Propco (Property Company)
What Is a Propco (Property Company)?
A propco, property company, or prop company is an optional entity made by a business explicitly to hold and deal with the real estate that it possesses.
Giving over income-generating property and its connected debt to a recently formed subsidiary commonly gives the parent or opco (operating company) with benefits connected with financing and credit rating issues.
How a Propco (Property Company) Works
Opco-propco business arrangements bring about the subsidiary or property company holding or possessing the entirety of the assets, including real estate, that the super operating company (opco) utilizations to create revenues. For what reason do this? Basically to secure better financing and capitalize the company for expansion.
All financing and credit rating- related issues are abruptly split between two parties. The opco eliminates the carrying cost of its real estate from its books, empowering it to free up funds and lift its financial wellbeing.
Simultaneously, the recently formed propco winds up acquiring a portfolio of property that it can use as collateral to take on debt and raise capital at competitive rates.
Analysis of a Propco (Property Company)
Opco-propco arrangements permit the operating company to rent or lease property from the property company. In practice, this seems to be a sale and a leaseback. In any case, the company never gives up 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 sorts 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 possible sell the property. Conversely, in a propco arrangement, the propco claims the property and may not decide to offload it in the event that the market won't return to the point of covering the debts.
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 debt-supported off the properties.
Special Considerations
Propco to REIT Transitions
Since a propco can limit the flexibility of the opco in certain situations, the operating company will at times [spin off](/side project) the property company as a real estate investment trust (REIT) to transform it into its own entity.
Making a REIT — companies that hold a portfolio of properties and mortgages, collect rent on them and afterward give the proceeds to investors as profits — offers tax benefits to the parent company, in particular by eliminating any double taxation issues that could emerge with a propco-opco arrangement.
Significant
An operating company may later opt to veer off a subsidiary as a real estate investment trust (REIT) to gain tax benefits.
Once veered off, the propco can act as some other REIT, adding properties to its portfolio that are unrelated to the opco's business.
Features
- These arrangements are quite often sought after to secure better financing and simplicity credit rating issues.
- Transferring the entirety of the real estate and related debt to the propco empowers the opco to free up funds and lift its financial wellbeing.
- A propco is a subsidiary company made explicitly by a parent company or opco to hold and deal with its income-generating real estate.
- The propco, in the mean time, inherits a portfolio of property that it can use as collateral to raise capital at competitive rates.
