Management Rights Made Easy

1

Management Rights Made EasyA comprehensive guide

resortbrokers.com.au

resortbrokers.com.au3


CONT-ENTS04 Introduction

05 What are management rights?

06 What do management rights include?

09 Additional income

10 How long do management rights agreements last for?

11 Types of management rights

14 How much will they cost?

15 What can I spend on management rights?

16 What is the process for buying management rights?

18 Who can assist me when buying management rights?

20 Glossary of terms

22 For more info...


This guide is intended to provide newcomers to management rights with a sound overview of the industry. Although by no means an exhaustive journal, we hope it will give you a good understanding of what management rights are, what they can offer you, things to look out for and things to avoid.

We feel we are very well placed to point you in the right direction. Here are a few facts you may or may not know about Resort Brokers Australia...

1. The original and still #1 - Established over 27 years ago, Resort Brokers Australia was the first real estate agency to specialise in the sale and marketing of management rights and motels. Today, we still sell more properties than our competitors.

2. A truly national company - With over 22 specialist agents nationwide, we are the only fully licensed agency in this industry operating in all Australian states and territories.

3. Industry contacts - Our years of experience have created extraordinary relationships with top industry specialists. When legal, accountancy, finance or management assistance is required, we can put you in touch with the right people, right away.

Introduction



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What are management rights?

The management rights industry grew hand-in-hand with the development of Strata Titled properties that began to flourish on the Gold Coast in the early 1970’s. To fully understand management rights, it is important to learn what ‘strata title’ means.

This is a system first put into place in Australia in 1961 to allow the legal ownership of a portion (known as a ‘lot’) of a building or complex. In the case of management rights, these ‘lots’ can be units in a walk-up or high-rise, or villas and townhouses in a complex. They are generally purchased by people wishing to live in them permanently (‘owner occupiers’), people wishing to live in them on occasion (‘lock-ups’) or people looking to let them to tenants (‘investors’).

Everything else in the parcel of land NOT contained within the Strata Titled lots is defined as the ‘common property’. This includes things like stairwells, driveways, visitor parking, paths, gardens, main gates, rubbish areas and lifts as well as recreational facilities such as a pool, gym, tennis court, sauna, BBQ area etc. This property is owned by the ‘owners association’ which comprises of all ‘lot’ owners. All owners must contribute to the maintenance of the ‘common property’ through a levy payment system.

When developers built these properties, it made sense for them to make provision for an on-site manager who would ensure the long-term maintenance of the ‘common property’ and provide a letting service for investors wanting to let their ‘lot(s)’. In a nutshell, ‘management rights’ is the business of on-site caretaking (page 7) and letting (page 8) of Strata Titled units.


What do management rights include?

A management rights business will generally consist of 3 basic elements:

The manager’s unit - As management rights is the business of on-site caretaking and letting, an owner is usually required to own and reside in a lot within the building or complex. This often includes an office, or the right to use an office.

The specifics of a manager’s residence are stipulated in the caretaking and letting agreements; they vary from building to building, complex to complex. However, the standard rule is that the manager must live in a pre-designated lot. Quite often this is because the office is attached to it.

The variety of managers’ accommodation amongst management rights businesses is enormous. One high-rise might have a small 1 bedroom manager’s unit behind reception; the one next door might have a 4 bedroom duplex penthouse.

Therefore it is important to have an idea of what sort of accommodation will suit you best. Those looking at a more ‘lifestyle’ based decision might opt to concentrate on finding a luxurious manager’s unit. Those focussed on a more ‘financial’ based decision might make sacrifices on the manager’s accommodation in order to ensure they maximise the size of business that they purchase.

Whatever your accommodation requirements, your agent at Resort Brokers Australia will be able to draw a shortlist of suitable properties. By inspecting these properties, you will quickly get an idea of exactly what will suit you best!



caretaking

agreement

The caretaking agreement - The owner will enter into a contractual agreement with the body corporate of a building or complex to provide caretaking / management services in return for a salary. The remuneration is usually paid monthly in arrears and is known as the ‘body corporate salary’.

