GlobeSt.com: When does a break-up strategy for acquiring and selling assets make sense?

Kirpalani: Any time an investor acquires a portfolio of assets, a break-up play may be a possible exit strategy. In its simplest form, a break-up strategy is when a portfolio of assets acquired in a single transaction is broken up and assets are sold off individually or in smaller portfolios. Portfolios usually include a spectrum of asset values, with some assets worth more than others for various reasons such as asset quality, lease term or tenant credit, to name a few. When included in the portfolio, the higher-value assets offset the lower value assets, and the portfolio trades for a weighted average price. Investors targeting a break-up strategy on the back end of a transaction can hedge their risk a little on the up-front purchase price and move their value up to win the deal because they will likely make up the difference by disposing the non-strategic assets quickly and adjust their basis in the remaining assets to a level that is more in line with their true value. A classic and well-known example of this strategy in the real world was the Blackstone acquisition of the Equity Office Properties portfolio in 2007.

GlobeSt.com: When does this strategy not make sense?

Kirpalani: In order for this strategy to work, the portfolio needs to include one or more assets that hold significant value as stand-alone investments. If the portfolio doesn't include a crown jewel, a break-up play may not give the portfolio buyer the lift they would be seeking by executing the strategy. Another reason break-ups aren't always employed by portfolio investors is the short-term benefit of the break-up could impact the long-term cash flow a buyer is seeking. Stabilized cash flow is key to some investors, and those groups aren't looking for the quick profit a break-up can offer.

GlobeSt.com: What other strategies are useful when so much capital is chasing after so few deals?

Kirpalani: In the hyper-competitive environment we have today, the groups we see succeed are those with the strongest capital relationships and that can look at assets from a slightly different perspective than the competition. The groups that can bring an outside-the-box strategy to an acquisition are the groups that can typically get comfortable stretching to win the deal. By combining that competitive advantage with a strong knowledge of market fundamentals and capitalization, investors can expect to find themselves in due diligence a little more often.

GlobeSt.com: What else should our readers know about this strategy?

Kirpalani: Break-up strategies can be lucrative if executed effectively. Changes to the tax code may impact how investors view the strategy going forward. The hold period under the carried interest provision recently changed from one year to three years, which means gains on a sale of real estate held for less than three years will be categorized as ordinary income, not capital gains. Since the changes to the tax code are recent, it remains to be seen if this will influence investors' exit strategies, but it is certainly something to keep an eye on going forward.