Operating Company Property Company Model - Explained
What is the Operating Company Property Company Model?
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Table of ContentsWhat is the Operating Company/Property Company Model?How is the Operating Company/Property Company Deal Used?Operating Company/Property Company Deal: OPCO/PROPCO deal and parent firms
What is the Operating Company/Property Company Model?
An operating company (OPCO)/property company (PROPCO) refers to an organizational model in which a property company, also called subsidiary company, and not the operating company (main company) has the ownership of all the properties that generate revenue or income. OPCO/PROPCO makes it easier for both firms to keep its finance-based and credit rating related problems separate.
How is the Operating Company/Property Company Deal Used?
OPCO or PROPCO deals are popular in the U.K. where a parent business firm can form a real estate income trust (REIT). A REIT deals with properties or real estate that generate income. Most real estate income trusts operate in a particular field. For example, healthcare REITs or office REITs. Usually, these REITS will offer rent payments collected as dividends to its investors. When the assets that have the potential to generate income are sold from operating organization to the subsidiary organization. Then, the operating firm gets its property back from the subsidiary firm. And gradually, the operating firm has the option of spinning off the subsidiary firm as a real estate investment trust. This helps the company in avoiding the issue of double taxation on the disbursement of income.
Operating Company/Property Company Deal: OPCO/PROPCO deal and parent firms
Parent firms can either be conglomerates or holding companies. Besides holding its primary operations, a conglomerate has the ownership of companies with different business structures. Whereas, a holding organization works with a view to hold a cluster of subsidiary companies, and refrains from carrying out its own operations. Holding firms are usually formed for earning tax advantages. Master Limited Partnerships or MLPs, being publicly traded most of the times, follow the same parent or subsidiary model. For instance, Linn Energy Inc. that comprises of both the MLP, LINE along with an entity having an interest in the MLP, LNCO. Considering the tax purposes, investors have the option of selecting the way they want to receive dividends generated by the company. A master limited partnership consists of a pass-through tax approach that states that all profits and losses of the company get passed through to its limited partners. The MLP has no liability for corporate taxes levied on its income, and therefore, helps most companies in avoiding the double taxation issues. It would be interesting to note that most MLPs can be seen in the energy sector. Subsidiary companies possess the ownership of the parent company MLPs shares, and redistribute the passive income in the form of dividends to its investors.