Opco and Propco refer to two distinct legal entities created from the same company to separate operational activities from real estate asset ownership. The Opco (Operating Company) runs the business, generates revenue, and bears current expenses. The Propco (Property Company) owns the buildings and land and collects rent paid by the Opco. This split is not merely a legal facade: it fundamentally alters the financial structure, taxation, and valuation of each entity.
Regulated agreements between Opco and Propco: an underestimated risk
The lease binding the Opco to the Propco is not a trivial contract. The rents, guarantees, and management agreements between these two companies fall under regulated agreements, subject to the approval procedures specific to each corporate form (SA, SAS, SARL). The rent level must correspond to market conditions, the lease duration must be justified, and each guarantee provided must be documented.
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An artificially low rent set to relieve the Opco’s cash flow, or conversely inflated to transfer cash to the Propco, exposes both entities to a tax reassessment. To better understand the difference between opco and propco, it is essential to recognize that the rental relationship between the two structures is the critical point of the arrangement.
Good governance practices require that each entity has its own bank accounts, independent accounting, and distinct decision-making bodies. Without this, the risk of asset confusion becomes real.
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Financial structure and debt: what the separation changes concretely
The Propco carries the real estate debt, backed by tangible assets. This profile reassures lenders: the borrowing rates obtained by a real estate company backed by buildings are generally more favorable than those of an operating company alone. The Propco can refinance its assets, raise mortgage debt, or sell a property without disrupting operational activities.
The Opco, on the other hand, maintains a lighter balance sheet structure. Without real estate on its balance sheet, its debt ratios improve, facilitating access to other types of financing (credit lines, mezzanine debt). In return, the Opco becomes a tenant of its own premises, creating a recurring rent expense that weighs on operating results.
Impact on valuation
Valuing a company that owns its buildings and a company that is a tenant using the same multiples would be a mistake. The owner company shows a higher operating result (no rent to pay), but its economic asset includes the value of the real estate. The tenant company has a reduced operating result due to rents, but a lighter economic asset.
The classic trap is to apply a single multiple of operating results without distinguishing the real estate component. Operating real estate must be valued separately, at its market rental yield, and then added to the value of the operational activity.
Tax doctrine and economic substance: the ongoing tightening
In recent years, several European tax administrations (France, Belgium, Luxembourg) have strengthened their controls on Opco/Propco arrangements. The main point of vigilance concerns the real economic substance of the Propco.
A Propco that exists only on paper, without its own governance, and without documented decision-making on works, sales, or refinancing, risks being reclassified as an artificial arrangement. The consequences are severe:
- Challenge of rental expense deductions at the Opco level, with tax reassessments over several fiscal years
- Reclassification of the structure as an abuse of rights, exposing the directors to increased penalties
- Dispute over the tax regime applied to dividends transferred from the Propco to a potential holding company
This risk is rarely addressed in standard presentations of the model. Decisions regarding real estate assets (works, arbitrations, refinancing) must be made and documented at the Propco level itself, not merely validated by the holding or the Opco.
Opco/Propco and real estate choices: when this arrangement makes sense
The Opco/Propco separation is not suitable for all situations. It is justified in specific cases where the value of real estate represents a significant portion of the company’s total assets, and where the company needs financial flexibility.
- Hotel groups, retail chains, or clinic networks where real estate weighs heavily on the balance sheet and operations require frequent investments
- Companies wishing to quickly reduce debt by selling their buildings while retaining the use of the premises through a lease (sale and leaseback)
- Private equity operations where the investor wants to isolate real estate risk from operational risk to structure distinct financing tranches
- Family transmissions where the separation allows assigning the Propco (stable asset) to certain heirs and the Opco (entrepreneurial activity) to others
Conversely, for an SME where real estate represents a small portion of the balance sheet, the costs of legal and accounting structuring (two companies, two accounts, regulated agreements) often outweigh the expected benefits.
The Opco model requires specific skills
Managing a Propco is not limited to collecting rents. The real estate company must actively manage its assets: arbitrations, maintenance work, lease renegotiations, monitoring market values. A passive Propco is a vulnerable Propco in the face of tax audits and asset value erosion.
The Opco/Propco arrangement remains a powerful tool for financial and asset structuring, provided that each entity has real governance, distinct accounting, and documented economic justification. European taxation no longer allows for facade structures.