Just when you thought cap rates couldn't get any lower, a deal in California shattered all expectations. In October, the 40-year-old, 75,327-square-foot Lincoln Rose Shopping Center in Venice, Calif., changed hands for $12.7 million cash — at a cap rate of 2.61 percent.

“And they weren't alone,” says Richard Walter, president of Faris Lee Investments, which brokered the deal. Walter and colleague Jeff Conover represented the seller. “There were other bidders at the same price.”

Los Angeles-based Combined Properties was the winner, buying the center from Deutsche Family Trust.

The low cap rate is at least partially attributable to the fact that the buyer will have an opportunity to upgrade the tenant roster within the next few years. Most retailers are nearing the end of their lease terms and are paying below market rate.

There's one hitch, though, in that the parking lot to the center is structured as a ground lease, which is subject to re-appraisal in five years — and that could lead to higher taxes. The rent rise should more than offset a tax hike, Walter says.

“The buyer felt they could raise the rents to a degree that the re-appraisal of the land won't be that severe,” says Walter.