Commercial strip center divesting the ownership

[Rao Mu]

I recently closed on a commercial strip in Highly affluent part of the central jersey with my purchase price at 9 cap. Though, it doesn't have national tenants, it has mom-and-pop and it's at a traffic light intersection. Most of the tenants are 10yr+ leased and the reason why I got at high price because of the fact that it's not very good looking. I love this property and demographics and high traffic flow, however, I would like to see if I can divest the property at 7 cap and retain 51% of ownership and give away 49% ownership to other partners. Is this something doable? If so, what are the legal complications? I do have a mortgage of close to 70% of my original purchase price (around 2 million) I paid an year ago. 

[Joel Owens]

When you say 10 year lease do you include options? It's very rare on a strip center for tenants to do 10 year leases. Usually it is 3 to 5 year primary leases with options thereafter. Some anchors in a center such as a Starbucks or a Davita Dialysis will do the 10 years.

The small operators like to keep flexibility to move so they like shorter term leases generally with the flexibility to exercise the options or not.

What are the rents being paid for base per sq ft? Are these NNN,NN, or gross leases for the 10 tenants or a mix?

How is the parking lot and condition of the roof? Even if tenants pay base plus cam to landlord they generally do not have the funds to cover parking lot or roof right away and landlord has to pay upfront and collect cam over the years to make it up.

If you want to fully update the center for new roof,re-coat and stripe parking lot, new paint and facade etc. it could run into the 6 figures for that or more depending on building size.

There are companies that buy shares but they want a discount.  What is the cap rate value of the property today?

If other properties in the market all mom and pop are not selling at a 7 cap then your center should not be valued at a 7 cap. Even if investors buy in it still has to appraise. You can't magically buy something at a 9 cap and then recapitalize with private investors at a 7 cap. Something has to change to increase the value. Mix of tenants, increase in rents, occupancy levels, cap rate compression for value in the local market with appraisals, length of primary lease terms, etc.