FAQs for Buyers
Why should I consider purchasing a Management Rights business?
Management Rights are businesses where you have clearly defined customers (the Body Corporate and investor owners), clearly defined responsibilities controlled by legislation (the Caretaking and Letting Agreements), predictable income, no bad debts and the flexibility to manage your day to accommodate your lifestyle aspirations. It’s not easy street, but an opportunity to run a business from home with good return.
Management Rights businesses come in many shapes and sizes with a wide range of investment and time commitment. It is an industry where common sense and diplomacy are as important as business skill, an industry where innovation and effort bring business rewards.
Although every purchaser’s situation needs personal assessment, Management Rights businesses are generally viewed favourably by lending institutions specialising in the industry as there is predicable business revenue.
How much do Management Rights businesses cost?
There are two components to a Management Rights purchase:
1. Real Estate(the Manager’s Unit and associated office if on title)
Real estate values have always been cyclic and there are supply/demand drivers.
Size, location, surrounding infrastructure and amenities are all determinants when value is established. The value of the Manager’s Unit will usually have a premium applied to it, as the Manager has either exclusive use of an office or reception area or that area is on the Title of the Manager’s Unit.
2. The Management Rights Business
The value of the business is normally assessed as a multiple of net profit. The multiple can range from 3.5 to 5.5 depending on market demand, interest rates, location, number of units in the letting pool, occupancy rates and the length of the agreements. Usually the greater the net profit, the greater the multiple, but recent sales indicate a wide variation in the sales multiplier achieved on different properties. Purchasers are looking for value and potential growth.
When assessing various Management Rights businesses it is important to analyse how much of the purchase price is apportioned to the Manager’s Unit as this will have a direct impact on return on investment.
Are there any other costs?
Over and above the purchase price of the Manager’s unit and the Management Rights business you will need to allow for stamp duty and registration charges, loan costs, accountancy and legal fees and licence costs. Every state and territory is different, but you should allow approximately 5% of the Managemetn Rights purchase price for these expenses.
How much can I borrow?
Although as a rule of thumb most lenders will finance up to 70% of the total purchase price including stamp duty and legal fees, they will also carefully assess your ability to service the loan. We believe that it is important that you meet with a lending representative specialising in Management Rights financing very early in your decision making process in order to determine your borrowing power. Please contact us if you would like to discuss your circumstances with a specialist finance broker.
Why do lenders like Management Rights?
Lending institutions view Management Rights as businesses with fair return for nominal risk. It is an industry with licensed operators which is governed by regulation, has transparent income and audited accounts and is an easy to learn proven business model.
Can I rely on the “figures” when purchasing Management Rights?
There is a requirement for transparency with a Management Rights transaction and the business purchase contract provides for a due diligence period which allows you to engage an accountant to verify the stated net profit and a lawyer to inspect the agreements and Body Corporate records. As a result it is very unusual for unexpected discrepancies to occur.
Do I need a licence to operate?
Prior to operating a Management Rights business at least one of the Directors of the purchasing entity will need to complete a certified training course to obtain a Resident Letting Agents Licence (Queensland) or an Onsite Resident Property Managers Licence (NSW).
Can I sell units in my complex?
If you wish to also sell units within the building or complex you will need to obtain a full Real Estate Licence.
Accredited Training Providers offer these training courses.
What is a Community Titles Scheme?
A Community Titles Scheme (CTS) is comprised of a Scheme Land (a technical term for either a high-rise building or a complex of individual or joined townhouses) and a Community Management Statement which, in conjunction with the Body Corporate and Community Management Act 1997, sets out important matters in relation to the management of the Scheme. Each CTS must be registered and has a unique registration number.
Upon the creation of a Community Titles Scheme a Body Corporate is established. The Body Corporate comprises all the owners of the lots within the Scheme. The owners are known as members of the Body Corporate.
What does the Body Corporate do?
The Body Corporate for a Community Titles Scheme supplies, or engages another person to supply, services for the benefit of owners and occupiers of the complex.
The owners of the lots within the Scheme elect a Body Corporate Committee to act and make decisions on behalf of the owners. The Committee will nominate a committee member to liaise with the Building Manager.
Who is the Building Manager?
