew.
All four buyers held positions on Inland’s board or Windwave’s board, before its sale. Two continue to serve on Inland’s board as well as the port commission. The others are a member of the county commission and the port’s former director.
All four played central roles in greasing Amazon’s expansion in Morrow County in the years before they bought Windwave.
As port director, Gary Neal helped arrange land sales to the company.
The Port of Morrow approved land sales and tax breaks in 2017, even as port commissioners Jerry Healy and Marv Padberg were negotiating to buy Windwave. (The port did not provide records showing whether or how Healy and Padberg voted. After completing the acquisition, they sometimes recused themselves from voting on land sales to the tech giant after completing the acquisition and sometimes did not.)
Morrow County Commissioner Don Russell, Windwave’s fourth buyer, voted to approve the tax breaks in his role on the county commission and led the enterprise zone board that negotiated the incentives.
After acquiring Windwave years later, they stood to benefit personally from that growth as Amazon bought more fiber for its new data centers. Windwave’s financial results ceased being public after its sale, so it’s not clear how much they have profited from owning the business, or how much more they could reap personally from Amazon’s continued expansion.
Past financial statements suggest Windwave’s contracts with Amazon provided no more than a few million dollars a year in revenue, and perhaps somewhat less. That’s a tiny number for a company of Amazon’s size – it reported more than $470 billion in sales last year.
But the revenue would be very meaningful to Windwave and the four local officials who bought it. The company reported $1.6 million in profits in 2017, according to documents submitted to the state. Even if sales didn’t keep growing, the profits could have equaled the purchase price within two years.
And they stand to continue profiting, so long as Amazon keeps expanding. The company is currently negotiating new tax breaks for five additional data centers, collectively worth $12 billion.
Faulty Assumptions
Inland began the process of selling Windwave in 2016. Rather than set the price on the open market, the nonprofit contracted with a Portland firm called Cogence Group to establish Windwave’s value.
Cogence’s analysis put the acquisition price at $1.9 million. But the Oregon Department of Justice, which reviewed the deal at Inland’s request, noted that 2017 federal tax cuts approved after the initial valuation would make the business more profitable because it would pay fewer taxes.
So Cogence redid its math in light of the tax law changes and came up with a new price: $2.6 million, almost 50 percent higher than the initial figure.
Inland then went ahead with the deal to sell Windwave, its biggest asset. In filings with the state, the nonprofit explained that it chose to sell because the Windwave business was too risky for the nonprofit.
It’s very unusual for a nonprofit to sell assets to members of its own board, but it’s not necessarily improper – provided the transaction is in the best interests of the organization. It’s also permissible for the nonprofit to hand select the buyers instead of seeking the highest offer for its asset so long as the deal aligns with the organization’s mission, according to experts on Oregon nonprofit governance.
Inland’s board said it chose to sell to familiar buyers rather than seeking the best price on the open market because the buyers shared “Inland’s mission and principles.”
The five-member board said it anticipated the buyers would continue serving existing customers and retain workers. But the sale agreement did not require that — Inland declined to say why not — and it’s not clear whether Windwave has.
Additionally, board members wrote in their filing with the state, putting the business on the market could potentially expose Windwave’s client list to competitors who might then poach customers instead of actually buying the business.
Inland’s board declined to comment on Windwave’s 2018 sale. Several features of the transaction, though, undercut Inland’s rationale and raise questions about the deal itself:
- When the purchase price for Windwave went up, at the insistence of state authorities, Inland loaned Windwave some portion of the purchase price at 2.75 percent annual interest. That was far below market borrowing costs for a small business facing significant operating risks and below the 10 percent cost of debt identified in the valuation documents.
- When Cogence assessed Windwave’s value, it discounted most of its 2016 financial results from its analysis because, it said, the fiber provider’s strong revenue growth that year was an outlier. Events proved otherwise: Documents associated with the sale show revenue increased 36 percent the following year, to nearly $10 million. The sale didn’t take place until March 2018, but Inland didn’t reconsider the sale price even though the new financial data showed the assumptions in the original valuation were incorrect.
- The two buyers who sit on Inland’s five-member board recused themselves from voting on the sale. One other member of the board, who was not among the buyers, says he didn’t attend the meeting when the vote took place and didn’t vote on it. That would leave just two of the five members voting on the deal, short of the quorum required in the nonprofit’s bylaws. Inland declined to address the issue or provide records that show at least three members did participate in the vote.
- While Inland’s board claimed it chose buyers who would continue serving local customers and keep Windwave’s employees aboard, sale documents indicate it did not include any provisions in the sale agreement to ensure they followed through.
- The sale agreement did include a requirement that neither party notify customers of the transaction and also required that they also not disclose it publicly or in a press release.
Word got out anyway and became a frequent topic of conversation and speculation among Morrow County residents. The Oregonian/OregonLive obtained details of Windwave’s sale through a public records request to the Oregon Department of Justice. The exact amount the buyers ultimately paid isn’t clear in the documents, though.
