Operating Company/Property Company Deal (OPCO or PROPCO)

An operating company/property company deal (OPCO or PROPCO) is a type of real estate transaction in which the seller transfers the ownership of a property to a newly formed entity, known as the operating company (OPCO). The OPCO then leases the property back to the seller, who is known as the property company (PROPCO).

There are a number of reasons why a seller might choose to structure a transaction as an OPCO/PROPCO deal. One reason is that it can help to defer taxes. When a seller sells a property directly to a buyer, the seller must pay capital gains taxes on the sale. However, when a seller transfers the property to an OPCO and then leases it back from the OPCO, the seller can defer paying capital gains taxes until the OPCO sells the property.

Another reason why a seller might choose to structure a transaction as an OPCO/PROPCO deal is that it can help to insulate the seller from liability. When a seller sells a property directly to a buyer, the seller is still responsible for any liabilities associated with the property. However, when a seller transfers the property to an OPCO and then leases it back from the OPCO, the seller is no longer responsible for any liabilities associated with the property.

Finally, an OPCO/PROPCO deal can also help to improve the seller's cash flow. When a seller sells a property directly to a buyer, the seller receives a lump sum payment for the sale. However, when a seller transfers the property to an OPCO and then leases it back from the OPCO, the seller receives a stream of rental payments over time. This can help to improve the seller's cash flow.

There are also a number of risks associated with an OPCO/PROPCO deal. One risk is that the OPCO may not be able to make the rental payments to the PROPCO. If this happens, the PROPCO may have to foreclose on the property. Another risk is that the OPCO may not be able to sell the property at a profit. If this happens, the PROPCO may not be able to recover the capital gains taxes that were deferred on the sale.

Overall, an OPCO/PROPCO deal can be a complex and risky transaction. However, it can also be a tax-efficient and liability-insulating way for a seller to transfer ownership of a property.