Opco is a generally accepted contraction of the expression “operating company”. It is mainly utilized to name one of the parties of an operating company/property company deal, which, in its turn, is also often shortened to “opco/propco deal.” The mentioned type of deal is a popular way of a real estate investment trust (REIT) formation.
Opco as part of opco/propco deal
There are always at least two parties in a said deal, one of which is the property company (or propco), while another one is the opco (or operating company). The former party, the propco, legally owns certain property, real estate, assets, and the associated debt and obligations connected with the property in question. The latter party performs all the activities aimed at generating revenue from the property, while formally the opco isn’t its possessor.
Such a system grants certain financial benefits to both parties, as in many cases the propco isn’t charged income taxes on the payments it receives from the opco for using the property, while the opco has a lightened balance sheet.
It’s important to distinguish the mentioned form of a real estate investment fund (or REIT) and a real estate operating company, as a REIT doesn’t necessarily operate the property. As REITs are often formed as a part of an opco/propco deal, it’s worth studying the difference between said entities.
The essential differentiation lies in a fact the REITs are usually aimed at generating revenue from renting and leasing, even if these entities invest in construction, the further use of the property would likely come in a form of renting it out. At the same time, real estate operating companies often participate in investing in construction for a subsequent resale. Companies of said type are also engaged in managing and overseeing its property, and they have more freedom in operating their income, while REITs are usually restricted by the requirement to give out most of its income to its shareholders.
Opco working principles
The main principle behind an opco/propco structure is that a company is allowed to sell its property to one of its subsidiaries, and after that take it for leasing to use it in its business processes. The main company in this case is an opco, as it operates the business, while the subsidiary is the propco, as it possesses the property.
An organizational model of this type allows both companies to keep their financial dealings separate, which is usually beneficial for each party.
Participating in such a structure removes all financial issues related to the property from the opco’s balance sheet. It might be especially convenient if any kind of debt and debt obligations are involved. As debt-related issues linked to the property may harm the opco’s credit history, it’s suitable for the company to pass the possessions and the related debt issues to its subsidiary, thus making its own credit history better, which may provide the company with various lucrative possibilities.
If a company goes into this type of deal with an intention to pass the possession of its real estate to the propco and creates a REIT, it will be delivered from double taxation. Although, there might be situations in which the described scheme stops being beneficial or even implementable. This usually happens under worsening conditions in credit or property markets.