The caretaking agreement will specify the actual duties required from a manager. Some agreements are very general and others show the requirements in great detail. Whatever the case, it is important to know exactly what is expected of you and to understand the true nature of your duties.

When looking to purchase management rights, it is easy to focus on the level of salary, rather than the work involved in achieving the salary. This can be a mistake. Although one business might have a slightly higher salary than another, it might also have considerably more work involved.

It is important to look at the caretaking agreement closely to ascertain what is involved, how long it will take you and how much you are getting paid for it. One common method when comparing similar businesses is to divide the salary by the total number of units to give a ‘per unit’ salary. The higher the better!

Your agent at Resort Brokers Australia will discuss your needs and capabilities, help you dissect relevant caretaking agreements and ensure that you take a role that is suitable for you.

The body corporate remuneration is usually linked to the Consumer Price Index (CPI) ensuring an annual raise. Some caretaking agreements make provision for salary reviews at pre-determined intervals (normally every few years) to ensure they are fair.



The letting agreement - The owner will enter into a contractual agreement with the body corporate to provide an on-site letting service for owners wishing to let their property to tenants. The owner will receive a percentage of the rent (c. 8% for permanent letting, c. 12% for short-term letting) as a management fee. The letting agreement usually provides the owner with the exclusive right to provide on-site letting services. Although owners are free to use the letting services of outside agents, they rarely choose to do so as the job is far better managed by an on-site manager.

Why? An on-site manager is focussed solely on letting units in their complex; an outside agent will have their loyalty divided between other units that they manage. An on-site manager can attend to urgent matters almost immediately; the response time of an outside agent can be slow. Minor repairs and maintenance can be performed without the need to call out a tradesperson.

The letting agreement usually requires the manager to promote the letting of units, supervise the standard of tenants, respond to issues that tenants might have with their accommodation and maintain an office / reception area.To be authorised to complete the duties of an on-site letting agent, an owner must obtain a Restricted Letting Agents Licence (RLA). As this only permits an owner to collect rent from within their complex, it is relatively easy to obtain. Whether you are looking to complete the required modules via correspondence or through a course, Resort Brokers Australiacan assist you through the process.

Office equipment / caretaking equipment - The office and caretaking equipment required to carry out the manager’s duties is either provided by the body corporate or by the manager. If it is provided by the manager, it is normal to include this equipment when the business is sold. If you are interested in a property, ask to see an inventory of the equipment. A good agent should have this information at hand or be able to get it quickly.




As well as the body corporate salary and the income derived from lettings, an owner has the potential to earn additional income from other sources.

Maintenance - As we all know, property is prone to wear and tear and often requires fixing. Particularly in the case of a rented property where the owner is absent, an owner will request that the manager attends to these issues. Some owners may simply call in a contractor to do the work. Others will opt to perform the work themselves and charge the owner for doing so.

This is a great way of making extra money. If a new manager is particularly handy, they can often increase their income substantially by taking on tasks that the previous manager used to pass to contractors. If this sounds like you, why not look for older buildings/complexes - the scope for maintenance work will be much higher!

At the same time, be aware of purchasing a management rights that shows a large amount of maintenance in the income. If you are not the handy type, you may find that you are unable to perform these tasks and that you have purchased a portion of income that you cannot maintain.

Cleaning - This mainly applies to management rights dealing with short-term letting (which we will look at shortly). Whenever a guest checks out, their room needs to be cleaned. This service is almost always managed by the manager. The manager will employ cleaning staff on a contractual or permanent basis to perform the work and will charge the owner for this service at a premium. In buildings where the turn-over of guests is frequent, this income can be substantial.

Additional income



Permanent

Holiday

How long do management rights agreements last for?

When management rights are initially established by developers, and the caretaking / letting agreements are first drawn up, there are 2 options for the type and length of the agreements. These are known as modules.

