Tips on Purchasing Management Rights

Tips and advice for those wanting more information on a Management Rights purchase.

Why buy a Management Rights Business?

Management Rights businesses generally fall into two (2) categories, permanent and holiday lettings. However, particularly in Queensland, many Management Rights businesses are often a combination of the two. Owning and operating a Management Rights business is both a financial investment and a time commitment. It is an industry where your business skills and diplomacy, coupled with your efforts, can bring great rewards.

A Management Rights business is one where you have clearly defined customers – the owners and the Body Corporate. You will sign a Caretaking Agreement and if you intend to act as a Letting Agent, a Letting Agreement, both of which are controlled by legislation. This business will give you a fairly predictable income, very few bad debts and the flexibility to manage your day.

Most potential purchasers will require finance and generally, Management Rights businesses are viewed favourably by lending institutions who specialise in the industry as the revenue is fairly predictable.

To find businesses in your area, speak with Mike Philpott of MR Sales.

What should we do first?

Attend one of our information seminars to see if this business is right for you!

We cannot stress enough how important it is to seek advice from qualified experts who have experience in the Management Rights industry. We recommend:

Accounting and Taxation:  Michael Beddoes or Paul Gaffney of Count Gold Coast

Legal: Col Myers or Ben Ashworth of Small Myers Hughes

Finance: Mark Ryall of MRM Finance

Sales: Mike Philpott of MR Sales

The first thing to consider is how much you can, or want, to invest by contacting a broker or financier who specialises in Management Rights. Then consider where you want to live and the type of accommodation you need. When making this decision, you need to consider the viability of operating a business in your selected area. Be prepared to compromise to ensure your decision will bring a realistic return on your investment. Look at the infrastructure of the area. Will tenants or holiday makers be attracted to the location?

Also consider the business opportunities in the area. Share your ‘wish list’ with your Sales Agent. Their local knowledge will be invaluable.

How much do Management Rights businesses cost?

There are two (2) components to a Management Rights purchase:

Real Estate (the Manager’s Unit and office – if on title; and

The Management Rights Business

As you will know, real estate values are cyclic and there are supply and demand drivers. Various factors such as size, location, infrastructure and amenities will determine the value of the business. The value of the Manager’s unit will usually have a premium applied as the Manager either has exclusive use of an office or reception area, or that area is on the Title of the Manager’s Unit.

The value of the business is normally assessed as a multiple of net profit. This multiple can vary and will depend 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 for many different reasons.

When you’re considering a Management Rights business to purchase, it’s important to take into account what portion of the purchase price is the Manager’s unit, as this will have a direct impact on your Return on Investment.

What other costs can I expect?

Over and above the purchase price of the Management Rights business and the Manager’s unit, you will need to allow for accounting and legal fees, licensing costs, loan fees, stamp duty and registration fees. Each state and territory is different and you should seek independent advice in each of these areas.

How much can I borrow?

We recommend you get in touch with Mark Ryall from MRM Finance. He will work with you to determine your borrowing power and help find the right solution for you.

How accurate are the figures I’m supplied with?

Management Rights transactions are by nature, transparent. The Business Purchase Contract provides for a due diligence period in which time you will need to engage an accountant to verify the stated net profit, and also a lawyer to review the Agreements and Body Corporate records.

What licences do I need?

Before you start operating, you will need to have completed a certified training course to obtain a Resident Letting Agents Licence in Queensland, or an Onsite Resident Property Managers Licence in New South Wales.

Can I also sell units?

Only if you hold a full Real Estate Agents licence.

What is a Community Titles Scheme?

A Community Titles Scheme (CTS) is made up of Scheme Land (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 matter in relation to the management of the Scheme. Each CTS must be registered and is allocated a unique number.

Once the CTS is created, a Body Corporate is established. The Body Corporate is made up of all the owners of the lots within the Scheme and are called members.

What does a Body Corporate do?

The Body Corporate engages another person (the Manager) to provide services for the benefit of owners and occupiers of the complex.

The owners of the lots within the CTS elect a Body Corporate to act for and make decisions on behalf of the owners. Generally, the Committee will nominate a member to liaise with the building manager.

What does the Building Manager do?

