Tips for Selling Management Rights

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TIPS FOR SELLING MANAGEMENT RIGHTS

Prepare for your sale well in advance…

As I have said in previous Resort News articles, and at the risk of stating what to many might seem obvious, the most important piece of advice I can give potential sellers of a management rights business is to prepare for your sale well in advance.

Before you actually list the business for sale, there is so much that can be done to make the sale as smooth as possible.

So how should you prepare for a sale?

Letting appointments First, check your letting appointments. POA forms 6 are automatically assignable but not PAMD forms 20a. If you are relying on these, then (depending on the version used) to be assignable, they will need to have the assignment section ticked and initialled or you will have to obtain the consent of all owners to an assignment to the buyer. It is also an offence for you, in the case of a letting appointment without an assignment clause, to assign that appointment without the owner’s consent.

Almost without exception, buyers are insisting that all appointments be properly assignable and assigned at settlement or the purchase price be reduced for non-compliant appointments. We have seen purchase prices heavily discounted and some contracts terminated because the sellers did not want to, or were not able to, assign appointments.

If your appointments are not assignable, you should consider new appointments (particularly if the existing ones are a few years old as there have been many changes that should be incorporated) under POA.

Management rights agreements Next, check your body corporate agreements.

Before you actually list the business for sale, there is so much that can be done to make the sale as smooth as possible

John Mahoney Mahoney Lawyers

Locate copies of all of the relevant agreements with the body corporate – copies of the caretaking and letting agreements, deeds of assignment, deeds of variation and the like. If my firm has acted for you, you would have all of these documents in the indexed binder or a SSB stick we give our clients after settlement of their purchase.

Get the real estate agent you have selected to scan electronically and/or take photocopies of these to give to prospective buyers. You should also give your solicitor copies of these documents for two reasons. First, your solicitor can check that everything is in order - for example, that options have been properly exercised.

Secondly, if the buyer’s solicitor or financier raises questions about the agreements during the course of the transaction, your solicitor will be able to deal with the matter quickly and eff iciently.

Term of agreements The term remaining on your agreements is critical. Unless you have long-term agreements with your body corporate, you should be thinking about how the term of your agreements will impact on a future sale as early as the time you buy.

You must also consider that most (if not all) buyers looking at a complex in the standard module will, these days, want close to the full 10 years to run on agreements when they purchase. With complexes in the accommodation module, most buyers will be looking for at least 15 years but some buyers and their financiers want even

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longer, depending of course on the amount being borrowed.

the problem created by that decision.

If you buy with 10 years or so to run on your agreements, you will invariably will have to add another option before you sell.

If you have not already done so, you should have your lawyer check your agreements to make sure they are Gallery Vie compliant. If they are not, you really should take steps to amend the agreements to deal with the issue.

The transfer fee rules will not penalise you just because you sell within two years of getting a new agreement or adding a new option. It is only if you sell within one or two years of becoming manager that the transfer fee applies, in which case the body corporate must impose a transfer fee of three percent or two percent of the business sale price.

Adding a new option to an existing agreement is technically prescriptive. Apart from getting a new agreement, this is the only way that the term can safely be extended. Because of these technical requirements, many lawyers and body corporate managers have failed in their attempts to extend the term.

Because of our involvement in the legislative changes (in fact, we designed the prescribed statutory form that must accompany the motion to add the new option), we have been called upon on a number of occasions to remedy ineffective additional options ruled invalid by the body corporate commissioner’s off ice.

The changes can be done in a simple and straight forward way but do require an AGM or an EGM as it is increasingly rare that a financier or a body corporate committee will accept this being done as part of the assignment. Most managers are dealing with the matter at the same time as they are topping up their agreements.

Financial figures You will need up-to-date financial figures. Take the time and spend the money to get up-to-date figures for sale purposes from your accountant.

So many sellers rely upon outdated financial figures or on figures that are not really prepared for sale purposes.

Termination clause in agreements

I have seen a number of sellers grossly underestimate their net profit and find that the buyer’s accountant has verified a net profit well in excess of that shown in the contract. With multipliers of around five and above, a difference of only $5000 will cost you more than $25,000 – enough to cover a fair component of the agent’s commission.

