OpCo PropCo mortgages Explained
If your business owns or plans to buy a commercial property, you may have heard the term OpCo PropCo mentioned by an accountant, solicitor, or lender.
In simple terms, an OpCo PropCo structure separates the trading business from the property it operates from. It is common in commercial mortgage lending and in certain industries it is not just preferred but expected by lenders.
Not Sure Whether An OpCo PropCo Structure Is Right For Your Business?
OpCo PropCo structures can be useful, but they need to be set up properly from the start. Lenders, accountants and solicitors will all look at the arrangement from different angles, so it is important that the structure works commercially as well as from a lending perspective.
At Kerr & Watson, we help business owners understand how commercial lenders view OpCo PropCo structures and whether this type of arrangement is suitable for their property finance plans.
What does OpCo PropCo mean?
OpCo is short for operating company. This is the company that runs the business day to day. It employs staff, generates turnover, and takes on the commercial risk of trading.
PropCo is short for property company. This company exists solely to own the property. It does not trade in the traditional sense and its income usually comes from rent paid by the OpCo.
Under an OpCo PropCo structure, the property is owned by the PropCo and leased to the OpCo under a formal lease agreement. The two companies are legally separate, even if they are owned by the same people.
Why businesses use an OpCo PropCo structure
In practice, there are two main reasons this structure is used.
The first is asset protection. By separating the property from the trading business, the property is insulated from many of the risks of the OpCo, if the trading business struggles or fails, the property is not held directly within that trading company.
The second reason is lender requirements. Where a significant part of the lending value sits in the property, many commercial lenders will require an OpCo PropCo structure as part of their risk management.
This is particularly common where the property is high value or highly specialised.
You most often see OpCo PropCo arrangements in sectors such as care homes, pubs and restaurants, hotels, industrial units, warehouses, and owner occupied commercial premises with strong asset value.
How lenders look at OpCo PropCo mortgages
Even though the property sits in the PropCo, lenders do not ignore the trading business. In fact, the OpCo is usually central to the affordability assessment.
Although the property sits within the PropCo, lenders will usually look closely at the strength of the trading business. In practice, the OpCo often remains the main focus of the affordability assessment because it is usually the source of rental income used to service the mortgage.
A lender will want to understand whether the operating business can comfortably afford the rent it pays to the PropCo and whether that rent is sustainable over the long term. If the OpCo is under pressure, has inconsistent profits or relies heavily on one trading location, the lender may take a more cautious approach.
Security and guarantees in OpCo PropCo lending
OpCo PropCo mortgages often involve more security than a straightforward commercial mortgage because lenders want protection across both the property-owning company and the trading business.
The lender will usually take a first legal charge over the property owned by the PropCo. This gives them security over the asset if the loan is not repaid. In addition, they may ask for guarantees from the OpCo, debentures over one or both companies, personal guarantees from directors or shareholders, and security over rental income or relevant insurance policies.
The exact security package will depend on the lender, the strength of the business, the loan size and the overall risk profile of the case.
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The lease between OpCo and PropCo
The lease between the OpCo and PropCo is not just a legal formality. It is one of the documents lenders will review carefully because it helps demonstrate how the mortgage will be serviced.
Lenders want to see that the rent is realistic, commercially justifiable and sustainable for the trading business. Setting the rent too high rarely helps because it may make the OpCo look less profitable or raise concerns during underwriting.
The lease length also matters. A longer lease can provide comfort to the lender, but it still needs to suit the long-term plans of the business. This is where coordination between your accountant, solicitor and mortgage adviser is important, as poor alignment between the lease, tax planning and lender requirements can cause unnecessary delays.
Tax and accounting considerations
OpCo PropCo structures are usually accountant led. There can be tax efficiencies depending on how rent, profits, and ownership are structured. There are also potential stamp duty and capital gains considerations if property is transferred into a PropCo.
From a mortgage perspective, lenders will want reassurance that any transfer was done properly and not as a last minute attempt to shield assets from an already struggling business.
If you are considering this route, you should take professional tax advice.
Common concerns we hear from business owners
One of the most common worries is complexity. Running one company is challenging enough, let alone two.
The reality is that there is more administration, higher professional fees, and more documentation. It is not something to enter into casually.
Another concern is flexibility. If your business operates from multiple sites, or may need to relocate or close locations, an OpCo PropCo structure can make those decisions harder. The property company still needs income to service its debts.
These are not reasons to avoid the structure, but they are reasons to ensure you carry out full due diligence.
When an OpCo PropCo mortgage makes sense
In our experience, this structure works best when:
- The property is a long term asset for the business
- The trading business is stable with predictable cash flow
- There is a clear commercial reason for separation
- The structure is planned early rather than imposed late
When those conditions are in place, OpCo PropCo mortgages can be a sensible and robust way to finance commercial property.
Each situation is different so you should take professional advice to understand what’s best for you.
When Might An OpCo PropCo Structure Not Be Suitable?
An OpCo PropCo structure is not right for every business. It can add administration, legal costs and accounting complexity, so there needs to be a clear commercial reason for using it.
It may be less suitable where the property value is modest, the business is unlikely to remain in the premises long term, or the added cost of running two companies outweighs the benefit.
This is why it is usually best considered early, with input from your accountant, solicitor and mortgage adviser before the finance application is submitted.
Conclusion
OpCo PropCo mortgages are a well-established part of commercial property finance, but they are often misunderstood.
The structure can help separate a trading business from the property it occupies, which may provide asset protection and lender reassurance. However, it also introduces additional complexity, including formal lease arrangements, guarantees, security requirements and professional advice costs.
For the right business, an OpCo PropCo structure can be a sensible way to hold and finance commercial property. The key is making sure the arrangement is commercially suitable, properly documented and acceptable to lenders from the outset.
If you are buying a commercial property, refinancing an existing one, or have been advised to consider an OpCo PropCo structure, speak to Kerr & Watson to discuss your commercial mortgage options.