The Building Manager is the Licensed Director of the entity purchasing the Management Rights.
What are the Building Manager’s duties?
The Caretaking Agreement will require you (or your staff) to look after the common property of the complex for the Body Corporate by maintaining the lawns and gardens, pools and other facilities. You are not required to undertake any work which requires the services of a qualified tradesperson, but you are required to supervise this work and report to the Body Corporate.
What skills do I need?
Many new purchasers of Management Rights businesses have never been in the industry before but they bring with them a variety of life skills and common sense.
As with any service industry, you will find that you are liaising with many different people every day whether they are unit owners, tenants, holiday makers, staff, body corporate personnel or tradespeople so good communication and people skills are important.
Computer skills will be an advantage as there are excellent programmes available to help you manage your trust account, but the basics are easily learned. Although not essential, marketing skills will certainly be beneficial in a holiday or corporate building but, again, you will find that there will be established systems in the business you buy and plenty of additional opportunities to consider.
How do I get paid?
A Body Corporate salary is paid for the manager to attend to all the caretaking, common area, cleaning and security arrangements of the complex. In large complexes the salary is usually large enough to employ staff to assist with property management, gardening or cleaning. In smaller complexes with smaller salaries the caretaking work is usually carried out by the Building Manager. This salary is paid monthly in arrears and is normally linked to the Consumer Price Index.
To obtain Letting Commissions the Building Manager is required to obtain written authority on a Property Management Agency Appointment Agreement (PAMD20A) from each unit owner in the rental pool. This Agreement will confirm the commission arrangement. Frequently:
- 12% of the rental charged for holiday units plus additional charges such as linen hire, cleaning etc
- 5% of the rental charged for permanent units plus a 2.5% management fee for arranging maintenance contractors etc. Additional let fees (usually one week’s rent) and rent renewal fees (usually 0.5 of one week’s rent) and administration fees to cover banking and monthly statement costs are also confirmed on the Agency Appointment Agreement
These charges, as well as any additional maintenance expenses, are deducted from the owner’s rental account. The Building Manager “pays himself” when he distributes income at the end of each month.
Can a Building Manager generate other income?
Yes. Managers often make additional income from tenants and owner/residents by providing gardening and/or cleaning services, hiring equipment or from tour desk commissions. If the Manager has a full Real Estate Licence there is also opportunity for additional sales commission income. The PAMD20As may also provide for additional income by way of providing additional services such as gardening maintenance or broadband or telephone connections. Sometimes managers will take on employment not associated with the complex and, although this is permitted, it is important that this doesn’t compromise the managerial duties for the Body Corporate.
If there is additional income included on the financial statements of the Management Rights business you are considering it is important to:
- check that the Manager is legally entitled to receive this income, and
- assess whether or not you, as the new owner, have the skills and/or desire to perform these services
Most of our experienced agents have had personal experience as Management Rights owners and they will be able to assist you with your analysis.
Why do I need a Trust Account?
All funds collected on behalf of the owners who have requested property management and letting services must be held in a Trust Account which must be audited three times per year.
Who is the Body Corporate Manager?
The Body Corporate Manager is the entity elected by the Body Corporate Committee to provide administrative services to the Body Corporate. Their services include:
- Attending and preparing minutes for committee and general meetings
- Attending to matters arising from committee and general meetings
- Attending to correspondence
- Preparing and serving notices when/as required by the Body Corporate Act
- Keeping records
- Sending levy notices to owners and collecting Body Corporate Levies
- Preparing financial statements and annual budgets
- Effect all insurances
What are By-Laws?
By-Laws are the rules and regulations with respect to the use and occupation of the lots and common property within a Community Titles Scheme by owners and occupiers of the lots and their guests.
Are there different types of Caretaking Agreements?
The Caretaking Agreement outlines the responsibilities of the Building Manager. It includes the remuneration that will be paid and the length of the term of the agreement.
The length of the term will vary depending on the type of agreement on offer. A Standard Module has a maximum term of ten years whilst an Accommodation Module has a maximum term of twenty five years. The terms of these agreements are linked to the Letting Agreement for the complex. As the years pass and the term lessens, the Building Manager is able to request that the term be extended.
