What Is an Opco?
Opco is the abbreviation for “operating company,” which is predominantly referenced when discussing the primary operating entity in an opco/propco deal—a prevalent structure for launching a Real Estate Investment Trust (REIT).
In these arrangements, the property company (propco) transitions to ownership of all real estate and connected debts, while the opco oversees day-to-day management and operational tasks. This division provides significant perks related to credit ratings and financial capabilities for the opco.
Key Takeaways
- Opco Defined: Opco stands for “operating company,” primarily involved in opco/propco deals aimed at structuring a REIT.
- Strategic Benefits: Companies are segmented into at least an operating company and a property company to enhance financial prospects.
- Operational Differences: While REOCs and REITs have nuanced differences, REITs are not obligated to directly manage properties.
How Does an Opco Work?
An operating company/property company (“opco/propco”) structure is a strategic business formation where the property subsidiary owns all revenue-generating real estate, while the main operating company conducts operations without direct property ownership. This separation supports improved financial standing for both entities.
Core Mechanism
In an opco/propco strategy, entities are divided into separate, independent companies. The property company retains asset ownership—like real estate—thus aiding in revenue generation. Meanwhile, the opco is responsible for utilizing these assets to drive sales.
This decoupling of debt and credit rating issues provides significant financial advantages by keeping these figures off the operating company’s balance sheets, leading to savings and improved financing options. Establishing a REIT for real estate holdings can also circumvent double taxation on income distributions. However, tighter credit markets or dropping property values can make opco/propco deals less feasible.
Real-World Example of an Opco
Casino Companies: Functioning similarly to entertainment or resort REITS, casino firms may implement opco/propco restructures to enhance shareholder value and streamline operations. A prime example is the 2013 restructuring of Penn National Gaming Inc.
Penn National Gaming was permitted by the IRS to conduct a tax-free spinoff, forming a REIT named Gaming and Leisure Properties, which acquired all real estate assets. Subsequently, these properties were leased back to Penn National Gaming for operation.
Due to unique tax rules, Penn National Gaming’s REIT avoids federal income tax on rents received from the opco. Additionally, the REIT enjoys lower interest rates compared to a typical gaming company, and the opco benefits from a streamlined balance sheet, enabling easier borrowing for operational needs and further development.
Unpacking REOCs and REITs
REOCs vs. REITs: Functional and strategic distinctions set real estate operating companies (REOCs) apart from REITs. Most REITs target producing cash flow from rents or leases related to their property portfolios, focusing on investor distribution.
REOC Strategies: Real estate operating companies might fund new construction projects and sell the properties for a return, or refurbish and resell properties for profit. They could also manage properties directly.
Earnings for REOCs are frequently reinvested into new projects, allowing for rapid portfolio growth with long-term prospects. This is in contrast to the regulatory requirement for REITs to distribute the majority of their net income as dividends, potentially offering REOCs greater growth opportunities, though with less immediate income returns.
Related Terms: REIT, property company, real estate operating company, subsidiary, tax-free spinoff.
References
- 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”. Center for Hospitality Research Report, vol. 23, no. 8, August 2023, pp. 2-3.
- BusinessWire. “Penn National Gaming Announces Intent to Pursue the Separation of Its Real Estate Assets from Its Operating Assets”.
- Penn National Gaming, Inc. “Penn National Gaming’s Planned REIT to Be Named ‘Gaming and Leisure Properties, Inc.’”.
