In the vocabulary of business structuring, opco and propco refer to two distinct entities arising from the same organization: one operates the business, while the other holds the real estate assets. This separation, common in commercial real estate and hospitality, profoundly changes the financial management, taxation, and borrowing capacity of each structure.
Accounting separation between operations and real estate assets
The principle is based on a simple legal division. The operating company (opco) manages daily activities: revenues, expenses, employees, customer contracts. The property company (propco) owns the buildings, land, or any other real estate asset used by the opco.
The opco pays rent to the propco, creating a financial flow between the two entities. This rent becomes a deductible expense for the opco and rental income for the propco. The balance sheet of each company is lightened: the opco no longer shows heavy real estate assets, and the propco has no operational risk related to the business.
To understand how opco and propco work, it is important to remember that this architecture primarily aims to isolate risk: if the operation faces difficulties, the real estate assets remain protected in a separate entity.
Financial structure: what the opco-propco split changes
The separation between opco and propco transforms how lenders view the balance sheet. A bank examining a propco sees a portfolio of real estate assets with predictable rental income. The risk profile is that of a traditional real estate company, with debt ratios assessed based on the value of the properties.
The opco, on its side, presents a lighter balance sheet. Without real estate liabilities, the operating company can leverage its borrowing capacity to finance its operational growth: recruitment, equipment, business development.
Impact on borrowing capacity
Each entity accesses financing lines suited to its profile. The propco secures real estate loans at lower rates, backed by tangible assets. The opco negotiates short-term financing for its working capital needs.
Both structures borrow better separately than together, because lenders assess a homogeneous risk in each case. A mixed balance sheet, which combines real estate assets and operational risk, complicates the analysis and often leads to less favorable conditions.
Taxation and income: arbitrating between opco and propco
The rent paid by the opco to the propco constitutes the main tax lever of this setup. The opco deducts this rent from its taxable income, reducing its tax base. The propco, in return, declares this rental income and can depreciate its real estate assets over time.
- The opco reduces its corporate tax thanks to the rental expense while retaining the use of the premises.
- The propco benefits from the accounting depreciation of real estate assets, which decreases its taxable income for several years.
- The amount of rent must comply with market prices to avoid reclassification by the tax authorities as an abnormal advantage.
The inter-entity rent must reflect the actual rental value. An artificially high or low rent exposes both companies to an adjustment. Consistency with local real estate market references remains the determining criterion.
Income situation based on structure choice
| Criterion | Opco (operations) | Propco (assets) |
|---|---|---|
| Source of income | Revenue from operations | Rental income |
| Main risks | Commercial and operational risk | Real estate risk (vacancy, depreciation) |
| Tax leverage | Deduction of rent | Depreciation of assets |
| Debt profile | Short term, cash flow | Long term, backed by assets |
Criteria for choice: when to separate opco and propco
The split does not make sense for all companies. The opco-propco setup is justified in specific situations related to the size of the real estate assets, the divestment strategy, or risk management.
- The company holds significant real estate assets relative to its revenue and wishes to protect these assets in case of operational difficulties.
- A partial divestment is being considered: selling the operations without selling the buildings (or vice versa) becomes possible only if the two entities are separated.
- The company wants to access distinct financing conditions for real estate and operations.
- A real estate investor wishes to enter the capital of the propco without exposing themselves to the operational risk of the business.
On the other hand, a company that rents its premises, or whose real estate assets remain marginal, has no interest in creating a propco. The management cost of two legal entities (accounting, meetings, reporting obligations) then outweighs the tax and financial benefits of the setup.
Frequent confusion with training OPCOs
In France, the acronym OPCO also refers to skills operators, accredited structures that finance professional training. These organizations have no connection with the concept of opco in the sense of an operating company. The confusion arises from homonymy, but the two concepts belong to entirely different domains: skills management on one side, capital structuring on the other.
The choice between maintaining a single structure or splitting into opco and propco depends on the actual weight of real estate in the balance sheet, the medium-term asset strategy, and the ability to bear the management costs of two entities. A poorly calibrated setup, with rent disconnected from the market or a portfolio too small to justify the separation, generates more administrative burdens than financial advantages.