QUEENSLAND MODULE Standard moduleThe standard module is geared towards management rights properties where the majority of units are owned by ‘owner occupiers’. This is not to say that investors / tenants are prohibited, but there will generally be over 50% ‘owner occupiers’. The standard module has a maximum term of 10 years. However, the standard module can be ‘topped up’ in increments of 1 year by application to the body corporate committee. For example, if an agreement is down to 7 years, the manager may request a ‘top-up’ of 3 years to return to 10 years. Accommodation moduleThe accommodation module is geared towards management rights properties where the make-up of the residents is predominately tenants (i.e. the owners are mostly investors). There will need to be an expectation that over 50% of owners will be investors for a developer to establish a management rights on an accommodation module. The accommodation module has a maximum term of 25 years. It can be ‘topped up’ by a maximum of 5 years at a time, by application to the body corporate committee. For example, if the agreements are down to 16 years, the manager may request a 5 year ‘top-up’ to bring them up to 21 years.The concept of ‘topping-up’ is fundamental, as it allows an owner to maintain the value of their management rights and to pass it on to a new owner. N.B. All unit owners are permitted to vote on a manager’s request for an extension. Generally, this can only happen at an AGM or an EGM. As such, an extension request needs to be planned well in advance, usually with the assistance of a lawyer. Interstate variations

New South Wales: the body corporate committee is known as the owner’s corporation. The maximum length of agreement is 10 years, regardless of the type of complex.

Victoria: there is no specific legislation regarding management rights as they are covered under the general ‘owner’s corporation act’. This act does not stipulate a maximum length of term for the management agreement.




Permanent

Holiday

How long do management rights agreements last for?

Types of management rightsThere are several different types of management rights available. It is important to understand the differences as they have contrasting advantages and disadvantages.

PERMANENT / RESIDENTIAL Permanent or residential complexes are comprised of people who occupy the units as their primary residence. Some unit owners will live in their own properties (owner occupiers), others will rent them out to tenants (usually for a minimum of 6 months).

The business involves finding good tenants, collecting rent, maintaining the common areas of the property and developing a good relationship with the owners.

Advantages• The income stream is steadier as you are not subject to the peaks and

troughs of short-term letting• The ‘front desk’ requirements are relatively minimal. For the most part,

the office will only open a few hours per week, if at all• Time spent managing tenant’s needs is minimal• Only a basic level of marketing skill is required – you are not involved in

the ‘hard sell’ of tourism properties

Disadvantages• The rate of return per unit under management

is lower than short-term letting• It is much easier for outside letting agents

to compete with you. The key is to keep your units full and your owners happy

• When properties in your letting pool are sold to owners, they may be sold to owner occupiers instead of investors (reducing your income)

• If you are not careful you might get caught up in the politics of the complex. This is simply something you need to stay out of – there is no point to risk offending your clients (i.e. the owners)



SHORT TERM LETTINGThis takes the form of both holiday and corporate letting; holiday let buildings are located in Australia’s tourism hubs, corporate let buildings are located in business sectors (especially CBDs).

Operating management rights in short-term lets is virtually the same as operating a resort or hotel. The complex must be promoted to attract tourists and business people. A high level of service is required, but returns can also be high.

Advantages• Greater rental return - people will pay more for

short-term rentals than long-term residential rental• Greater potential to make additional income from

services such as cleaning, linen hire and ticket sales• If you are adept at marketing, there is good opportunity to grow the capital

value of your business by increasing occupancy and driving tariffs• The location of a holiday letting will probably be superb, which is great for

lifestyle

Disadvantages• Short-term letting is hard work. The hours are longer and the tenants are

generally more demanding• You are at the mercy of the economic climate - a downturn can lead to

reduced occupancy and reduced tariffs• The work can be quite complex - you need to have, or develop, good

marketing and management skills. A variety of support services are available to help in these areas

• Don’t be fooled into thinking it is a holiday for the manager - the lifestyle advantages are clear, but good returns come from hard work

Types of management rightscontinues...

The Original and still No. 1




Types of management rightscontinues...

OFF THE PLAN ‘Off the plan’ refers to developments which are yet to be built or are in the process of being built. The purchase of ‘off the plan’ management rights is between a buyer and the developer.

Although purchases have known to be negotiated before the first sod has even been turned on a new development, ‘off the plan’ management rights usually come to market when a proportion of the units have been sold.

Buying ‘off the plan’ is more complicated than buying an existing business because it is difficult to establish exactly what you are buying, particularly in regards to the ‘letting pool’.

