Key Takeaways
- Opco runs operations; Propco owns property assets.
- Separates property risk from operational risk.
- Propco enables cheaper, secured property financing.
- Tax-efficient structure via Propco REIT status.
What is Operating Company/Property Company Deal (OPCO or PROPCO)?
An Operating Company/Property Company deal, commonly referred to as OPCO/PROPCO, separates a business into two entities: a Propco that owns real estate and revenue-generating assets, and an Opco that leases those assets to manage daily operations. This structure is designed to isolate property risks from operational risks, often implemented through a sale-leaseback arrangement.
This arrangement is prevalent in industries with significant property holdings, providing financial flexibility and risk management benefits by splitting asset ownership from operational activities.
Key Characteristics
OPCO/PROPCO deals feature distinct elements that support asset protection and optimized financing:
- Dual Entity Structure: Propco owns property while Opco runs the business, enabling clear separation of assets and operations.
- Sale-Leaseback Mechanism: Property is sold to Propco and leased back to Opco, allowing Propco to secure debt using real estate collateral.
- Risk Isolation: Propco shields property from Opco liabilities, limiting creditor access and insolvency risks.
- Tax Efficiency: Propco can operate as a Real Estate Investment Trust (REIT), passing rental income to investors without double taxation.
- Financing Flexibility: Propco accesses larger, lower-cost debt facilities while Opco remains relatively debt-light, improving credit profiles and operational agility.
How It Works
Typically, the original company transfers its property assets to a newly formed Propco entity. Propco then leases these assets back to Opco, which continues day-to-day business activities. This sale-leaseback arrangement allows Propco to raise debt secured by real estate, often at favorable terms due to the tangible collateral.
The Opco pays rent to Propco as an ongoing obligation, which supports Propco's debt service. This separation enables you to optimize your capital structure: Propco focuses on stable asset management, while Opco concentrates on business growth without the burden of significant real estate debt.
Examples and Use Cases
OPCO/PROPCO deals are common in sectors where property ownership and business operations must be distinct:
- Airlines: Delta and American Airlines have utilized OPCO/PROPCO structures to separate aircraft leasing from operational risks.
- Retail and Commercial Real Estate: Companies like Crown Castle leverage real estate ownership through Propco subsidiaries while operations run separately.
- Industrial and Office Properties: Real estate investment trusts such as Federal Realty Investment Trust exemplify Propco entities optimizing rent income distribution.
Important Considerations
While OPCO/PROPCO deals offer significant benefits, you should be aware of key challenges. Lease dependency means that Opco’s cash flow can be strained by rent increases or disputes, which may impact operational stability.
Moreover, setting up this structure requires navigating complex legal, tax, and accounting regulations, including compliance with insolvency rules to avoid asset avoidance issues. Aligning goals between Opco and Propco is essential to prevent conflicts over budgeting and asset management. Understanding your firm’s suitability for this model is critical before implementation.
Final Words
Separating assets into Opco and Propco entities can enhance risk management and financing options by isolating property from operational liabilities. Evaluate how this structure aligns with your business goals and consult with a financial advisor to optimize your capital strategy.
Frequently Asked Questions
An Opco/Propco deal splits a business into two entities: the Propco owns real estate and assets, while the Opco leases these assets to run daily operations. This structure separates property risks from operational risks, commonly used in sectors like retail and hospitality.
In a sale-leaseback, the business sells its property to the Propco and then leases it back to continue operations. This allows Propco to use the assets as collateral for cheaper debt, while Opco remains focused on running the business.
Opco/Propco deals offer asset protection by shielding property from operational liabilities, enable debt optimization with lower borrowing costs, provide tax advantages through structures like REITs, and improve access to capital by appealing to lenders and investors.
Lenders favor these deals because Propco holds the property assets as collateral, allowing them to take first charges without complications from Opco’s operational risks. This setup often results in larger, lower-cost loans secured solely on real estate.
Yes, especially in the UK where Propco entities can be spun off as Real Estate Investment Trusts (REITs). This allows rental income to be distributed as dividends, avoiding double corporate taxation and improving tax efficiency.
Property-heavy businesses such as retail chains, care homes, pubs, and industrial units benefit most, as the structure enhances scalability, isolates risks, and provides financial flexibility tailored to separating property ownership from operations.
While beneficial, these deals can be complex and costly to set up and manage. There are also insolvency risks and potential for abuse if the separation between entities is not maintained properly.
