OpCo, PropCo, and HoldCo Deals Explained for Dummies: A Beginner’s Guide to Structuring Smart Business Deals

I’ll be honest, when I first came across terms like OpCo, PropCo, and HoldCo, I nodded along in meetings, pretending to understand while secretly wondering what everyone was talking about. It felt like financial wizardry, and I struggled to connect the dots.

Only now am I really starting to catch on, and as I do, I realize how powerful these structures can be in unlocking value, reducing risk, and optimizing financing. So, if you've ever felt lost when these terms come up, this article is for you.

Breaking Down the Basics

1. What is an OpCo (Operating Company)?

The OpCo (Operating Company) is the entity that runs the business. It generates revenue, manages day-to-day operations, employs staff, and carries the business risk.

Example: If you own a hotel, the OpCo would be the company handling reservations, housekeeping, food and beverage, and guest services.

Key Risks: Since it is actively running operations, it is exposed to market fluctuations, customer demand, and operational risks like lawsuits, supply chain issues, or economic downturns.

2. What is a PropCo (Property Company)?

The PropCo (Property Company) owns the physical assets, like real estate, and leases them to the OpCo. This setup is common in asset-heavy industries like hospitality, retail, and logistics.

Example: The PropCo owns the hotel building and land, then leases it to the OpCo for a fixed or variable rent.

Why Do This? Separating property from operations makes financing easier. Lenders see real estate as a lower-risk, stable asset, allowing the PropCo to secure funding at better interest rates.

Key Risks: If the OpCo struggles to pay rent or goes bankrupt, the PropCo could face financial difficulties. However, having a separate PropCo makes refinancing or asset sales easier.

3. What is a HoldCo (Holding Company)?

The HoldCo (Holding Company) is an umbrella entity that owns shares in the OpCo and PropCo (and sometimes other businesses). It does not operate businesses itself but provides oversight and owns equity in multiple assets.

Example: A private equity firm or investor may create a HoldCo that owns both the PropCo (which holds the real estate) and the OpCo (which runs the operations).

Why Do This?

• Risk Management: If the OpCo fails, the PropCo remains protected.
• Tax Efficiency: Some HoldCo structures allow for better tax planning.
• Better Financing: Lenders prefer dealing with a HoldCo, as it can provide collateral and stability.

Key Risks: HoldCos can become complex to manage, and if they take on too much debt, they can create financial strain on the entire group.

How Do These Entities Work Together in a Deal?

Here is how the relationship typically works in a structured deal:

• The HoldCo owns both the OpCo and the PropCo.
• The PropCo leases assets (like real estate) to the OpCo at a market-based rent.
• The OpCo runs the operations and generates revenue, paying rent to the PropCo.
• Investors or lenders finance different parts of the structure based on risk tolerance.

Example: A Hotel Investment Deal

Let’s say an investor wants to buy a hotel. Instead of putting everything under one company, they structure it like this:

• PropCo: Owns the hotel real estate and secures financing at a lower interest rate.
• OpCo: Runs the hotel operations, leases the property from PropCo, and pays rent.
• HoldCo: Owns shares in both companies and raises funds from investors.

This structure ensures that if the hotel business struggles, the real estate remains a protected asset. The PropCo can even lease the hotel to another operator if needed.

How to Structure a Deal to Maximize Value

To get the most out of an OpCo-PropCo-HoldCo structure, consider these strategies:

• Ensure the Rent is Fair and Sustainable – The OpCo must be able to afford rent, and the PropCo should receive enough to cover financing costs and provide returns to investors.
• Use Leverage Wisely – The PropCo can secure lower-interest loans by using property as collateral, while the OpCo raises working capital separately.
• Maintain Flexibility – If the OpCo struggles, the PropCo should have the option to lease to a different operator.
• Optimize for Tax Efficiency – In some cases, structuring through a HoldCo in a tax-friendly jurisdiction can reduce the overall tax burden.
• Keep Investors Aligned – Ensure that both property investors and operational investors have clear expectations on returns, risks, and exit strategies.

Now that I have finally started to understand OpCo, PropCo, and HoldCo, I realize why so many businesses use this structure. It allows for risk protection, financing flexibility, and tax efficiency, all critical factors when structuring a deal.

If you are new to this, do not worry. I was in the same boat, but once you grasp the fundamentals, it starts making a lot of sense. Whether you are in hospitality, retail, logistics, or real estate, structuring deals this way can make a business more resilient and attractive to investors.