In some instances, the agreement on offer will not require the Building Manager to actually carry out the duties personally, but rather to arrange and supervise contractors performing the designated duties. These agreements are known as Supervisory Agreements. The remuneration for a Supervisory Agreement is less than for a Caretaking Agreement.
What is the difference between Permanent and Holiday letting?
Permanent complexes provide long-term accommodation for tenants, usually on six to twelve month leases. Holiday complexes provide short-term accommodation for holiday makers. Each type of business has different daily responsibilities and, whilst the income in a holiday complex can be significantly greater than that earned in a permanent complex, the hours involved in obtaining the income can also be more demanding.
Do I need staff?
This will depend on the size and nature of the Management Rights business. Many of the smaller properties are operated by sole operators or as husband and wife businesses whilst the larger businesses offer opportunity for leverage.
What is the difference between an Accommodation and a Standard Module?
The Accommodation Module is designed specifically for complexes where there is an expectation that there will be a high need for letting services. It allows for greater spending authority by the Body Corporate and allows the Body Corporate to grant a longer term. This provides greater security of management and greater security for the Management Rights investment.
The Standard Module is much more regulated and is designed for owner-resident complexes. It allows for more input from the owners and limits the term of the agreement to ten years. There is nothing wrong with this type of agreement providing the Management Rights owner regularly requests the Body Corporate to “top up” the agreement. This must be put to a general meeting as an ordinary resolution and obtain 51% agreement from the members of the Body Corporate.
What is the Transfer Fee?
Since September 2008 legislation has required the Body Corporate to charge the seller a transfer fee on the assignment (sale) of the Management Rights business if it consents to an assignment within two years of the seller’s settlement date. The transfer fee is 3% of the value of the business if selling within twelve months of settlement date or 2% if selling within two years. This provides incentive for the Building Manager to operate the business for a minimum of two years which provides stability for the Body Corporate and is fair in that there is no penalty if the agreement has been “topped up” or a new agreement issued at any stage.
What do we do first?
It is important to seek advice from agents, financiers, accountants and lawyers with specialist experience in the Management Rights industry. Seek out advisors you feel comfortable with as their knowledge is invaluable to you.
The first thing to consider is how much you can or want to invest by contacting a broker or bank who specialises in Management Rights.
Then seriously consider where you want to live and the type of accommodation you will need for your personal circumstances. When making this decision you will also need to consider the viability of operating a business in the selected area, so be prepared to compromise to ensure that your decision will also bring a realistic return on investment. Look closely at the infrastructure in the area; will tenants/holiday makers be attracted to the location?
Finally realistically assess the business opportunities in the area. Don’t be afraid to share your “wish list” with a specialist Management Rights agent. He or she will have local knowledge, be able to show you a selection of properties and will also be able to guide you through the purchasing process as you liaise with other professional advisors.
What support is available to new Managers?
When you purchase a Management Rights business the seller is contractually bound to provide transitional training. The timing and duration of this assistance is agreed between the parties but is frequently seven days before and seven days after settlement date.
In addition you will find that the trust accounting companies will provide training services and your Body Corporate Manager, Government authorities such as the Residential Tenancies Authority www.rta.com.au, the Real Estate Institutes of Queensland and New South Wales www.reiq.com and www.reinsw.com.au and industry bodies such as the Australian Resident Accommodation Managers Association www.arama.com.au provide valuable resources.
At Calvin Bailey Management Rights we are committed to offering new Managers the support they need and have been providing comprehensive services to our clients since 1996. This is a complimentary service and we are happy to work alongside you or answer your phone queries as they arise.
Can I have a pet?
Every complex is different; you will need to check the agreements and by-laws for the particular business you are considering.
What about holidays?
Your Caretaking Agreement will confirm your holiday arrangement. The Body Corporate will require notification of your intention to take leave and will require confirmation of the Relief Manager who will take on your responsibilities. A number of experienced former Management Rights owners provide locum management support.
Where else can we source more information?
You will find additional information including a list of professional advisors specialising in the Management Rights industry on our website.
This document contains general information about the Management Rights industry. It is not advice and you should not rely on the information in this document as an alternative to legal, accounting or financial advice from your professional advisors.