The opco/propco structure is not just a binary legal choice. The decision impacts the balance sheet structure, the accounting treatment of leases, the taxation of intercompany flows, and the ability to raise debt on each vehicle. We observe that most available analyses skim over these trade-offs by reducing them to “separating operations from real estate.” Understanding the specifics of opco and propco requires delving into the financial and accounting mechanics that condition each scenario.
Impact of IFRS 16 on the choice between opco and propco
The IFRS 16 standard has profoundly changed the balance sheet reading of leases. When an opco signs a lease with its propco, it must record a right of use as an asset and a lease liability as a liability. The lease is no longer off-balance sheet.
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For listed groups, this registration increases the apparent debt of the opco. The net debt/EBITDA ratio mechanically deteriorates, even if the actual cash flow has not changed. A financial analyst will indeed recalculate EBITDA by adding back the rents (EBITDA “pre-IFRS 16”), but the bank covenants negotiated after the implementation of the standard often incorporate both readings.
On the propco side, the effect is the opposite. The mortgage debt remains confined to the real estate vehicle, and the rents received from the opco constitute a secure recurring income. To explore the specifics of opco and propco, we recommend modeling both balance sheets in parallel before any split, testing several lease duration and indexing hypotheses.
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Firm lease duration and propco valuation
The valuation of a propco directly depends on the quality of the lease signed with the opco. A long firm lease (twelve years or more) with a reputable tenant allows for a tighter capitalization rate, thus a higher asset value.
Conversely, a short or cancellable lease weakens the financing of the propco. Lenders then demand higher margins and more restrictive covenants. The duration of the firm lease conditions the cost of real estate debt, which impacts the rent charged to the opco.
Sale and leaseback: when the opco/propco split creates value
Sale and leaseback remains the most common mechanism for transitioning from an integrated structure to an opco/propco scheme. The company sells its real estate to an investor (or to a propco it retains in whole or in part) and signs a lease in return.
The operation frees up immobilized capital. This cash can be used to reduce the opco’s debt, finance external growth, or redistribute to shareholders. However, it creates a future rental commitment that rigidifies the cost structure of the opco.
- The opco recovers immediate cash but loses the flexibility of an asset it owned, particularly the ability to pledge that asset to secure other financing.
- The propco benefits from predictable rental income but bears the risk of vacancy if the opco defaults or restructures its lease at maturity.
- The sale price must reflect market value; otherwise, the tax administration may reclassify part of the transaction as an abnormal benefit.
The spread between rental yield and the cost of real estate debt determines whether the operation creates or destroys value for the propco. When rates rise, this spread compresses, and sale and leaseback becomes less attractive for the buyer.
Intercompany flows and rental taxation between opco and propco
The rent paid by the opco to the propco constitutes a deductible expense for the former and taxable income for the latter. This seemingly simple mechanism conceals several points of attention.
The rent must be set at a market level. If the propco is owned by the same group, an inflated rent artificially reduces the opco’s profit and inflates that of the propco, exposing it to a tax adjustment regarding transfer pricing. Transfer pricing documentation must include robust rental comparables.
VAT and registration fees
The transfer of real estate to the propco generates registration fees or VAT depending on the nature of the property and the status of the transferor. A property completed for more than five years is generally subject to transfer duties, unless an option for VAT is taken under certain conditions. This friction cost can represent several percentage points of the property’s value and must be included in the overall profitability calculation of the structure.
On the current rent, the VAT option allows the propco to recover the tax on its maintenance costs and works. The opco, if VAT liable, deducts the VAT on the rent. However, if the opco engages in an exempt activity (health, education), the VAT on the rent becomes a net cost.
Logistics and data centers: sectors where the propco model dominates
In recent years, opco/propco structures have significantly spread in logistics, healthcare, and data centers. The reason lies in the specificity of the assets: expensive, technical buildings with a long lifespan, whose value relies more on location and physical characteristics than on the tenant’s activity.
In these sectors, the propco attracts institutional investors with a core or core+ profile seeking stable returns. The opco, relieved of the balance sheet burden of real estate, shows more readable operational profitability ratios for its own investors or lenders.
- In logistics, sale and leaseback often involves new or recent platforms, with long firm leases indexed to inflation.
- In data centers, the propco finances the building envelope while the opco carries the technical equipment (cooling, power supply), creating two distinct risk profiles.
- In healthcare (clinics, nursing homes), the split allows for the separation of regulatory risk related to operations from pure asset risk.
The choice between maintaining an integrated structure or splitting into opco/propco is not decided on a general principle. It depends on the marginal cost of debt, the intended holding period, and the ability to negotiate a lease whose terms satisfy both vehicles. A poorly calibrated structure, where the rent crushes the opco’s operating margin or where the real estate debt exceeds the propco’s rental capacity, destroys more value than it creates.