Courtesy / Porta & Co.
340 Cumberland Ave. (pictured) and nearby 380 Cumberland Ave. in Portland were purchased for $8.6 million as the second half of a 1031 exchange.
October 30, 2017
A deal worth $20 million helped by 1031 exchange
Courtesy / Porta & Co.
This 41,235-square-foot retail plaza at 274 Western Ave. in Augusta was the start of a 1031 chain that amounted to over $20 million in total transaction volume.
A chain of 1031 exchanges involving properties in Augusta and Portland resulted in over $20 million in total transaction volume. And the chain illustrated how, even with different client criteria and tax implications, a deal can make sense for two parties on opposite ends of the transaction.
Joseph Porta, owner of Porta & Co. in Portland, handled the various transactions.
The chain was started by a client Porta represented who had a significant closing on a winery in California and had a 1031 exchange requirement.
Under IRS rules, a 1031 exchange allows a taxpayer to defer capital gains by exchanging similar, qualifying types of property.
The client, Casey Investments LLC, had owned a stake in the California winery for 20 years, and there would have been a considerable tax penalty for not doing an exchange. To further complicate things, the manager of that real estate capital passed away, leaving his wife and son to manage it. The family, which now lives in Falmouth, wanted stable income with low risk of turnover on a long-term basis.
Enter the suitable exchange property
Porta was familiar with 274 Western Ave., a newly constructed 41,235-square-foot premium retail plaza in Augusta.
The center sits on a five-acre site that was formerly the Kennebec Journal printing building when it was purchased five years ago by Northland Enterprises, a commercial real estate development company in Portland that tore down the KJ building and built the retail plaza. Since then, Porta has helped Northland procure leases for some of the strongest national retailers in the Northeast.
Tenants include Five Guys Burgers & Fries, Starbucks, Supercuts, US Cellular, Men’s Wearhouse, Goodwill and a land lease to Bangor Savings Bank, according to Porta.
“Retailers have reported strong numbers and the long-term security of the tenancy made it an ideal property for a 1031 exchange buyer who prioritized cash flow and lease term,” Porta wrote in an email.
Although the retail plaza wasn’t being marketed for sale, Porta suspected that Northland Enterprises had a strike price that could be reached if the buyer’s cash position was paired with the right financing package.
“So we put the transaction together quickly, and the folks at TD Bank in Portland stepped up and performed remarkably,” he said, reached by phone.
In a deal that closed in early May, Casey Investments LLC purchased the property for $12 million. The asset has a capitalization rate of 6%.
Portland properties: An opportunity to add value
Coming out of that transaction, Northland Enterprises had its own exchange requirements that needed to be satisfied in order to justify the Augusta sale. The company allocated a portion of the proceeds to a development it has underway at 1945 Congress St. in Portland, which includes building a 25,000-square-foot building to be owned by Northland and leased to Clark Insurance.
And Porta identified a handful of off-market properties, two of which were at 340 and 380 Cumberland Ave. in Portland, that would satisfy Northland’s acquisition criteria to purchase and add value.
The Cumberland Avenue properties were previously represented by Tony McDonald of CBRE|The Boulos Co.
So Porta worked with McDonald to submit the unsolicited sales proposals to the owners, A & M Partners. Those deals closed Sept. 28 for a total of $8.6 million, with a roughly 7.5% cap rate on existing income and just over $100 per square foot.
340 Cumberland Ave. is one of the city’s tallest buildings and the location of Portland Data Center. The 44,000-square-foot, 10-story concrete-and-steel building is on just over a quarter-acre. The building will stay as is, with four floors rented to data service providers. Five open floors, with 14-foot ceilings and panoramic views, are available for lease, said Porta.
“If you’re a data user, that’s the site for you,” he said. “But we think the balance of the space could be other types of special purpose uses that fall between or outside of ‘office’ and ‘retail.’ It has great views, with open-floor concepts, and is centrally located in town. I could see boutique office uses or a type of special service provider who wants to create a unique space in town.”
380 Cumberland Ave., one block from 340 Cumberland, includes a two-story, 29,000-square-foot building, on just over an acre. The space is occupied by tenants with 10-year leases, but land on the corner of Shepley and Casco streets is available for development. Northland is considering mixed-use commercial development there, perhaps with a multi-family or housing component, said Porta.
“What we like about this is, it fits the core competency of Northland — developers who are looking to add value,” Porta said. “They don’t need to pay a premium for an asset that is already positioned optimally for its highest and best use with long-term leases achieving stable cash flow. What they like to do is to re-invest in an asset to make it more valuable over the long term. Therefore, it made sense to exchange out of Augusta for over $300 per square foot and exchange into Portland-based real estate at around $100 per square foot. When you’re buying real estate at $100 per square foot in Portland, there’s room to add revenue. That was a high-level factor driving these transactions.”
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