# What Is an Opco? Definition, Example, vs. Propco

## What Is an Opco?

An "Opco," short for "operating company," is crucial in the structure of an opco/propco deal, especially when setting up a real estate investment trust (REIT). This model separates operations from property ownership, allowing the opco to handle daily management while the propco owns all real estate assets. This strategic division enhances financial advantages, credit ratings, and leasing operations.

### Key Takeaways

*   An Opco, or operating company, manages daily business operations without direct property ownership in an opco/propco deal.
*   In an opco/propco arrangement, the property company owns assets and related debt, separating financial responsibilities from the operating company.
*   This strategy can optimize financial performance by improving credit ratings and reducing debt from the operating company's balance sheet.
*   Casino companies, like Penn National Gaming Inc., have used opco/propco models to enhance shareholder value and streamline operations.
*   The distinction between REOCs and REITs lies in investment and income distribution strategies, with REITs primarily distributing income to investors.

## Understanding How an Opco Structure Operates

In an opco/propco deal, a [subsidiary](https://www.investopedia.com/terms/s/subsidiary.asp) owns the revenue-generating properties, while the main company manages the operations without owning the properties. Opco/propco deals allow all financing and credit rating-related issues for both companies to remain separate, thus improving each entity's financial position.

In this strategy, companies split into at least one opco and one propco. The propco owns revenue-generating assets, and the opco uses them to make sales.

An opco/propco strategy makes it possible for companies to keep certain elements—namely, debt and thus debt service obligations, credit ratings, and related issues—off the books of the operating company. This arrangement often results in financial benefits and savings for the company. If the operating company creates a REIT for all of its real estate holdings, it can avoid double taxation on all of its income distributions. When credit markets become more constricted, or when property values take a plunge, opco/propco deal strategies are not as practical and, in many instances, are not even feasible.

## Real-World Example: Opco/Propco Strategy in Action

[Casino companies](https://www.investopedia.com/markets-news-4427704), which often function in a sense as entertainment or resort REITS, may consider opco/propco restructuring to create 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](https://www.investopedia.com/terms/t/tax-freespinoff.asp) of its properties into a new REIT.

Tax rules allow Penn National Gaming's REIT to avoid federal income tax on rents from the opco. After completing this spinoff, Gaming and Leisure Properties then leased the properties back to Penn National Gaming, which operated them.

The special tax rules that exist on Penn National Gaming's REIT prevent the propco from having to pay federal income tax on any rents obtained from the opco. Penn National Gaming's REIT also has a significantly lower interest rate than a gaming company. In addition, because Penn National Gaming eliminated all of the direct debt related to the property by assigning ownership to its REIT, the opco's lighter balance sheet permits the casino company to borrow the funds it needs to operate and also to dump into further development and expansion of its casinos.

## Comparing Real Estate Operating Companies (REOCs) and REITs

There are functional and strategic differences between [real estate operating companies (REOCs)](https://www.investopedia.com/terms/r/reoc.asp) and REITs. Many REITs focus on generating cash flow by renting or leasing properties they own. Their construction and acquisition investments often target rental income. That net income primarily goes toward distributions issued to investors.

A real estate operating company might fund new construction and then sell the property for a return. The company could also buy a property, refurbish the building, and then resell the real estate for a profit. A REOC could likewise serve as a management company that oversees the properties.

A real estate operating company can reinvest its earnings in acquisitions, refurbishments, and new construction. This allows a REOC to fill up its portfolio relatively quickly with potential long-term prospects. This can be contrasted with regulations that require REITs to distribute most of their net income to their shareholders as dividends. There may be the potential for greater growth prospects with a REOC, but they might not generate as much immediate income as REITs.

## The Bottom Line

The opco/propco structure offers strategic financial benefits by separating ownership and operational responsibilities, enhancing financial flexibility, and potentially improving credit ratings for the operating company. In particular, this structure is often used in real estate investment trusts (REITs) to avoid double taxation on income distributions. By allowing operating companies to manage operations without bearing property ownership-related debt, opco/propco deals can provide significant financial advantages, especially in stable credit markets. However, when credit conditions tighten or property values decline, these strategies may become less feasible. Companies considering this approach must weigh the benefits against the potential challenges in varying economic climates.

> **Article Sources**
>
> 1.  Lólis, F. Philip; Scott, Mike; and Dickinson, Clay. "[Consolidating the $50 Billion U.S. Short-term Rental Market: How PropCos Can Help Best-in-Class OpCos Scale and Institutionalize the Asset Class](https://ecommons.cornell.edu/server/api/core/bitstreams/5eafbe41-146a-40d8-b62b-1d863dd2e9ef/content)." _Center for Hospitality Research Report_, vol. 23, no. 8, August 2023, pp. 2-3.
>     
> 2.  BusinessWire. "[Penn National Gaming Announces Intent to Pursue the Separation of Its Real Estate Assets from Its Operating Assets](https://www.businesswire.com/news/home/20121115006912/en/Penn-National-Gaming-Announces-Intent-to-Pursue-the-Separation-of-Its-Real-Estate-Assets-from-Its-Operating-Assets)."
>     
> 3.  Penn National Gaming, Inc. "[Penn National Gaming’s Planned REIT to Be Named 'Gaming and Leisure Properties, Inc.'](https://pennnationalgaming.gcs-web.com/news-releases/news-release-details/penn-national-gamings-planned-reit-be-named-gaming-and-leisure)."