Real Estate Operating Company (REOC)

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on September 07, 2023

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What Is a Real Estate Operating Company (REOC)?

A Real Estate Operating Company (REOC) is a firm that actively engages in real estate activities such as development, management, and sometimes leasing, in addition to owning its properties.

Unlike Real Estate Investment Trusts (REITs), REOCs can reinvest their profits into business operations instead of distributing them to shareholders, allowing for potential growth and expansion.

The major distinguishing factor between REOCs and other real estate structures, like REITs and Limited Partnerships (LPs), is the requirement for profit distribution.

While REITs must distribute at least 90% of their taxable income to shareholders, REOCs are free from such obligation. This gives REOCs greater flexibility in terms of business development and expansion, allowing them to plow back their profits for growth.

Understanding the distinct operational dynamics of REOCs may present savvy investors with unique growth opportunities, as these companies can reinvest their profits for expansion, potentially leading to higher long-term yields.

Historical Evolution of REOCs

REOCs have been central to the real estate industry for decades, pre-dating the introduction of Real Estate Investment Trusts (REITs) in 1960.

The advent of REITs, designed to allow small investors access to large-scale, income-generating real estate, imposed income distribution obligations that REOCs did not have. This allowed REOCs to retain and reinvest profits for growth and development.

The Financial Modernization Act of 1999 was another landmark event, enabling REOCs to diversify operations beyond real estate into areas like insurance and securities.

In the 21st century, both REOCs and REITs continue to evolve, leveraging technological advancements like PropTech to improve operations and profitability.

REOCs have evolved from being the standard model for real estate companies to one of several structures, each offering unique advantages and constraints based on specific business goals and strategies.

REOC Structure and Operation

Overview of Organizational Structure

In a typical REOC, the organizational structure is hierarchical, consisting of several key roles and departments. Here's a closer look:

Board of Directors

At the top of the hierarchy is the Board of Directors. They ensure the organization adheres to legal guidelines and maintains a strong corporate governance framework.

The board makes high-level decisions about the company's direction, establishes policies, and oversees the CEO's and senior management's performance.

CEO, CFO, and Other Top Management

Directly under the Board of Directors are the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and other members of top management.

The CEO is responsible for the company's overall strategic direction, while the CFO focuses on financial planning, risk management, and financial reporting.

Other top management roles include the Chief Operating Officer (COO), responsible for day-to-day operations, and the Chief Investment Officer (CIO), responsible for the company's investment strategy.

Departmental Managers and Operational Teams

Below the top management are the departmental managers and operational teams responsible for executing the company's strategic plans. These departments can include:

  • Property Management: This team manages the day-to-day operations of the properties, including maintenance, tenant relations, and lease administration.

  • Leasing Team: This team ensures high occupancy rates by negotiating lease terms with current and prospective tenants.

  • Development Team: This team identifies and oversees the development of new properties.

  • Finance and Accounting: This team manages the company's finances, including budgeting, financial reporting, and ensuring financial compliance.

Organizational Structure of a Real Estate Operating Company (REOC)

How a REOC Operates: Daily Operations and Long-Term Strategies

REOCs' operations involve a mix of daily tasks and long-term strategic planning. Here's an overview:

Daily Operations

Daily, REOCs manage their properties, handle leasing activities, and conduct continuous market research. These tasks are essential to maintain high occupancy rates, ensure tenant satisfaction, and to stay informed about market trends and opportunities.

  • Property Management: Includes activities like maintaining facilities, addressing tenant concerns, and collecting rent.

  • Leasing Activities: REOCs continually work to attract and retain tenants. This involves marketing available spaces, negotiating lease terms, and renewing existing leases.

  • Market Research: REOCs regularly analyze the real estate market to identify potential investment opportunities and stay ahead of industry trends.

Long-Term Strategies

In addition to daily operations, REOCs also focus on long-term strategies to drive growth and increase shareholder value. These strategies typically involve property acquisition, development, and sometimes strategic divestment.

  • Property Acquisition: This involves identifying and purchasing properties that align with the company's strategic goals.

  • Property Development: REOCs often develop properties to increase their value. This can involve renovations, expansions, or even redevelopment.

  • Strategic Divestment: At times, a REOC might sell a property if it no longer aligns with the company's strategy or if the potential sale price is particularly attractive.

Financial Aspects of a REOC

Revenue Generation

REOCs generate revenue through a combination of rental income and property sales. The mix between these two revenue streams can vary greatly depending on the company’s strategy and market conditions.

Cost Structure and Expense Management

The primary expenses for REOCs include operating costs, interest expenses, and capital expenditures.

Operating costs cover property maintenance and management. Interest expenses arise from debt financing property acquisitions, and capital expenditures are for property improvements and acquisitions.

Cash Flow Analysis

Analyzing a REOC's cash flow involves evaluating operating cash flow (rental income minus operating expenses), investing cash flow (capital expenditures and property sales), and financing cash flow (borrowings and repayments, and equity issuances and buybacks).

Benefits of Investing in a REOC

Flexibility in Profit Reinvestment

Unlike Real Estate Investment Trusts (REITs), REOCs are not mandated to distribute a significant portion of their income to shareholders.

This gives them the liberty to reinvest their profits back into the business for expansion and development, potentially accelerating growth and increasing the company's value over time.

Potential for Greater Returns

Due to their ability to reinvest profits into new developments or renovations, REOCs may offer higher returns than REITs, particularly in the long term. This is dependent, however, on the success of their reinvestment strategies.


REOCs can diversify their revenue streams by engaging in various aspects of real estate, from development to management and leasing. This diversification can reduce risk and improve financial stability.

Risks and Challenges of Investing in a REOC

Market Risks

Like any other company operating in the real estate market, REOCs are exposed to market risks, such as fluctuations in property values, interest rates, and economic conditions. These can significantly impact the company's performance.

Reinvestment Risks

While the ability to reinvest profits can be a benefit, it can also be a risk. If a REOC's reinvestments do not yield the expected returns, it could harm the company's financial health and the value of its shares.

Operational Risks

As REOCs are typically involved in various aspects of real estate operations, they may face operational risks such as project delays, cost overruns, and difficulties in property management. These can negatively impact profitability and returns.

Benefits and Risks of Investing in a Real Estate Operating Company (REOC)

Analyzing a REOC for Investment Purposes

Key Financial Indicators and Ratios

Several key financial indicators and ratios can be used to analyze a REOC, including:

Non-financial Factors to Consider

Non-financial factors that can impact a REOC's performance include the quality of the management team, the company's strategic positioning, its competitive advantages, and the health of the real estate markets in which it operates.

Impact of REOCs on the Real Estate Market

Influence on Property Prices

REOCs can have a significant impact on property prices. By actively developing and improving properties, they can help increase real estate values in their operating areas.

Effect on Market Dynamics and Trends

REOCs can also influence market dynamics and trends. For example, a REOC's decision to invest heavily in a particular type of real estate (such as commercial properties or multifamily residential properties) can influence other investors and contribute to broader market trends.

Final Thoughts

A REOC is a type of real estate company that actively engages in real estate activities such as development, management, and leasing and retains its profits for reinvestment and growth.

REOCs contribute to economic development by improving properties, creating jobs, and contributing to local economies through property taxes and purchasing goods and services.

While the REOC model has many advantages, it also carries risks. Investors should carefully consider both the potential benefits and risks when investing in REOCs.

For investors looking to diversify their portfolio with real estate exposure, REOCs offer an attractive investment option. Consult with a wealth management advisor to discuss whether investing in REOCs aligns with your investment goals.

Real Estate Operating Company (REOC) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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