AUGUSTA — The new owner of the soon-to-be-former MaineGeneral Medical Center hospital on East Chestnut Street plans to spend $23 million on renovations to lure in new tenants to the building.
But only if the city provides a generous, 20-year tax break to help make it happen.
Mayor William Stokes said he believes if Augusta East Redevelopment Corp. hadn’t stepped forward to buy the building, no one would have. And without a tax break, known as tax increment financing, the prominent seven-story, 317,000-square-foot building on the city’s east side would likely stay vacant and deteriorate, he said.
With the nonprofit MaineGeneral Health previously owning the building, the city wasn’t getting any property tax revenues from the property anyway, Stokes noted.
“In my mind, without this TIF, there’s no way anyone’s buying this building,” Stokes told city councilors when they discussed granting a tax break for the project during a meeting last week. “This building would be a white elephant in Augusta.”
Augusta East Redevelopment Corp., a subsidiary of local firm Mattson Development, recently purchased the East Chestnut Street building for $2.5 million from MaineGeneral, which is consolidating its core operations into a new, regional hospital under construction in north Augusta. The company is owned by Hallowell resident Kevin Mattson and his partners.
Mattson’s development firm is seeking to initially get back 100 percent of the property taxes it would pay to help defray the cost of converting the large building into something that could draw new tenants to fill the space.
As tenants are found to occupy space, the developer would get correspondingly less tax revenues returned to it by the city over the life of the proposed 20-year agreement, shrinking to 50 percent of taxes returned, once 95 percent of the developable space in the building is occupied.
The tax break proposal is scheduled to be discussed at a public hearing set for Feb. 21.
The $23 million the firm would spend on the project would be private investment, not a bank loan, according to William Dowling, a representative of Augusta East Redevelopment Corp. and a former Augusta city councilor and mayor.
That’s because, according to City Councilor Michael Byron, a former commercial lender, no bank would touch a deal as risky as redeveloping the old hospital.
“This deal is not bankable, that’s why they have to go after private money to fund this,” Byron said when the council discussed the tax break on Thursday.
MaineGeneral Medical Center will pay rent to Mattson to remain in the building until the opening of its new $312 million, 192-bed hospital near Interstate 95, off Old Belgrade Road. The regional hospital is designed to combine inpatient functions of its Augusta site as well as its hospital at the Thayer campus in Waterville.
The new hospital, to be called the Alfond Center for Health, is scheduled to open in November.
Dowling said that nationally, when hospitals are vacated, the buildings are almost never redeveloped for new uses because of their layout. They have individual bathrooms in each room, and specialized infrastructure systems, making redeveloping them especially expensive, he said.
Without a tax break, no developer would be able to afford to take the project on, Dowling said.
“You’d have to tear it down, or you’d have a vacant building, attractive to vandals,” he said. “If not for us, that building would go undeveloped.”
Councilor Jeffrey Bilodeau said he wanted proof that, without the tax break, the building wouldn’t be redeveloped, beyond taking the word of the developer.
Stokes pointed out that before striking a deal with the developer, MaineGeneral had tried to auction off the building but received no interest whatsoever.
If the property were taxed fully and reflected the $2.5 million the firm paid, it would generate about $43,000 a year in property taxes, according to city estimates.
But officials and Dowling noted it could be worth a lot more in future tax revenue if the firm is successful in investing $23 million and can increase its value.
“If we take that same building, and put $20 million into it, it’s no longer $43,000 (a year in taxes),” Dowling said. “The value of the building increases at the same rate the (occupied) square footage does. This is going to incentivize me to make this work, and incentivize the city because they can see the growth as it takes place, one step at a time.”
Councilors have not taken any action on the tax break proposal, which is recommended for approval by the city’s TIF committee.
The building will start with at least one tenant, since MaineGeneral has agreed to lease 52,000 square feet of space in the building even after the new hospital opens for about 15 years. That would leave about 200,000 square feet of developable space.
Some of the property borders the Kennebec River and the campus of the former Augusta Mental Health Institute. The hospital has been on East Chestnut Street for more than a century.
The developer would receive 100 percent of its property taxes back until the property is at least 74 percent developed and, once it is 95 percent developed, would get 50 percent of its taxes back.
After the agreement ends in 20 years, the developer would be required to pay its full share of property taxes on the property.
TIFs allow municipalities to shelter property taxes generated by new development within designated districts. Sheltering funds through a TIF means they would not be added to the city’s total property valuation for state tax calculation purposes. Without that, as a municipality’s total property valuation increases, its state-provided revenue — such as aid for education and revenue sharing — decreases, and its county tax liability increases. New value sheltered in a TIF also doesn’t count toward a municipality’s property tax value when a TIF is in place.
Multiple city councilors said they’ve already gotten calls from constituents, asking them why they would give a tax break to a developer who can afford to purchase a large building.
Councilor David Rollins said the city should consider the tax break because the property previously didn’t generate any property tax revenue. Without the tax break, the $23 million investment would be risky, he said.
Byron, the city councilor who’s also a former commercial lender, put it more bluntly.
“I’ve been looking at deals for 40 to 45 years. This is one of the biggest financial crapshoots I’ve ever seen. I’m amazed they’re going forward,” Byron said. “Congratulations, but (Dowling) should be waking up in a cold sweat every night.”
Keith Edwards — 621-5647