Common practise is for a specialist accountant to calculate an estimate of the letting income. This is based on what percentage of the units are likely to be purchased by investors (as indicated by pre-sales) and a rental appraisal from a local valuer / real estate agent.

There are several different mechanisms to ensure that a buyer only ends up paying for what income he / she ends up receiving from the letting pool. The most common mechanism is the claw back / claw back clause. It is in place to protect both parties.

Advantages• ‘Off the plan’ management rights businesses are almost always cheaper

than an established equivalent• You are often able to negotiate additions to the manager’s unit and on

occasion vary the manager’s agreements to better suit your needs• You will often play an integral part in placing new tenants, which means

you can control who the residents are to a certain extent

Disadvantages• There will always be a degree of uncertainty as to how an off the plan

management rights business will pan out• Beware of agents overselling the expected returns on units – you might be

the only one left to pick up the pieces of unrealistic expectations. This can be overcome by using an industry specialist accountant (page 19)

• As developers are keen to place an experienced manager at the helm of their new project, new-comers can often find it hard to get a foot in the door



How much will they cost?There are 3 components to look at when assessing the cost of purchasing a management rights - the business, the managers unit and costs.

The businessOne word you will hear over and over again is the ‘multiplier’. The value of a management rights business is calculated by applying a ‘multiplier’ to its annual net profit. The annual net profit is always for the last 12 months trading and will need to be verified by a specialist accountant.

For example, if a management rights business has made a net profit of $150,000 over the last 12 months and the multiplier (also known as ‘years purchase factor’) is set at 4.5, the price of the business will be $675,000 (i.e. $150,000 x 4.5).

There is no set rule as to what the multiplier will be! It is very much subject to supply and demand and is therefore set by the market. However, some factors which can influence the multiplier are…

• Location: a beachfront property with stunning views is likely to have a higher multiplier than an equivalent tucked away on a back street

• Style and quality: a new high-end property is likely to have a higher multiplier than an older basic property

• The length of term of the agreements : the greater the amount of years remaining on the caretaking / letting agreements, the higher the multiplier will be

• Size of income: as a general rule, multipliers will be greater in large high income properties than in smaller low income properties

• Growth potential: if a property has significant scope to increase the income, it may well achieve a higher multiplier

Remember - a management rights is only worth what someone is willing to pay for it!

Manager’s unitIn the first instance, a managers unit will be valued just like any other piece of real estate. If there is an office and/ or storage units on the same title, these will also be taken into account. In some cases, the manager’s office will be on a separate title and will therefore have a separate value.

CostsAs a general rule of thumb, 5 - 6% of the total sale price (business + managers unit) needs to be added on to cover bank set up fees, legal costs, income verification and stamp duty.




How much will they cost? What can I spend onmanagement rights?

We recommend that the starting point for any prospective management rights purchaser be to work out what you are able to buy and what lending you are comfortable with. This is most easily done by speaking to an industry finance professional (which could be a broker or a bank).

You will need to consider the value of your assets. As well as traditional cash savings, you may look at your family home, investments, shares or superannuation. Depending on your financial position, you may choose to sell some of them.

As financial institutions look very favourably on the management rights industry and the security of investment that it provides, lending ratios are relatively high.

Banks will usually lend at least 60% of the total cost of the management rights purchase (i.e. business + unit + costs). For example, if you are purchasing a business and a unit for $1,000,000 with costs of $50,000 (5% of purchase price), you would need to provide $420,000 and the bank would provide $630,000.

For the right property and the right operator, banks often offer higher lending ratios; up to 70% and beyond is not unusual.

One of the most critical areas to look at is the serviceability of your loan. Although a bank might be satisfied that you have sufficient security, they

might be concerned that there is sufficient income to repay the loan and for you to live comfortably.

This becomes particularly relevant if you are looking to purchase a management rights with an expensive managers unit and a

comparatively small business. If the manager’s unit constitutes more than 50% of the total price (business + unit), it is possible

that debt serviceability will be an issue.



What is the process for buying management rights?