The sale documents describe a $2.2 million “promissory note” and indicate Inland would loan Windwave money at 2.75 percent interest in conjunction with the deal. But they don’t specify the size of the loan or whether the buyers paid the full $2.6 million specified in the updated valuation report.
Two finance experts who reviewed the transaction and Cogence’s methodology for valuing Windwave, at the news organization’s request, say it conformed with basic financial principles. But they also said the consulting firm made a series of assumptions in its approach that had the effect of substantially reducing the purchase price and favoring the buyers over the seller.
And the experts wondered why Inland didn’t include common provisions in the transaction that could have provided it additional compensation if Windwave outperformed Cogence’s extremely conservative assumptions.
“They checked all the boxes, but particularly as I read through the valuation, every single decision they made broke toward: Let’s make this worth less,” said University of Washington finance professor Jarrad Harford.
Cogence’s estimate of Inland’s future cash flow “was as low as possible,” Harford said, excluding the 2016 financial results and assuming the business environment in eastern Oregon, competition from bigger companies and the direction of the telecommunications industry all would work against Windwave.
Separately, Harford said it stands out that Inland agreed to loan Windwave money for the transaction at 2.75 percent interest. That’s far below market rates. And in Cogence’s valuation, they estimate Windwave’s cost of debt at close to 10 percent because the business has a high degree of risk.
That’s an inherent contradiction, Harford said. Further, he said, the loan ties Inland to Windwave for the duration of the payments. But Inland had claimed it was selling Windwave because the portion of its fiber operation that served businesses was too risky.
“Then the last thing you would want to do is seller financing. You’re on the hook then,” Harford said. “You haven’t actually offloaded the risk.”
The nature of the transaction, with the nonprofit board selling to some of its own members, is inherently complicated, Harford said. While hiring an outside firm to value the Windwave business could theoretically overcome any conflicts of interest that might emerge, he said the assumptions made in the actual valuation undercut that.
“The totality of it raises serious questions,” Harford said.
Dave Garten, who teaches business strategy and acquisitions at Portland State University, echoed Harford’s conclusions about Windwave’s valuation.
“Their analysis, it stands up. It’s just at every fork in the road it was very conservative,” Garten said. “Everything about this is making it easy for the buyers.”
If he had been designing this deal, Garten said he would have approached it completely differently. Rather than set a fixed price, Garten said he would have built in conditions to account for the possibility that Windwave might outperform the “extremely conservative” estimates in Cogence’s conclusions.
For example, Garten said, Inland could have structured the deal to require additional payments if Windwave outperformed those forecasts. By making gloomy assumptions about Windwave’s prospects, and not accounting for the prospect of a windfall from Amazon or other revenue, he said Inland potentially left a lot of money on the table.
In transactions like this, where some board members are playing multiple roles, Garten said it’s especially important to be clear about how everyone’s incentives relate.
“You need extra transparency,” he said. “That was the biggest issue for me, is there was a lack of transparency.”
Cogence declined comment on its Windwave valuation.
Susan Gary is professor emerita at the University of Oregon’s law school, where she specialized in nonprofits, trusts and estates. She said state law requires that any time a nonprofit disposes of an asset, the transaction has to be fair to the organization making the sale.
“When you’ve got insiders that are buying the assets, which is the case here, you’ve got to be really careful,” Gary said.
Oregon law provides a “presumption of fairness” in business dealings, provided nonprofits take all the appropriate steps to ensure they follow a process to ensure that fairness.
When issues arise in such transactions, Gary said they often relate to whether the nonprofit received fair value for its assets. She said the fact that the Oregon Department of Justice reviewed the proposal and signed off on it after requesting the adjustment for the federal tax cuts is an indication Inland cleared that bar with the Windwave sale.
Still, Gary said it’s potentially concerning if only two of Inland’s five board members voted on the deal. And she said Oregon law generally bars nonprofits from making loans to their board members. The interest rate Inland set for the loan could also be an issue.
“The fact that it’s below market interest, I can’t think of any reason it’s not a problem,” Gary said.
Oregon law does allow nonprofits to loan to a separate entity owned by the board members, according to Gary. If the loan went directly to Windwave, or some other business entity, it likely didn’t violate Oregon law.
“Some of these things raise questions. It certainly doesn’t mean that they’ve done anything legally wrong,” Gary said. “It may be that in their judgment this is what’s best for the nonprofit itself.”
Amazon's Growing Influence
Windwave’s buyers negotiated their deal to acquire the business concurrent with community negotiations over new tax breaks for Amazon, its customer. Amazon struck five new tax deals in Morrow County from 2016 to 2020.
The tax agreements come under Oregon’s enterprise zone program, which provides property tax exemptions for large capital investments. The deals have saved Amazon $161 million over the past five years, including $47 million last year.
