Financing Management Rights . . . a laymans guide

Published: 17 April 2007.

By Terry McMiles

In Queensland & New South Wales, there are usually two contracts that are entered into.

The first is the contract for the purchase of the Real Estate – the Managers Unit or Villa or Townhouse.

The second contract is for the sale of the business. Both contracts are conditional on the other one completing, as in most cases the business cannot be bought unless the buyer has also contracted to buy the Managers Unit. This unit is usually designated as the only Unit that an on site Manager can operate his business from.

There can be rare exceptions to this but for the purpose of this article, the above is “the norm”.

Management Rights lending is a specialist area, and not all Banks and financial Institutions lend in this area. Those that do, have a very low level of failed loans as the business has a history of stability and predictability.

The Real Estate part of the contract is just like any other real estate purchase. Loans are common up to 80% and sometimes higher. Repayments can be interest and principal or interest only.

Financing the Business has greater restrictions and usually Banks do not like to lend more than 50% of the contracted business value.

Loans usually call for repayment of Interest and principal and the term of the business loan is no longer than the remaining years left in the Body Corporate Agreement. This loan calls for full repayment to coincide with the expiry of the agreement. In practice, agreements rarely expire as most managers negotiate top-up terms as their terms begin to run low. This of course protects their Capital invested in the business.

Banks need to be comfortable that the Unit is worth what is being asked, and here “the norm” is 5-10% above the value of others in the complex (reflecting it’s added value of being the only unit from which the complex can be managed) plus any further amount which may be added if the Unit has additional rooms “on title”. This would normally be an office and sometimes storage rooms. Another factor will be if the Managers unit is bigger or has additional features not to be found in other units in the complex. External exclusive use areas may be applicable in a Townhouse development or private yards can sometimes be attached to the Managers unit if it is ground floor situated in a tower building. A sworn valuation is sometimes requested.

To assess the value of a Management Rights Business the Banks will require that “due diligence” on the businesses figures have been carried out by a specialist Accountant experienced in the Management Rights Business. Unlike some other businesses where 2 or 3 years figures are requested, in Management Rights the criteria is the figures relating to the most recent 12 months of trading.

The reason for this is that older figures may well be irrelevant to the current level of business being done. Factors that can change over time include the size of the letting pool, tariffs or rents and of course Owners Body Corporate remuneration which is usually tied to CPI adjustments and in some cases can be renegotiated at an AGM or EGM.

Your Bank will want to see the due diligence report where the Accountant has been given access to all Trust Account records so that a check can be done on all figures as supplied and that all letting agreements with owners are in order.

So how much can you borrow? This depends on the complex and the relationship between the value of the Real Estate and the Business. As you can see from the notes above, on a total price where the Unit value is 75% , and the business accounts for just 25% you will borrow more (in percentage terms of total price) than if those figures were reversed.

You also must consider buying costs. Stamp duty & legal costs etc will add approx 5% to your overall investment.

Is there a “rule of thumb” so that you have some idea of what you can afford? Yes there is.

If you multiply your available cash by 2.85 that is a rule of thumb calculation which should cover your costs and give you an approximate limit of affordability. Working backwards, if you know the purchase price, divide by 2.85 for an approximate “all up” amount of cash you will need to invest.

Banks may lend a higher percentage if the value of the total purchase is over a million dollars, or if you have additional security to offer, or if you have additional income from other sources.

Please remember that not all Lenders understand and deal in Management Rights, and you are well advised to deal with a Bank or Broker who specializes in the area.

This article prepared by Terry McMiles. Terry McMiles is an Independent Real Estate Agent/Broker specializing in Management Rights. For more information visit www.terrymcmiles.com

Reply from: Douglas

11:23am Tuesday, 22 July 2008

Thanks for the article Terry that really explains a lot. One thing I don't understand is, what happens when the Management Rights Agreement expires? There's a listing I found on here recently that looked quite interesting but the term was 25 years and it expires this year. Does this mean the purchase is going to be worthless within weeks of settlement? Does the buyer have to then rebuy the rights back off the BC for another couple of million?

Reply from: Terry McMiles

12:58pm Thursday, 24 July 2008

Hello Douglas,

It is a bit difficult to comment on the scenario you relate without knowing more about the circumstances. It is normal for a manager to top-up his/her contract term as it starts to get down in years to run. If this has not happened one would have to wonder if the resident manager for some reason was in breach of the agreement. That is the only circumstances that I can imagine that would stop a manager getting an increased term.

You certainly wouldn't want to contract to buy a business where the agreement is about to expire unless the contract was subject to a new term being put into place. For this you need to talk with one of the specialist Management Rights Lawyers. There are some that have contact details on this site.

Hope this helps.

Terry