The eastern States have experienced substantial increases in the value of real estate over the last couple of years. This increase in property values, however, is not such a great thing when it comes to selling your management rights.

The value of manager’s residential units in some areas (particularly those close to the beach or in the Sydney area) has increased to such an extent that it is becoming a liability to the saleability of the management rights.

The Problem

When investors look at purchasing management rights, they look at the total cost of the acquisition – ie the cost of the business plus the cost of the residence/office. Where real estate values have escalated substantially, the net return on the total investment can be significantly reduced and the proposed purchase is not as attractive as it is otherwise would have been.

Some management rights brokers have reported occasions recently where this reduced rate of return has led buyers to look elsewhere for businesses whilst they chase a better rate of return. Leasehold motels is a classic alternative – with no Owners Corporation to deal with, no real estate to purchase, no real estate licences and trust accounts required, a residence still on-site and long term security of tenure.

Minimise the problem

Unfortunately, options may be limited. If the reception/office is part of the title to your residential unit (or is an exclusive use allocation attaching to your residential unit) then you have no flexibility. The unit cannot be severed from the management rights.

In the Sydney area, however, many (if not most) of the reception/offices are held as separate freehold lots. Consequently, designated manager’s residential units are irrelevant to the operation of the management rights.

It is these types of complexes where there are some real options available.

Options

Your options are twofold:

1. If your Owners Corporation will allow it, sever the management unit completely from the management rights so that the management rights are attached only to the office lot; or

2. Sever the existing management unit from the management rights but provide that the manager must still reside in the complex. By doing this, the manager has the flexibility of either buying a cheaper (say) one bedroom unit in the complex or renting a two or three bedroom unit.

So what’s the better option?

I remain a firm believer that managers should at least reside in the complex they manage. It is difficult to argue that Owners Corporations should pay managers a caretaking fee (which may be substantially in excess of what independent tradespersons may charge for the same work) if the manager is not living on-site and effectively on call 24/7 in the case of an emergency. This is the ultimate (and unarguable) difference between on-site managers and Owner Corporation employed tradespersons.

As long as the manager resides in a unit in the complex, ownership of a unit should be irrelevant to the Owners Corporation.

Issues to consider

There are a couple of issues to consider.

Firstly, one of the prerequisites to obtain an On-Site Residential Property Manager’s licence in New South Wales is that the licensee’s principal place of residence must be situated in the complex and the licensee owns that principal place of residence. This licence, however, will soon become obsolete when changes are made to the licencing legislation.

I have previously expressed the view that On-Site Residential Property Managers should, in time, upgrade their licenses to full Real Estate Agent licences as it creates all sorts of flexibility from the manager’s point of view. It also gives the manager a potential new income stream in respect to selling lots in the complex. This process is not overly complex or time-consuming and will soon become mandated.

Secondly, a change may be required to the by-laws so as to delete reference to the particular nominated manager’s residential lot and to substitute a reference to “any lot occupied by the manager from time to time”.

Thirdly, the Caretaking Agreement will also need to be varied to delete reference to the nominated manager’s residential lot and again substitute a reference to “any lot occupied by the manager from time to time”.

CONCLUSION

Managers should consider their options as far as severing expensive residential management units from the management rights documentation and thereby provide flexibility, moving forward. This flexibility will make a future sale of the management rights more attractive in the marketplace.

Liability limited by a scheme approved under Professional Standards Legislation
Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.

 

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