Operating Company/Property Company Deal - Opco/Propco Deal

You own a chain of retail boutiques specializing in organic, gourmet enemas. You own the buildings your stores operate in, making you a prime candidate for an opco/propco situation.

In the opco/propco structure, a company's interests get divided into two segments. There's a company that owns all the real estate...that firm is known as the property company, or "propco." Meanwhile, you've got a separate entity that runs the actual business. It's referred to generally as the operating company, or "opco."

By separating the businesses, you take advantage of different legal requirements and debt structures. The property company has all that real estate...collateral it can use to take on additional debt. You use that to lever up the propco...leaving the opco relatively debt free, meaning it has a strong credit rating and doesn't spend much of its revenues on debt service (though it does have to pay rent to the propco as part of the deal).

Meanwhile, since the propco only deals in real estate, it's potentially eligible to organize as a real estate investment trust, or REIT. That structure gives it a significant tax advantage when it comes to income distributions.