The process for buying a management rights is fairly fixed and ensures a maximum degree of security over your purchase.

Offer and AcceptanceWhen you have found a management rights property that you would like to purchase, we request that you make an offer via an ‘offer and acceptance’ form. This is a non-legally binding document that serves as a means of formalising your offer. This will stipulate your purchasing entities, a ‘dollar’ offer on the managers unit, a ‘dollar’ offer on the business and usually a number of conditions. This form is presented to the owner, who may wish to accept, reject or counter-offer. This process is repeated until a price is agreed (or not, as the case may be).

ContractsOnce a price is agreed, the vendor’s solicitor will draw up contracts. Both parties sign these and the property is now ‘under contract’. It usually takes a few days to prepare contacts.

DUE DILIGENCE

Income verificationThis is the first step of the due diligence process. Your appointed accountant will visit the property and conduct a thorough investigation of the income and expenses. This is to ensure that the business is not overstating the income that it is making. The accountant will provide a report with his findings. If discrepancies are found, this might lead to a readjustment of the purchase price.

Legal The next step is for your appointed solicitor to verify that the business is legally sound. This involves matters such as examining the caretaking / letting agreements, looking at the minutes of the body corporate meetings and checking that the PAMD forms (letting agreements with owners) are in order.

OFFER

CONTRACTS

DUE DILLIGENCE

LEGAL

FINANCEASSIGNMENT

SETTLEMENT THE PROCESS




What is the process for buying management rights?

OFFER

CONTRACTS

DUE DILLIGENCE

LEGAL

FINANCEASSIGNMENT

SETTLEMENT THE PROCESS


Finance The final step is for your chosen financier to provide a stamp of approval for your lending. Once this has been granted, the contracts become unconditional.

AssignmentThe new owner must meet with the body corporate committee in order to gain approval for the re-assignment of caretaking / letting agreements.

For the most part, this is just a formality, although we do recommend to new owners that they prepare themselves for this meeting. After all, first impressions last.

SettlementSettlement can happen a few days after the assignment has been approved. Often there is a pre-agreed date between the vendor and the purchaser, usually on the first day of a month.



Agent • Lawyer • Accountant • Financier • Valuer

Who can assist me when buyingmanagement rights?

Aside from your agent, there are a few key people whose help you will need to ensure that you buy the right management rights and that the purchase process is as smooth as possible.

This is perhaps the most important piece of advice that we give to our clients…‘make sure you use experienced industry specialists’. The security and knowledge that can be gained from dealing with these professionals cannot be underestimated.

FinanceIf you are dealing directly with a bank, make sure you are dealing with a person who specialises in management rights. Ask how many management rights transactions they have facilitated in the past. But remember, you should get a few quotes to compare.

We highly recommend speaking to a specialist finance broker. Contrary to common belief, using a broker will not cost you extra. In actual fact, because lenders know that a broker will be shopping around for the best deal, they will usually make an effort to ‘sharpen their pencils’. A broker will also know which lenders are most suited to the type of management rights you are looking to purchase.




Agent • Lawyer • Accountant • Financier • Valuer

Who can assist me when buyingmanagement rights?

AccountantAgain, it is critical that you engage a specialist accountant with an intimate knowledge of the industry. You will be spending a considerable amount of money on the business component. The value of this business is derived solely from the profit it is making. You must be 100% confident that the business is making the money that it claims to be making, and that it is sustainable. Your lender will require this security as well!

A specialist will have verified hundreds, if not thousands, of management rights profit and loss statements during his / her career. They know what to look out for and what to be wary of and can provide sound advice in the event that any discrepancies crop up.

Prior to going to contract you should also speak to your accountant about establishing the correct entities to suit your needs. The business structure that you set up to purchase the business and the unit can have considerable tax advantages, along with other benefits.

LawyerManagement rights form a unique section of law in which two acts of parliament are involved. Only a specialist lawyer will truly understand the complexities at hand. It is their job to make it simple for you to see any big issues.

As mentioned earlier in this guide, it is your lawyer’s job to ensure the validity of the agreements that provide the security to the business you are purchasing. They will also review body corporate minutes to ensure you are not entering into a hostile relationship.

