Agents

Pick an agent with a long history in management rights sales. Once you have a clear idea of the type of property, the level of funds you have to invest, the area you wish to live, the type of lifestyle you require and the workload suitable to you, talk to an experienced agent who will put together a list of suitable properties. You should inspect a number of businesses to gain an understanding of the industry. You may not find a suitable property initially and it may take several months to find the right one.

Try to understand factors that affect the value as the multiplier may vary between properties. There will be various reasons for this such as, the location and the condition of the building, the length and conditions of the caretaking and letting agreements, the number and quality of competing businesses, is the office on title, exclusive use or is it on common property. The Body Corporate history is also important and should be looked at in the early stages of purchase.

An experienced management rights agent will look after you; after all they are looking at keeping you as a future client. They will hope to sell you out of the business with a healthy capital gain and secure the next property for you. The expert agent will have a loyal list of clients in the industry and will often give them first choice of new and exciting properties as they come on the market. There are examples of properties being sold the next day after listing to an existing client. Some agents deal in ‘off the plan’ sales, suitable for the more experienced managers, while others may have client companies that purchase businesses for partnerships. The company may source an equity partner to manage the complex which is an ideal way for a purchaser with lower levels of equity to gain entry into the industry.

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Accountants

An experienced management rights accountant must be engaged before you go to contract. Not all accountancy firms are experienced in this type of business. Your agent or solicitor should be able to suggest an experienced accountant to you. One of the first things you will do is to discuss the appropriate business structure you will purchase under. Some of the factors your accountant will consider will include capital gains tax, sole trading, company or partnership and asset protection. The correct structure for your situation could be worth thousands of dollars both in stamp duty and capital gains tax.

When a contract is presented it usually has several important time frames.
  • 14 to 21 days for solicitors approval
  • 14 to 21 days for accountants verification of profit and loss accounts
  • 21 to 28 days for financial approval
  • At least 60 days for settlement

The accountant will verify the net profit presented to you by the vendor. The sales agent would have suggested to the vendor that they produce verified accounts to a period as close as possible to the property going to the market. The GST returns should also be available.

The net profit will include all income, less operating costs. Items not included will be the cost of borrowing, interest on borrowings, drawings and any labour that can be done by a two person management team.

Your accountant will also investigate the future viability of the business. They may enquire about any future developments that will compete. They may check how many units have come into and out of the letting pool in the past 12 months to ascertain if the building is changing to owner occupied. You must be careful to protect yourself against any possible misrepresentation; there may be a hidden reason why the vendor is selling. 

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Lawyers

Few legal firms specialize in management rights. The laws in Queensland, New South Wales and New Zealand are all different. There are firms that specialize only in New South Wales and others that offer specialized service for purchases both in Queensland and New South Wales. It is even harder in New Zealand to find a lawyer who specializes in the industry due to its infancy. Price should not be an issue as many issues need to be resolved, discussed and negotiated, that is why the 60 day settlement period is required if the contract has any complications. Your lawyer will require copies of caretaking and letting agreements, copies of the body corporate rules or bylaws, copies of all assignments, full trust account details and copies of letting agreements with owners.

Do not sign anything until you have spoken to your lawyer. You may be asked by the agent to sign an offer and acceptance. This generally outlines the main conditions but is not a binding contract. In Australia two standard contracts will be drawn up, one for the manager’s unit and the other for the business. The contract will include any special conditions such as all important dates, transfer of web sites, business names, stock included in sale, a list of chattels, training before and after settlement, staff implications and so on. Your lawyer will need to be satisfied with the special conditions before you sign.

One area that sometimes causes problems is the PAMD20(a) forms. These forms are part of the regulations under the Fair Trading Act in Australia. You cannot let a unit, take deposits or advertise a property for rent without a signed PAMD20a form. A signed form means signed by the owner of the property and the existing letting agent. It is vital that the forms have an assignment clause included, if not you as the new purchaser cannot let the apartments you have paid a large sum for until new agreements are signed by the owner and yourself. This can create problems if you have purchased a going concern with deposits paid and the tenants or guests staying over the period when you do not have signed PAMD20a forms.

There are also various licenses required. Your lawyer will discuss these with you. In Australia you cannot operate the mandatory trust account into which all rent receipts are paid into until you have obtained a licence from the Office of Fair Trading. Your purchasing entity will require one licence and all working partners who will receive rent or run the office will also require licenses. You will be required to sit and pass a Restricted Real Estate Course or have a full Real Estate Licence. This must be presented to the Office of Fair Trading along with your applications forms. They will still not issue you with your licenses until they receive minutes of the EGM assigning the letting agreement to your entity

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Finance Consultants

Your finance consultant is as important as the other professionals. It is safe to assume that the majority of buyers are aware that there has been a significant downturn in the economy and obtaining funding for tourism ventures requires dedicated expertise and in depth knowledge of commercial funding. Your finance consultant will require up to date information from the vendor. For example, the profit and loss statements must be the latest possible. You will not be able to provide profit and loss statements over one year old as buyers are aware due to the downturn they will not reflect the true business. 

Management rights lending is a specialized area and as with lawyers and accountants,not all banks and financial institutions specialize in this area. Those that do understand the industry have enjoyed a good relationship with borrowers due to a history of stability and a low level of failures generally. Most banks will require an equity contribution of 30% plus the cost of fees such as stamp duty in Australia, legal fees, costs of borrowing and other associated fees. These extras can add up to 5% to 6% of purchase price.

Considerable time and money can be saved by making contact with an experienced finance broker. They will often have arrangements with a number of lending institutions and because they deal with lending institutions on a daily basis with comparable business clients they will be able recommend suitable financial packages to suit your situation.

Management rights businesses are a cash flow business and the financial product must take that into consideration. Other things to consider will be the loan term, variable or fixed rates; is there a redraw facility? Do you have flexibility? What are the ongoing fees?

The information required to obtain finance to purchase a management rights business is far greater for a first time purchaser. The road is a lot easier for the experienced manager.

This business is all about building relationships with your financier, agents, accountants and lawyers. The first time purchaser has to prove to the lender he has the assets, skills and work ethics to complete the purchase and then enhance the profits and sell with a good profit. At some stage of the purchase process you will also have to produce character and business references for the body corporate and your bank, your assets and liabilities and income and expenditure. You will be required to produce police checks in Australia. You may also be asked to provide a business plan. At times you may become frustrated by what can be considered as red tape, but once you have successfully completed the purchase it will have been worthwhile.

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