An Operating Company – Property Company deal (“Opco Propco”) is a strategy is which a company is divided into at least two parts: a Property Company that owns all of the real estate and assets associated with generating revenues, and an Operating Company that uses those assets to generate sales.
How it works / Example:
Let’s say company XYZ is a men’s haircut barbershop with five units. If company XYZ wants to implement an Opco Propco deal, it might sell its operating assets to a newly-formed subsidiary (the “Propco”). The remaining entity, which runs the business (the “Opco”) might then lease the operating assets back. This is called a “sale-lease back.”
In turn, the Propco typically has much more collateral and thus can support more debt (partly because collateralized debt tends to be cheaper). Holding this debt within the Propco means that the credit ratings and the debt service on the debt are attached to the real estate subsidiary rather than the operating subsidiary.
Another example involves a general contractor who has a fleet of vehicles, an operating business and a commercial building from which they operate the general contracting business. With a classic Opco Propco deal, the real property assets are held in the Propco Company and the Operating Company owns the vehicles and operates the general contracting business.
Should there ever be a claim against the Operating Company (for example an employee causes significant personal injury to one of its customers while operating a company vehicle which is in excess of the standard commercial general liability limits) then the property is protected from a claim by the Opco.
Why it matters.
If the Operating Company (the Opco) should ever have a judgment or financial difficulties then the real property assets held in the Propco are typically immune from claims, or in other words, a division of the risk.
Also, the Opco Propco strategy allows companies to keep debt (and thus credit ratings, debt service obligation and associated issues) off the books of the Operating Company, which can be a considerable advantage.