What Is a Propco (Property Company)?
A propco, property company, or prop company is a secondary entity created by a business specifically to hold and manage the real estate that it owns.
Handing over income-generating property and its related debt to a newly formed subsidiary typically provides the parent or opco (operating company) with advantages related to financing and credit rating issues.
- A propco is a subsidiary company created specifically by a parent company or opco to hold and manage its income-generating real estate.
- These arrangements are almost always pursued to secure more favorable financing and ease credit rating issues.
- Transferring all of the real estate and related debt to the propco enables the opco to free up funds and boost its financial health.
- The propco, meanwhile, inherits a portfolio of property that it can use as collateral to raise capital at competitive rates.
How a Propco (Property Company) Works
Opco-propco business arrangements result in the subsidiary or property company holding or owning all of the assets, including real estate, that the main operating company (opco) uses to generate revenues. Why do this? Primarily to secure more favorable financing and capitalize the company for expansion.
All financing and credit rating-related issues are suddenly divided up between two parties. The opco removes the carrying cost of its real estate from its books, enabling it to free up funds and boost its financial health.
Criticism of a Propco (Property Company)
Opco-propco arrangements allow the operating company to rent or lease property from the property company. In practice, this looks like a sale and a leaseback. However, the company never relinquishes the property in any real way, as the propco and opco are part of the same group of companies.
While this might sound like the corporate equivalent of having your cake and eating it, there can be several downsides to creating a propco. If a business works out of multiple locations rather than a primary one, a propco arrangement locks the company into a situation where closing any location becomes more difficult.
In a traditional business setup, for example, a company might choose to close an underperforming location or office, and likely sell the property. By contrast, in a propco arrangement, the propco owns the property and may not choose to offload it if the market won't return enough to cover the debts.
As a result, the opco may be required to pay rent on a property, even if it is not utilizing it, because the propco depends on that income to service the debt-financed off the properties.
Propco to REIT Transitions
Because a propco can limit the flexibility of the opco in certain situations, the operating company will sometimes spin off the property company as a real estate investment trust (REIT) to turn it into its own entity.
Creating a REIT—companies that hold a portfolio of properties and mortgages, collect rent on them and then pass on the proceeds to investors in the form of dividends—offers tax advantages to the parent company, namely by removing any double taxation issues that could arise with a propco-opco arrangement.
An operating company may later opt to spin off a subsidiary as a real estate investment trust (REIT) to gain tax advantages.
Once spun-off, the propco can act as any other REIT, adding properties to its portfolio that are unrelated to the opco's business.