# Operating Company/Property Company Deals: Benefits and Criticisms

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

An operating company/property company (opco/propco) deal is a business structure where the property company ("[propco](https://www.investopedia.com/terms/p/propco.asp)") owns the revenue-generating real estate, while the operating company ("[opco](https://www.investopedia.com/terms/o/opco.asp)") manages the core business operations.

This arrangement separates financing and [credit ratings](https://www.investopedia.com/terms/c/creditrating.asp) for each entity, often improving access to capital and financial stability. Opco/propco structures are especially common in the real estate industry and in forming [real estate investment trusts](https://www.investopedia.com/terms/r/reit.asp) (REITs) due to their tax advantages. However, they can face criticisms, such as reduced flexibility in closing or relocating properties, which may complicate business operations in certain sectors.

### Key Takeaways

*   Opco/Propco deals strategically separate property ownership from the operating activities of a business, allowing for distinct financial and credit rating management.
*   These deals can offer significant tax advantages, helping companies minimize tax liabilities by keeping property and operational income separate.
*   While Opco/Propco arrangements provide financial benefits, they may also lead to operational challenges, like the difficulty of closing underperforming locations due to property ownership conflicts.
*   A common application of Opco/Propco structures is in the creation of Real Estate Investment Trusts (REITs), which use the arrangement to avoid double taxation on income distributions.
*   Critics argue that these deals can sometimes be perceived as exploiting tax loopholes, although they are entirely legal and often a mark of savvy business strategy.

## How Opco/Propco Deals Work

[Parent companies](https://www.investopedia.com/terms/p/parentcompany.asp) can be conglomerates or holding companies. A conglomerate, such as General Electric, owns companies with distinct business models in addition to its core operations. In contrast, a holding company is created with the specific purpose of holding a group of [subsidiaries](https://www.investopedia.com/terms/s/subsidiary.asp) and does not conduct its business operations. Holding companies normally form to realize tax advantages.

[Master limited partnerships](https://www.investopedia.com/terms/m/mlp.asp), or MLPs, also employ a similar parent/subsidiary structure. Most MLPs are publicly traded. For tax purposes, investors may choose how they would like to receive the income the company generates.

A MLP has a pass-through tax structure, meaning that all profits and losses are passed through to the limited partners. The MLP itself is not liable for [corporate taxes](https://www.investopedia.com/terms/c/corporatetax.asp) on its revenues and thus avoids the double taxation of most corporations. Most MLPs operate in the energy industry. Subsidiaries own shares (officially units) of the parent company MLP, redistributing the passive income through the corporation as a regular [dividend](https://www.investopedia.com/terms/d/dividend.asp).

## Drawbacks of Opco/Propco Structures

Opco-propco arrangements enable the opco to rent or lease property from the propco. It often resembles a sale and [leaseback](https://www.investopedia.com/terms/l/leaseback.asp) arrangement. However, ownership stays within the same group, as propco and opco are affiliated companies.

While this might sound like the corporate equivalent of having your cake and eating it, there can be several downsides to creating a propco. If a business works out of multiple locations rather than a primary one, a propco arrangement locks the company into a situation where closing any location becomes more difficult.

In traditional setups, a company may close an underperforming location and sell the property. In a propco arrangement, the propco owns the property and may not sell it if it won't cover debts. Consequently, the opco might pay rent on unused property because the propco needs that [income](https://www.investopedia.com/terms/i/income.asp) to cover debt.

## Example of an Opco/Propco Arrangement

In the U.K., opco/propco deals are a popular way for parent companies to create a REIT. A REIT owns, operates, and/or finances real estate that produces income. Most REITs specialize in a specific sector, such as office REITs or healthcare REITs. In general, REITs will pass on collected rent payments to investors in the form of dividends.

A REIT can be created by selling income-generating assets from the opco to its subsidiary. The subsidiary then leases the property back to the operating company. The operating company can subsequently spin off the subsidiary as a REIT. The advantage of doing this is that the company can then avoid [double taxation](https://www.investopedia.com/terms/d/double_taxation.asp) on its income distributions.

## The Bottom Line

An opco/propco deal separates property ownership from business operations, allowing each entity to maintain its own financing and credit terms. This structure offers benefits such as tax advantages and relief from double taxation, making it especially attractive for creating REITs, as seen in the U.K. market.

However, it can limit operating companies' flexibility in using or closing properties, which may pose challenges. Despite criticisms, opco/propco arrangements are legal and often viewed as smart strategic tools that optimize tax efficiency and capital structure rather than serving as tax loopholes.

> **Article Sources**
>
> 1.  Legal Information Institute. "[Pass-Through Taxation](https://www.law.cornell.edu/wex/pass-through_taxation)."
>     
> 2.  Internal Revenue Service. "[Instructions for Form 1120-REIT (2020)](https://www.irs.gov/pub/irs-pdf/i1120rei.pdf)," Pages 2-3.