AgentYou may remember this page from the beginning on this guide. However, as we feel that your agent will play the most integral role in helping you find the right management rights for you… we thought we’d say it again.

We feel we are very well placed to point you in the right direction. Here are a few facts you may or may not know about Resort Brokers Australia…

1. The original and still #1 - Established over 27 years ago, Resort Brokers Australia was the first real estate agency to specialise in the sale and marketing of management rights and motels. Today, we still sell more properties than our competitors.

2. A truly national company - With over 22 specialist agents nationwide, we are the only fully licensed agency in this industry operating in all Australian states and territories.

3. Industry contacts - Our years of experience have created extraordinary relationships with top industry specialists. When legal, accountancy, finance or management assistance is required, we can put you in touch with the right people, right away.


Glossary of terms Strata titled: Describes a building or complex where each individual unit can be owned by an individual person

Lot - The term given to an individual unit in walk-up or high-rise, or an individual villa or townhouse in a complex

Owner occupiers - People who permanently live in the unit that they personally own

Investors - People who rent their unit out to tenants

Lock-ups - Describes a unit where the owner only lives in it occasionally, usually for holiday reasons. When they do not live in it, they lock it up and it stays empty

Common property - Describes all land contained within a high-rise or complex that does not form a part of the individual ‘lots’ (eg. stairwells, paths, gardens, pool, gym, BBQ area etc.)

Management rights - The business of on-site caretaking and letting of ‘strata titled’ ‘lots’

Manager’s unit - The unit within a high-rise or complex allocated for the manager / management rights owner to reside in

Caretaking agreement - This is a legal document that outlines the caretaking duties required of a manager, the salary that a manager will receive and the length of the term that the manager is engaged for (amongst other things)

Letting agreement - Usually in conjunction with the caretaking agreement, this permits a manager to provide an exclusive on-site letting service to owners wishing to let their property to tenants, and outlines the length of the term for which this authority is given

Inventory - It is common practice is for the office and caretaking equipment required to operate a management rights business to be passed from the outgoing manager to the incoming manager, this is called inventory. This will include items such as lawn-mowers, whipper-snippers, computers and printers




Glossary of terms


Standard module - A type of caretaking/letting agreements geared toward a complex that is predominately owner occupied, providing a maximum of 10 years engagement at one time

Accommodation module - A type of caretaking / letting agreements geared toward a complex that is predominately tenanted, providing a maximum of 25 years engagement at one time

Permanent management rights - Describes the business of managing a complex or high-rise where the residents are comprised predominately of people who occupy the units as their primary place of residence

Short-term management rights - This consists of both holiday and corporate management rights and describes the business of managing high-rises or complexes where residents stay for a relatively short time - these are normally located in tourism or business hubs

Off-the-plan management rights - This describes the purchase of a management rights business prior to or during its construction, directly from the developer, usually based on projected incomes

Due diligence - When the purchase of a management rights business is agreed, there is a period between contracts being signed and the transaction becoming finalised, where the purchaser conducts a number of exercises to ensure that the business is sound. This is known as due diligence and consists of income verification, legal checks and finance approval


FOR MOREINFO...

SPEAK WITH YOUR BROKER

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HIS / HER EMAIL IS

CALL HEAD OFFICE: (07) 3878 3999OR EMAIL US: [email protected]

“This Management Rights Made Easy has been compiled to give you a reference guide when making enquiries about the acquisition of a management rights business or when taking steps to acquire a management rights business. This reference guide should not be used as a substitute for professional legal and financial advice. Resort Brokers Australia Pty Ltd disclaim liability from all loss, injury or damage resulting from any person acting upon or refraining from action or otherwise relying upon this reference guide or the material contained within or from any cause whatsoever. No part of the reference guide may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the express permission of Resort Brokers Australia Pty Ltd.”


QUEENSLAND OFFICEPO Box 5004

West End, QLD 4101(07) 3878 3999

NEW SOUTH WALES OFFICEPO Box 78

Freshwater, NSW 2096(02) 9904 8224

VICTORIA OFFICE PO Box 1100

Carlton, VIC 3053(03) 9347 3100

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