Key Takeaways
- OpCo runs core business operations and generates revenue.
- Separate entity from PropCo, which owns real estate assets.
- OpCo pays rent to PropCo, isolating operational risks.
- Structure enhances asset protection and financial flexibility.
What is Opco?
An OpCo, or Operating Company, is a legal entity responsible for managing a business's core operations such as daily activities, revenue generation, and staff management. It focuses on running the company’s primary business functions, separate from owning physical assets like real estate.
This separation often pairs the OpCo with a PropCo, which owns the property and leases it to the OpCo, creating distinct operational and asset management roles. Understanding how this structure works can clarify your company’s financial and operational strategies, especially if you operate as a C-corporation.
Key Characteristics
The OpCo structure has several defining features that impact business operations and financial management:
- Focus on Operations: Handles all business activities excluding property ownership, such as sales and service delivery.
- Revenue Source: Generates income primarily from core services or product sales, not rental income.
- Asset Ownership: Holds operational assets like inventory and equipment, but not real estate.
- Risk Exposure: Bears operational risks including obligations related to business performance, distinct from property risks.
- Financial Flexibility: Can secure financing for operations without encumbering real estate assets, facilitating better capital management.
How It Works
The OpCo operates under a lease agreement with the PropCo, paying rent for the use of real estate assets while focusing solely on business activities. This separation allows the OpCo to optimize its operations without managing property-related responsibilities.
Because the PropCo owns the real estate, it can finance property acquisitions independently, often using facilities tailored for real estate investment. Meanwhile, the OpCo secures operational funding based on its earnings and business prospects, reducing the complexity of its financial obligations.
Examples and Use Cases
The OpCo/PropCo structure is widely used across industries to manage risks and improve operational efficiency. Here are some common examples:
- Retail and Commercial Real Estate: Companies like Crown Castle utilize property ownership and leasing separately from operations to optimize asset management.
- Shopping Centers: Firms such as Prologis own and lease industrial properties to operational tenants, illustrating the PropCo role.
- Office Real Estate: Real estate investment trusts like Federal Realty Investment Trust own properties leased to various operating companies.
- Corporate Structures: Businesses structured as a designated activity company may adopt OpCo/PropCo models to separate operational risks from asset ownership.
Important Considerations
When implementing an OpCo structure, it's crucial to clearly define the obligations between the operating company and the property owner to avoid conflicts. Lease agreements should reflect market terms to maintain financial clarity and legal protection.
Additionally, tax implications vary based on jurisdiction, and the separation must be managed carefully to ensure operational flexibility without compromising asset protection. Understanding your facility options and earnings potential can guide better financial planning within this structure.
Final Words
Separating your business into an OpCo and PropCo can limit operational risks while optimizing asset management. Review your financial structure carefully to determine if this division aligns with your growth and risk tolerance goals.
Frequently Asked Questions
An OpCo, or Operating Company, is a legal entity responsible for running the core business operations such as daily activities, revenue generation, and staff management. It focuses on the operational side without owning real estate assets.
An OpCo manages business operations and generates revenue through sales or services, while a PropCo owns and manages the real estate assets, leasing them to the OpCo. This separation helps isolate operational risks from property ownership.
Businesses use the OpCo/PropCo structure to protect property assets from operational risks, improve financial flexibility, and achieve tax efficiencies. This setup allows the OpCo to focus on growth while the PropCo handles real estate management.
Separating the entities enables PropCo to secure real estate loans using property as collateral, while OpCo can access operating capital without property constraints. Additionally, rent paid by OpCo is deductible, and PropCo can benefit from rental income and depreciation tax treatments.
If the OpCo encounters financial failure, the PropCo’s real estate assets remain protected because they are held in a separate legal entity. This limits creditor claims on property and safeguards valuable assets during insolvency.
Yes, in the OpCo/PropCo model, the OpCo leases real estate assets from the PropCo under a formal agreement. This creates a landlord-tenant relationship where the OpCo pays rent to use the property.
Separating operations and property allows investors to independently evaluate the value of business activities and real estate holdings. This is particularly useful under accounting standards like IFRS 16 that require lease-adjusted financial metrics.