The port and county signed off on the deals while three of Windwave’s new owners were serving on their commissions. A fourth owner, Gary Neal, was port director when the port sold Amazon land for its expansion. After Neal retired, his son Ryan took over the job. Ryan Neal died earlier this year after contracting COVID-19.
Inland’s five-member board consisted of four local businesspeople, two of whom were among Windwave’s buyers, and Rep. Greg Smith, who represents Morrow County in the state Legislature.
Jill Parker, the president of Inland’s board and president of Old West Federal Credit Union in John Day, initially said she would answer a list of questions about Windwave’s sale. After reviewing the questions, though, she said her colleagues on Inland’s board had instructed her not to respond.
Another Inland board member, Rich Devin, told The Oregonian/OregonLive he wasn’t at the board meeting where the nonprofit approved Windwave’s sale and didn’t vote on the transaction. Then he hung up the phone.
The past year has been ferociously contentious in Morrow County politics, with residents and officials in the small community sparring with one another over the nitrates scandal, school funding, emergency services and county staffing. A recall campaign now under way against two commissioners – one of whom is due to leave office at the end of the year — reflects growing bitterness.
Amazon’s presence plays a central role in many of the fights.
For example, the city’s fire department and the county’s health district are sparring over who should respond to ambulance calls. It’s created a weird situation where two ambulances – one from the fire department, one from the health district – sometimes respond to the same 911 call.
Fueling the debate, in part, are Amazon fees that currently go to the health district – but that some officials want redirected to the fire department to fund the city ambulance service.
This is the kind of infighting that’s often endemic in small-town politics. But usually you don’t have a trillion-dollar company right in the middle of it.
Windwave’s buyers included Don Russell, the Morrow County commissioner, who owned a local oil company before selling the business to a company owned by Devin. He served on the port commission when Amazon began building in Boardman, then joined the county commission. He is also president of the enterprise zone board that negotiates with Amazon for its tax breaks and distributes payments the company makes that partially offset those incentives.
After buying a minority share of Windwave, Russell resisted calls that he recuse himself from votes related to Amazon or its tax breaks. At a 2019 county hearing, he argued that Windwave wasn’t assured of winning Amazon’s future business and so he didn’t have to step aside.
Earlier this year, though, Russell changed course and said at a county commission meeting and at an enterprise zone board meeting that he would begin recusing himself from such discussions. He said he expects Windwave will get a share of the business from the huge new data centers Amazon has planned.
Contravening that pledge, Russell voted this spring against Morrow County hiring an outside attorney to negotiate with Amazon. He said negotiations should be handled by the enterprise zone board.
And Russell’s overlapping responsibilities remain a point of contention.
During an April public meeting over a proposed school bond, conversations between Russell and others at the meeting became increasingly heated over Amazon’s tax breaks, which would have exempted the company from most of the tax obligations it would otherwise face had the school bond passed. (Voters rejected it in May.)
When one persistent critic repeatedly attacked Russell’s role in Amazon’s tax breaks, he became irate.
“If you’re going to interrupt me, if you’re going to interrupt me why don’t you and I just have a conversation outside?” Russell shouted, followed by an expletive.
In a subsequent phone interview, Russell denied that he was challenging his critic to a fight: “Oh, hell no,” he said. Instead, Russell said he was responding to being interrupted.
In the interview, Russell declined to discuss his investment in Windwave, which he called his “private business,” except to describe it as “an opportunity that came along.”
But Russell defended Amazon’s tax breaks and his role in approving them, noting the company’s huge economic contribution to the community.
Amazon says it employs more than 500 people in Morrow County and pays an average wage of $76,000 annually, far above the county’s $60,000 average. Russell said Amazon and other tenants at the port have played an important role in diversifying the local economy.
“We knew the wages were going to be high on the employees that qualified,” he said. “And that has happened. Amazon pays really high wages for this area and probably anywhere in the state of Oregon.”
Windwave’s other buyers either declined comment or did not respond to messages left through Inland and Windwave.
To critics, the question isn’t whether Amazon provides an economic benefit. It assuredly does, they say.
Their question is whether the benefit could have been greater, and generated more tax revenue for schools, public safety, economic development and other services.
“I think that there’s been too many other potential agendas in the room, pushing for certain things. As incentives were given, it wasn’t always clear what other benefits people at the table might be receiving,” said Melissa Lindsay, who serves with Russell on the Morrow County commission. She has campaigned for a more thoughtful approach in the community’s negotiations with Amazon.
“It was always troubling to me to look around the table and feel that pressure,” said Lindsay, who lost her re-election bid in May by 26 votes.
Windwave’s sale to county and port leaders created an inherent conflict, according to Doherty, the third member of the county commission. He said that’s especially true because two of the buyers also had leadership roles at Inland.
“They were looking after the nonprofit and when they (saw) the opportunity coming forward, there’s no getting around that they made themselves the offshoot of the parent company,” Doherty said.
The whole affair “leaves a real bad taste in one’s mouth,” he said, “just knowing how things came to be.”
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