Opco
What Is an Opco?
Opco is the truncation for "operating company," normally utilized while depicting the primary operating company engaged with a opco/propco deal, which is the most common structure for spinning off a real estate investment trust (REIT).
The property company (propco) keeps up with ownership of all real estate and related debt, while the opco directs everyday operations and management, offering the opco benefits connected with its credit rating and financing abilities.
How Does an Opco Work?
An operating company/property company ("opco/propco") deal is a business arrangement where a subsidiary company (i.e., the property company) claims all of the revenue-generating properties, while the principal company (operating company) oversees operations without direct property ownership itself. Opco/propco deals permit all financing and credit rating related issues for the two companies to stay separate, in this way working on every element's financial position.
In an opco/propco deal strategy, companies are separated into something like one operating company and one property company. While the property company possesses the entirety of the assets — including real estate or other property — that are associated with the generation of revenues, the opco is the one that utilizes the assets to generate sales.
An opco/propco strategy makes it workable for companies to keep certain components — specifically debt and hence debt service obligations, credit ratings, and related issues — off of the books of the operating company. This ordinarily gives the company extensive financial benefits and savings. All on the off chance that the operating company makes a REIT for its real estate holdings, it can keep away from double taxation on its income distributions. At the point when credit markets become more tightened, or when property values go all in, opco/propco deal strategies are not as down to earth and in many cases are not even practical.
Illustration of an Opco
Casino companies, which frequently function as it were as diversion or resort REITS, may consider opco/propco restructuring to make shareholder value and to streamline operations. The model for this is the 2013 restructuring of Penn National Gaming Inc., where the casino company received permission from the U.S. Internal Revenue Service (IRS) to perform a tax-free spinoff of its properties into another REIT.
Penn National Gaming in this manner veered off the REIT Gaming and Leisure Properties, transferring all ownership of real estate assets to the recently framed REIT. Subsequent to finishing this spinoff, Gaming and Leisure Properties then, at that point, leased the properties back to Penn National Gaming who operated them.
The special tax rules that exist on Penn National Gaming's REIT prevent the propco from being required to pay federal income tax on any rents got from the opco. Penn National Gaming's REIT likewise has an essentially lower interest rate than a gaming company. What's more, since Penn National Gaming killed all of the direct debt connected with the property by appointing ownership to its REIT, the opco's eased up balance sheet permits the casino company to borrow the funds it necessities to operate and furthermore to dump into additional development and expansion of its casinos.
REOCs and REITs
There are functional and strategic differences between real estate operating companies (REOCs) and REITs. Numerous REITs center their investment and portfolio strategy to generate cash flow through the rent or rents generated by the properties they hold. Investments made by a REIT in a construction project and acquisitions may be pointed toward generating rental income from the property. That net income essentially goes toward distributions issued to investors.
A real estate operating company could fund new construction and afterward sell the property for a return. The company could likewise buy a property, repair the building, and afterward resell the real estate for a profit. A REOC could similarly act as a management company that directs the properties.
The earnings that a real estate operating company generates can generally be reinvested in projects like acquisitions, renovations, and new construction. This permits a REOC to top off its portfolio somewhat rapidly with expected long-term possibilities. This can be diverged from regulations that expect REITs to disperse a large portion of their net income to their shareholders as dividends. There might be the potential for greater growth possibilities with a REOC yet they probably won't generate as much quick income as REITs.
Features
- There are functional and strategic differences between real estate operating companies and REITs, yet REITs don't have to operate the properties.
- In an opco/propco deal strategy, companies are partitioned into essentially an operating company and a property company to work on the finances of the two possibilities.
- Opco is the contraction for "operating company," commonly utilized while depicting the primary operating company engaged with an opco/propco deal that structures a REIT.
