Operating Company/Property Company Deal (Opco/Propco)

What Is an Operating Company/Property Company Deal (Opco/Propco)?

An operating company/property company (opco/propco) deal is a business arrangement where a subsidiary company (i.e., the property company or "propco") claims all of the revenue-generating properties rather than the principal company (the operating company or "opco.")

Opco/propco deals permit all financing and credit rating- related issues for the two companies to stay separate. This business structure is common in real estate deals and in the organizing of real estate investment trusts (REITs).

Figuring out Operating Company/Property Company Deals (Opco/Propco)

Parent companies can be conglomerates or holding companies. A conglomerate, like General Electric, possesses companies with distinct business models notwithstanding its core operations. Interestingly, a holding company is made with the specific purpose of holding a group of subsidiaries and doesn't conduct its business operations. Holding companies regularly form to realize tax advantages.

Master limited partnerships, or MLPs, likewise utilize a comparable parent/subsidiary structure. Most MLPs are publicly traded. For tax purposes, investors might pick how they might want to receive the income the company produces.

A MLP has a pass-through tax structure, implying that all profits and losses are passed through to the limited partners. The MLP itself isn't responsible for corporate taxes on its revenues and hence maintains a strategic distance from the double taxation of most corporations. Most MLPs operate in the energy industry. Auxiliaries own shares (formally units) of the parent company MLP, reallocating the passive income through the corporation as a normal dividend.

Reactions of an Operating Company/Property Company Deal (Opco/Propco)

Opco-propco arrangements permit the operating company to rent or rent property from the property company. In practice, this seems to be a sale and a leaseback. Be that as it may, the company never surrenders the property in any real manner, as the propco and opco are part of similar group of companies.

While this could seem like the corporate equivalent of having your cake and eating it, there can be several disadvantages to making a propco. In the event that a business figures out of numerous locations as opposed to a primary one, a propco arrangement gets the company into a situation where closing any location turns out to be more troublesome.

In a traditional business setup, for instance, a company could decide to close an underperforming location or office, and reasonable sell the property. On the other hand, in a propco arrangement, the propco claims the property and may not decide to offload it on the off chance that the market won't return to the point of covering the obligations.

Thus, the opco might be required to pay rent on a property, even on the off chance that it isn't using it, on the grounds that the propco relies upon that income to service the obligation supported off the properties.

Illustration of an Operating Company/Property Company Deal (Opco/Propco)

In the U.K., opco/propco deals are an extremely well known method where a parent company can make a REIT. A REIT possesses, operates, as well as finances real estate that produces income. Most REITs have some expertise in a specific sector, like office REITs or healthcare REITs. By and large, REITs will pass on collected rent payments to investors as dividends.

The creation of a REIT through an opco/propco deal can happen by initially selling income-generating assets from the operating company to a subsidiary. The subsidiary then, at that point, rents the property back to the operating company. The operating company can hence veer off the subsidiary as a REIT. The advantage of doing this is that the company can then stay away from double taxation on its income distributions.

Features

• Opco/propco business arrangements bring about a subsidiary or property company (the propco) holding or possessing the entirety of the assets and real estate that the vitally operating company (the opco) uses to produce revenues.
• Notwithstanding loan independence, these types of deals can have tax advantages for the parent company.
• Opco/propco deals can assist the parent with companying benefit as financing and credit terms are independent of the operating company.
• Albeit some might consider these types of deals tax escape clauses, they are completely legal and are generally viewed as the mark of an intelligent business.