Across the real estate industry, "Opco/Propco"
structures continue to be used as a method of raising debt against
the real estate assets of a business. This article discusses
key issues that a lender should look at in its credit assessment
and potential exit strategies when considering Opco/Propco
The classic Opco/Propco structure involves an operating business
("Opco") transferring ownership of its real estate assets
to a special purpose property holding vehicle
("Propco"). The model was largely pioneered by
private equity and investment banks as a way of raising cheaper
debt in acquisition financing structures and is often used by hotel
By essentially transferring the real estate assets of the
operational business into a newly formed special purpose property
holding structure with leasebacks in place, owners can create
ring-fenced cashflows which can be secured over that real estate to
achieve significantly more attractive commercial mortgage terms as
opposed to more expensive leveraged finance.
Over the last 20 years, the appetite amongst borrowers and
lenders for sale and leaseback transactions and ground rent schemes
has been very significant.
Some of the typical advantages of the Opco/Propco structure
Ring-fenced mortgage deals are workable within commercial
mortgage departments of banks and compatible to covered bond
structures such as Pfandbrief. The risk profile and thus
the cost of debt is significantly lower as the leverage is entirely
different – typically, a fully collateralised
mortgage on a 60% Loan to Value Covenant deal with the income
servicing the loan (essentially, the lease rent under the sale and
leaseback arrangements) being prioritised.
The trading business releases value in capital assets.
There may be tax advantages – holding property
in an offshore vehicle may permit transfers of the shares in PropCo
to be made free from UK registration duties (neither stamp duty
land tax nor stamp duty applies to transfers of shares in an
offshore Propco, at least under current UK tax law).
VAT planning is sometimes easier with an Opco/Propco structure
because the grant of an intra-group lease may allow Propco to
As with any structure, the method of the structure's
original construction and how it fares when it is unwound for a
potential sale are highly significant. This is the case not only
for the borrower but also the lender, given that the credit
assessment of such a loan will require (or should require) legal
due diligence being undertaken on the effects of any enforcement of
Lenders should therefore focus early on the intra-group lease
structure/post-sale re-organisation which would be required to
effect the Opco/Propco split. In particular:
How do the cash flows work? Is the equity for the financing
subject to related transactions around the sale of the business?
What protective measures are needed when debt is advanced?
Is sufficient and effective security being granted over the
entire sale and leaseback arrangement and group so that the lender
has options on enforcement? Can the lease be terminated or amended
by the lender so that it can be repackaged for exit?
Are cash flows and intra-group lending arrangements fully
secured so that intra-group liabilities can be expunged by the
Has appropriate tax analysis been undertaken in conjunction
with the structuring, and what are the tax ramifications of
unwinding the structure?
What are the effects of splitting the group on enforcement in
relation to any intra-group reliefs utilised during the
re-organisation period? For instance, can a revenue authority claw
back taxes in situations where the vehicle to which the property
was transferred leaves the group?
Can revenue authority challenge relief applied for around the
re-organisation period, or is the relief applied for just
How have capital gains tax ("CGT") liabilities been
dealt with within the group? We would refer you to our
tax article in the first edition of REF News and Views
which dealt with the UK's new non-residents capital gains tax
regime. On any enforcement sale, Propco may be liable for any CGT
in respect of the property, and the lenders may look to exit via a
sale of the property and leave the CGT liability with Propco. So,
essentially, the lenders' enforcement options are more
limited – the sale of shares in the Propco being
unlikely unless the CGT liability is something the purchaser is
willing to take. Suffice it to say it does not automatically follow
that the property will have dropped so considerably in value at the
time of enforcement that all CGT liability is extinguished.
The above matters are all considerations that a prudent lender
would wish to take, as they could affect the cash flow front end of
the deal and any enforcement. Clearly, a number of these scenarios
will be more relevant than others depending on whether the
preferred exit strategy is a sale of the real estate or an indirect
sale (the Propco). In situations where there is a genuine risk of a
clawback, the lender may wish, on a case-by-case basis, to have
discussions with the borrower as to retentions or other
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.