Operating Company / Property Company (Opco/Propco) Deals
An opco/propco structure splits a business into two affiliated entities: the operating company (opco), which runs the core business, and the property company (propco), which owns the revenue-generating real estate. The two entities typically enter into lease or rental arrangements so the opco can use the properties while the propco retains ownership.
Key takeaways
- Separates property ownership from business operations, allowing different financing, credit ratings, and risk profiles for each entity.
- Commonly used to create Real Estate Investment Trusts (REITs) and to realize tax efficiencies, including avoidance of double taxation on property income when structured as a REIT.
- Can improve access to capital and stabilize balance sheets, but may reduce operational flexibility (for example, making it harder to close or dispose of individual locations).
- Legitimate strategic tool, though sometimes criticized as a tax-planning technique.
How opco/propco structures work
- The propco owns real estate assets (stores, offices, warehouses, hospitals, etc.).
- The opco conducts the business that generates operating income and typically leases property from the propco.
- Each entity can obtain financing and be rated separately, which can lower borrowing costs or isolate risks—credit problems in one entity don’t automatically transfer to the other.
- Common variations include sale-and-leaseback transactions within the same corporate group and spinning a propco subsidiary into a standalone REIT to distribute rental income tax-efficiently.
Typical uses
- Real estate-heavy businesses (retail chains, hotels, healthcare providers) use opco/propco structures to monetize property and improve capital allocation.
- Creating a REIT: a company can transfer income-producing properties into a propco, lease them back to the opco, then convert or spin the propco into a REIT. The REIT distributes rental income to investors and can avoid corporate-level tax on those distributions when meeting REIT rules.
Drawbacks and operational risks
- Reduced flexibility to close or sell individual locations: if the propco needs rental income to service debt, it may be unwilling or unable to sell property, forcing the opco to continue paying rent for underperforming sites.
- Transaction and governance complexity: intercompany leases, transfer pricing, and debt covenants add legal and accounting overhead.
- Perception and regulatory scrutiny: while legal, these structures may attract criticism if viewed mainly as tax avoidance.
Bottom line
Opco/propco arrangements are a widely used corporate-finance structure that separates property ownership from operations to optimize financing, tax outcomes, and balance-sheet management. They are especially useful when real estate is a significant asset class for the business, but they introduce contractual complexity and can limit operational flexibility. Proper structuring and governance are essential to capture benefits while managing the associated risks.
Sources
- Legal Information Institute — Pass-Through Taxation
- Internal Revenue Service — Instructions for Form 1120-REIT