Opco

Key takeaways

• An opco (operating company) runs day‑to‑day business operations but does not own real estate in an opco/propco structure.
• A propco (property company) owns the real estate assets and related debt; the opco leases those assets.
• Separating operations from property ownership can improve the operating company’s credit profile, reduce on‑balance‑sheet debt, and create tax efficiencies when a REIT is involved.
• The structure is most useful in stable credit markets and may be impractical when credit tightens or property values decline.

What is an opco?

An opco is the operating entity in a corporate split that separates business operations from real estate ownership. In an opco/propco arrangement the opco manages and runs the business (e.g., hotels, casinos, retail operations) while the propco holds the physical property and related financing. This division lets each entity pursue financing and tax strategies suited to its role.

How the opco/propco structure operates

• The propco owns income‑producing properties and typically carries the related debt.
• The opco leases those properties from the propco and handles operations, staffing, sales, and services.
• Because property debt stays with the propco, the opco’s balance sheet can be lighter, often improving its credit rating and borrowing capacity.
• If the propco is structured as a REIT, rents paid by the opco to the propco can benefit from REIT tax rules (e.g., avoiding corporate income tax at the propco level if qualifying rules are met).
• Limitations: the structure can be harder to execute when lending markets are constrained or property values fall, and it introduces intercompany lease and governance complexities.

Real‑world example

A notable example is the casino industry restructuring where an operator spun off real estate into a REIT and leased properties back. The REIT owner of the properties avoided federal income tax on qualifying rental income, and the operating company reduced property‑related debt on its balance sheet. That lighter balance sheet helped the operator access funding for operations and expansion while the REIT accessed lower‑cost financing tied to property assets.

REOCs vs. REITs

• REITs (Real Estate Investment Trusts): Primarily own and lease real estate to generate rental income that is largely distributed to shareholders as dividends. They are structured to deliver steady cash flow and often prioritize income distributions over retained growth capital.
• REOCs (Real Estate Operating Companies): Actively develop, buy, refurbish, manage, and often sell properties for profit. REOCs can reinvest earnings into growth projects, potentially accelerating portfolio expansion and capital appreciation but may produce less immediate income for investors compared with REITs.

Bottom line

An opco/propco split can deliver strategic financial benefits by isolating property debt, improving the operating company’s credit metrics, and enabling tax‑efficient ownership via a REIT. It suits businesses that want to separate asset ownership from operations, but it adds structural complexity and depends on favorable credit and property markets. Companies should weigh the operational, tax, and financing tradeoffs before implementing this model.