how does an opco work 
an operating company property company opco propco deal is a business arrangement in which a subsidiary company i e the property company owns all of the revenue generating properties while the main company operating company manages operations without direct property ownership itself opco propco deals allow all financing and credit rating related issues for both companies to remain separate thus improving each entity s financial position in an opco propco deal strategy companies are divided into at least one operating company and one property company while the property company owns all of the assets including real estate or other property that are associated with the generation of revenues the opco is the one that uses the assets to generate sales 1an opco propco strategy makes it possible for companies to keep certain elements namely debt and thus debt service obligations credit ratings and related issues off of the books of the operating company this typically presents the company with considerable financial advantages and savings if the operating company creates a reit for all of its real estate holdings it can avoid double taxation on all of its income distributions when credit markets become more constricted or when property values take a plunge opco propco deal strategies are not as practical and in many instances are not even feasible example of an opcocasino companies which often function in a sense as entertainment or resort reits may consider opco propco restructuring to create shareholder value and to streamline operations the model for this is the 2013 restructuring of penn national gaming inc where the casino company received permission from the u s internal revenue service irs to perform a tax free spinoff of its properties into a new reit 2penn national gaming thus spun off the reit gaming and leisure properties transferring all ownership of real estate assets to the newly formed reit after completing this spinoff gaming and leisure properties then leased the properties back to penn national gaming who operated them 3the special tax rules that exist on penn national gaming s reit prevent the propco from having to pay federal income tax on any rents obtained from the opco penn national gaming s reit also has a significantly lower interest rate than a gaming company in addition because penn national gaming eliminated all of the direct debt related to the property by assigning ownership to its reit the opco s lightened balance sheet permits the casino company to borrow the funds it needs to operate and also to dump into further development and expansion of its casinos reocs and reitsthere are functional and strategic differences between real estate operating companies reocs and reits many reits focus their investment and portfolio strategy to generate cash flow through the rent or leases generated by the properties they hold investments made by a reit in a construction project and acquisitions might be aimed at generating rental income from the property that net income primarily goes toward distributions issued to investors a real estate operating company might fund new construction and then sell the property for a return the company could also buy a property refurbish the building and then resell the real estate for a profit a reoc could likewise serve as a management company that oversees the properties the earnings that a real estate operating company generates can largely be reinvested in projects such as acquisitions refurbishments and new construction this allows a reoc to fill up its portfolio relatively quickly with potential long term prospects this can be contrasted with regulations that require reits to distribute most of their net income to their shareholders as dividends there may be the potential for greater growth prospects with a reoc but they might not generate as much immediate income as reits 