A holding company owns and controls other companies, and sits at the top of a corporate hierarchy. In most instances, a holding company is the same as a parent company (there are no globally accepted definitions here).
For this reason, the umbrella term “mother ship” is a good way of understanding the entity type.
Holding companies and commercial real estate (CRE) ownership
In many cases, the legal owner and holding company of a property can be two different legal entities. In most cases, they are both represented by the same people.
- An effective owner / holding company is the “mother ship” that controls the property
- Legal owner is the legal entity that owns the property. The “mother ship” owns the legal entity that is the property legal owner
For example: Property fund ABC has a legal entity Dee-Ee Eff 5000 (Pty) Ltd. Many of their properties are, according to the deeds registry, owned by Dee-Ee Eff 5000 (Pty) Ltd. (Other ABC properties could be owned by other legal entities, with various names) However, if you talk to any tenant of the property, they will tell you that ABC owns the property. Similarly, any owner representatives of the property will generally engage with tenants under the ABC brand.
Holding companies and relating to tenants
Tenants can be grouped into two categories:
- Tenants linked to holding companies
- Tenants not linked to holding companies – for example sole proprietors, small and medium-sized businesses, or businesses operating as franchisors (see more below)
The relationship of tenants to their holding companies depends on the lense and objectives of the analyser. The holding company is used either to evaluate and order tenants by:
- Tenant covenant strength
- Brand exposure
Shareholders and credit providers are incentivised to view tenants through the financially relevant lense of their relationship to holding company tenant covenant strength.
Holding company and tenant analysis
In evaluating tenants based on their holding company (“HoldCo”) tenant covenant strength, to avoid misrepresentation, it is critical to categorise tenants into two categories
- Tenant can inherit the HoldCo’s covenant – conditions:
- The HoldCo is the same entity as the occupying, contracted tenant
- The occupying, contracted tenant differs from the HoldCo, but the performance by the occupying, contracted tenant is guaranteed by the HoldCo. Thus the effective tenant, in event of rental default by the occupying tenant, is the HoldCo
- It is misleading for the tenant to inherit a HoldCo covenant – conditions:
- The occupying tenant is a franchisee of the HoldCo. There is no guarantor relationship between the HoldCo and occupying tenant. This means, in the event of non-payment by the occupying tenant, the landlord can only seek damages from the occupying tenant.
- The occupying tenant operates under the brand of the HoldCo. As with above, that is where the financial relationship ends.
If interested in legal reading on this matter, please see here
Drivers for the creation of a HoldCo – SubCo structure
- A legal entity/entities that allows intellectual property or other assets to be held independently of its subsidiary companies, reducing litigation risk
- Reduced risk – in the event of failure of a subsidiary company
- Tax efficiencies
- Ability to co-venture or partner with other businesses at a subsidiary level