A hotel operator signs a lease with a real estate company that owns the building. The hotelier collects operating income, while the real estate company receives an indexed rent. The two structures bear distinct risks, have separate balance sheets, and often attract different investors. This is the principle of the OPCO/PROPCO model, and understanding it is crucial for making significant asset and operational decisions.
The lease between OPCO and PROPCO: where everything plays out concretely
The separation between operation and real estate ownership is often described as a simple scheme. In practice, the complexity lies in the contract that binds the two entities: the lease.
The type of lease chosen (traditional commercial lease, triple net lease, variable rent indexed to turnover) determines who bears the maintenance, local tax, and renovation costs. In a triple net lease, the PROPCO collects a predictable rent and transfers nearly all costs to the OPCO. The yield for the real estate company appears stable, but the operator bears a high risk during periods of reduced activity.
Conversely, a lease with a variable component protects the OPCO during slow periods but introduces volatility into the PROPCO’s income. The choice between these formulas depends on the negotiating power of each party, the industry sector, and the desired commitment duration. To fully understand OPCO and PROPCO, one must start by reading this lease and its annexes, not by looking at legal flowcharts.
OPCO and PROPCO in non-traditional sectors: education, glamping, coworking
The classic image of the OPCO/PROPCO model refers to the hospitality or retail sectors. In recent years, the structure has expanded into sectors where it was not expected.
Specialized schools and educational structures
Private equity players are now structuring specialized schools (notably SEN schools in the UK) by separating the ownership of school buildings into a PROPCO and the educational service into an OPCO. This setup often occurs in joint ventures, allowing the real estate company to secure a rental yield backed by an operator that has already completed several operational cycles.
Glamping and alternative accommodation
Glamping exemplifies the OPCO/PROPCO logic applied to lightweight assets. The operator manages marketing, guest reception, and customer experience. The PROPCO owns the land and semi-permanent structures. The operational risk remains concentrated in the OPCO, while the asset value of the site rests with the PROPCO.
What makes these sectors interesting is that the OPCO/PROPCO separation addresses a concrete problem: traditional real estate investors do not know how to operate a school or a glamping site, and operators lack the equity to purchase the land.
Legal vehicle of the PROPCO: classic company or regulated fund
The choice of vehicle in which to house the PROPCO has direct consequences on taxation, governance, and the ability to raise funds.
A recent trend shows the increasing use of regulated funds like the Luxembourg RAIF (Reserved Alternative Investment Fund) to hold the real estate component. The architecture relies on a rigorous isolation of land ownership from operation, which secures the risk profile for institutional investors.
In practice, housing the PROPCO in a RAIF rather than in a classic SCI or SAS allows for structuring the distribution of rental income according to regulated rules, accessing a standardized reporting framework, and reassuring subscribers accustomed to regulated funds. Returns on this point vary depending on the size of the real estate portfolio and the profile of targeted investors, but the trend is clear for operations worth several tens of millions of euros.
- SCI or SAS: management flexibility, but limited transparency for demanding institutional investors.
- Luxembourg RAIF: regulated framework, structured reporting, suitable for significant fundraising with institutional LPs.
- REIT or SIIC: listed or semi-listed vehicle, relevant when the PROPCO reaches a critical size and aims for liquidity.
Criteria for choosing between integrated OPCO and OPCO/PROPCO separation
The question is not always whether the OPCO/PROPCO model is “better.” Sometimes, keeping the real estate within the same structure as the operation is the right decision.
Separation occurs when the value of the real estate is significant relative to the activity, when the operator wants to free up capital to invest in their operation, or when the risk profiles of the two activities are too different to coexist within the same balance sheet.
Separation does not occur when the land is modest, when the activity is too young to attract a distinct real estate investor, or when the legal and tax complexity of the setup exceeds the expected benefit.
- Real estate volume: beyond a certain threshold, separation becomes profitable despite structuring costs.
- Operator maturity: an operator with a solid history reassures the PROPCO about the sustainability of rents.
- Exit strategy: if the goal is a quick sale of the operation without the real estate (or vice versa), separation facilitates the transaction.
- Accounting constraints: IFRS 16 pushes some companies to reconsider their leases, prompting a reevaluation of the OPCO/PROPCO setup.
The IFRS 16 standard, by requiring the recognition of usage rights on the lessee’s balance sheet, has made previously off-balance-sheet lease commitments visible. This accounting transparency revitalizes the relevance of the OPCO/PROPCO analysis for comparing companies with different real estate strategies within the same sector.
The OPCO/PROPCO model is not a financial tool reserved for large hotel groups or listed real estate companies. It now structures schools, alternative tourist sites, and coworking spaces. The right reflex, before making a choice, is to look at the lease, the legal vehicle, and the size of the real estate portfolio involved, not the current trend.