Quality medical office building in Portland sells for $7.2M
Courtesy / Porta & Co.
A 24,524-square-foot medical office building in Portland ticked the right boxes for location, tenant, quality and return on investment.
A high-quality medical office building anchored with a long-term lease by Mercy Hospital sold for $7.2 million in an off-market deal.
Baxter 43 Holdings LLC bought 43 Baxter Boulevard in Portland from Chabot Street LLC. Joseph Porta of Porta & Co. brokered the transaction.
The property comprises a 24,524-square-foot building and 100-car parking lot on a 1.6-acre parcel.
The seller, Chabot Street LLC, owned the property for at least 25 years, said Porta. The building was gutted and rebuilt in 2014 to coincide with Mercy Hospital signing a 15-year lease for the free-standing medical office building.
No drama
“The seller has a large portfolio of real estate assets and was open to the opportunity for a strong exit if I had the right client,” said Porta. “He said, ‘Joe, if you can get $7.2 million with no drama, I’ll sell it.’”
He continued, “A lot of people who have held assets for a long period of time, or are in need of refinancing, are open to discussing a sale. If you can figure out how an asset can be organized to work for specific needs of a buyer’s balance sheet, then you can provide two solutions at once.”
The value of the property is enhanced by its proximity to the entrance of a busy Hannaford supermarket.
“Hannaford will always drive trips to the location,” Porta said. “It’s an optimal site for many different uses.”
It’s near I-295 and convenient to greater Portland. An abundance of surface parking makes it a scarce commodity in Portland these days, he added.
Room for upside
The $288-per-square-foot value for the building, sitting on 1.6 acres with a quality long-term tenant, “is a safe cost basis with room for upside,” he said. “I like the value of the asset.”
He also had a buyer in mind who was in need of bonus depreciation, which is a tax incentive that allows an immediate business deduction on the purchase price of certain assets.
The one potential soft spot of the deal was an initial capitalization rate of 5.8% which, by itself, is too low to entice the buyer, he continued.
The capitalization rate, or cap rate, is the ratio of net operating income to asset pricing. A cap rate of 5.8% is not enough yield for most investors, Porta said.
But a package that included an aggressive loan-to-value ratio, a scheduled increase in lease income before the end of the calendar year, and a creative approach from Mechanic Savings Bank, facilitated by commercial loan officer Justin Laverriere, helped enhance the performance of the transaction. To clinch the deal, Porta put together a short-term reserve to bridge a funding gap related to lease income.
All told, Porta said, the deal is expected to yield a 15% after-tax return on equity and a potential internal rate of return of over 35%.
Internal rate of return is the annual rate of growth an investment is expected to generate.
“We think that solving tax problems to create alternative yield is just as important as increasing revenue,” he said. “The investment is secured by an asset with a below-market lease rate. And we’re only going to have to think about replacing income in 2029 as a worst-case scenario. At that point, I expect the remaining cost basis to be quite safe.”
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