In accordance with the Caretaking Agreement, you (or your employees) look after the common property of the complex on behalf of the Body Corporate. This may involve things such as maintaining the pool and BBQ areas, lawns, gardens and other facilities. You should not undertake any work which requires a qualified tradesman, but you will need to supervise their work and report back to the Body Corporate.

How do I get paid?

You will be paid a Body Corporate salary to attend to the caretaking, common areas, cleaning and security arrangements. In large complexes, generally the salary is large enough so you can employ staff to help with property management, gardening and cleaning. Smaller complexes are generally not afforded this as the salary will be less. Usually, your salary from the Body Corporate will be paid monthly in arrears and may be linked to the Consumer Price Index.

Another form of revenue for you may be letting commissions. To do this, you will need to obtain a Letting Agents Licence and written authority on a Property Management Agency Appointment Agreement (PAMD20A) from each unit owner in the rental pool. These Agreements confirm the commission arrangement.

What other ways can I generate income?

Often, Managers make further income by hiring equipment, tour desk commissions and providing cleaning services. If you hold a full Real Estate Agents Licence, this is an opportunity to generate sales commission for yourself. If you take on employment outside of the complex, be aware that this should not compromise your managerial duties for the body corporate.

When you receive the financial statements of the business, if there is additional income listed, consider whether you are legally entitled to receive this income and if so, do you have the skills and expertise (and desire) to continue to provide these services.

Do I need any special skills?

For a lot of new Management Rights purchasers, this is the first time many have been involved with the industry.

This is a service industry and you will deal with a lot of different people, every day whether they are your owners, people visiting on holiday, the body corporate and its committee, tenants, tradesmen and other professionals, so you’ll need good people skills. It’ll also be useful if you have basic computer skills, as most programs and accounting packages are now cloud-based.

Why do I need a trust account?

You need a trust account to hold funds on behalf of unit owners (for property management and letting services). It’s also important to know that your trust account will need to be audited three (3) times a year, by an independent auditor.

Who is the Body Corporate Manager?

The Body Corporate Manager is a person or entity elected by the Body Corporate Committee to provide administrative services to the Body Corporate. These services include attending and preparing minutes for the Committee and General meetings; attending to matters arising from these meetings; attending to correspondence; preparing and serving notices as required by the Body Corporate Act; keeping records; sending levy notices to owners; collecting Body Corporate levies; preparing financial statements and annual budgets; and taking care of insurances.

What are By-Laws?

By-Laws are the rules and regulations in 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.

Can you have different types of Caretaking Agreements?

The Caretaking Agreement outlines the responsibilities of the Building Manager. It will include your remuneration and the length of the Agreement, usually in years.

The length of the Agreement will vary on type of Agreement, either a Standard Module or an Accommodation Module. The terms of these Agreements are linked to the Letting Agreement and as the years pass, you may be able to request that the term of the Agreement be extended.

What’s the difference between Holiday and Permanent Letting?

Holiday complexes provide short-term accommodation for holiday makers, while permanent complexes provide accommodation for tenants, usually on six (6) to twelve (12) month lease agreements. Each type of business has different daily responsibilities while income generated in holiday letters can be greater, you should consider the hours involved as it tends to be more demanding.

Will I need to employ staff?

It all depends on the size and nature of your business. The larger businesses tend to need staff while the smaller businesses can be run by a husband and wife team.

What’s the difference between the Standard and Accommodation Modules?

The Standard Module is designed for owner-resident complexes and allows for more input from owners and also limits the term of the Agreement to ten (10) years.

The Accommodation Module is designed for complexes where there is 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.

How much and what is the transfer fee?

In September 2008, legislation was introduced which required the Body Corporate to charge the seller a transfer fee on the assignment of the Management Rights business if it consents to a new assignment within two (2) years of the seller’s settlement date. This fee is currently 3% of the value of the business if selling within 12 months (or 2% within 24 months). This provides an incentive for the Building Manager to run the business for 2 years which gives the Body Corporate stability.

What support will I get?

Usually, the seller is contractually bound to provide transitional training to you. The timing of this training may vary, but is generally 2 weeks.

Will WE ever get a break?

You Caretaking Agreement will confirm your holiday arrangement. You will need to notify the Body Corporate of your intention to take leave and they will require confirmation of a relief manager who will take on your responsibilities while you’re away.