Published: 30 August 2006.

Consider the following example:

The bank will lend you $312,500.00. You will need the other $312,500.00 in cash to settle.

The major banks that lend for management rights will usually lend 50 per cent of the purchase price, legals and stamp duty.

The bank will want the loan structured so the principal debt reduces each year of the management rights agreement. At the end of the management rights agreement the debt should be no greater than the value of the unit. This is the bank's protection against your failure to get a renewal of the management rights agreement from the body corporate.

In our example assume a 10 year management and letting agreement. The debt must be reduced from $310,000.00 to $250,000.00 minimum over 10 years - a yearly capital reduction of $6,000.00 per annum plus interest.

It is important to deal with banks that know management rights. They will be able to say at the outset what they can and cannot do. Banks that don't know management rights can inadvertently mislead you. Your application may be rejected by a higher authority in the bank at the eleventh hour or they may impose terms and conditions that are unacceptable. This can cost you dearly.

You will not have these problems from the banks that regularly lend for management rights.

Checklist

The following information is required by the bank to assess your application:

• Resume - show complete work history for all applicants.
• A copy of both contracts of sale (the contract for the unit and the management rights business).
• A copy of the management and letting agreements.
• A copy of your latest taxation returns - personal and business.
• If applicable, financial records for any companies or trusts you operate.
• Verification report by a bank approved accountant familiar with the management rights industry on the previous twelve months' figures for the management rights being purchased.
• Your projected monthly cash flow for twelve months covering all income and expenditure (including your financing costs).
• A signed statement of assets and liabilities.
• A signed credit check form to allow completion of the necessary credit checks.
  

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