Much has been written about the Gallery Vie QCAT decision and the changes that financiers want made to the termination provisions in management rights agreements to deal with

Make sure you get the most up-to-date figure you can. You would expect these to show a higher figure than figures a month or two older but if they don’t, you can at least decide

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what it is you are going to rely upon and include them in the contract.

Make sure your body corporate salary has been updated to take into account the latest CPI increases or any market review that might be permitted under your agreement.

Get expert help Above all, use the experts.

You might think that you don’t need an accountant or a specialist accountant to put together your net profit figures.

As any honest accountant will tell you, it is a very specialised area. As a general rule, figures prepared according to normal accounting standards will show a net profit lower than the way in which it is calculated for sale contract purposes. Only a specialist accountant will be able to produce accurate figures.

You might be tempted to use a local or suburban lawyer because they offer a cheaper rate. Although, as a general rule, there are fewer legal issues when you are selling than when you are buying, I have seen so many sellers get themselves into

trouble because they have tried to save money by using a lawyer who does not specialise in the area.

You need someone who understands management rights to be able to deal with any issues raised by the buyer or the buyer’s solicitors – so often, we are able to salvage a sale transaction because of our expertise and ability to convince other solicitors of our view of the legal position.

Perceived savings on commission might encourage you to market your business yourself rather than use an agent and sometimes you might succeed. But there are downsides. A good agent will help guide a buyer through the purchase process and often keep together a sale that might otherwise fall apart. I have seen that happen on more than one occasion.

then an experienced lawyer will be able to handle contract preparation and negotiation.

Check out potential buyers There has been a misconception that a body corporate cannot refuse to consent to an assignment unless the proposed new manager is a criminal or a bankrupt. That is far from the case. A body corporate is entitled to be satisfied that a proposed new manager has the qualifications, experience and financial capacity to perform all of the duties under the management rights agreements.

Bodies corporate today are far more vigilant in considering requests for assignment consent and you should expect your body corporate to thoroughly investigate any potential new manager.

So, make sure the buyer the agent brings to you is going to meet these requirements, before you sign any contract.

If not, you should consider suggesting that the buyer undertake one of the many training programs that are conducted by ARAMA and other industry experts.

Servicing Resident Managers throughout Australia

A good agent will also pre-qualify a buyer to ensure that your time is not wasted by people who will not get finance approval.

On the other hand, if you are able to find a buyer yourself,

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info@mahoneys.com.au

RESORT NEWS – JANUARY 2018

TIPS FOR SELLING MANAGEMENT RIGHTS

Maximising your sale price When the time comes to sell your management rights business, there are a number of things you can do to help maximise your sale price and ensure a smooth sales process.

Paul Gaffney Principal, The MBA Partnership

Review your letting authorities and POA Form 6.

professional is made aware of any letting pool movements during the period, and identify any one-off income that is earned.

Consider engaging a professional to review your agreements to ensure they are: •

the correct version;

•

signed correctly;

•

assignable, and;

•

that the schedule of charges are attached, and agree, with what’s being charged in your trust software.

Your auditor should be reviewing a select number of these agreements at each visit; however, that may not be the case if you are not using an industry specialist auditor.

It is the responsibility of the vendor to ensure the letting authorities reflect the correct charge to a letting owner.

When carrying out verifications for purchasers, we find a large number of vendors do not review their letting agreements, and they are then required to engage with their owners to have the agreements updated.

Additional wage assistance over a two-person management team During the sales process, it can be very stressful getting agreements returned in time for settlement.

Check body corporate agreements Where possible, you should have your body corporate agreement terms upgraded or extended so that your purchaser has suff icient years left on the agreements to enable their financier to fund the purchase.

With 10-year agreements, the term must be as close to 10 as possible and with 25-year agreements, as close to 25 years is desirable.

Consider approaching your lawyer to request that the body corporate upgrade

Due Diligence Auditing Taxation Business Advice

07 5557 8700 mail@mbapartnership.com.au

Michael Beddoes and Paul Gaffney www.mbapartnership.com.au www.managementrightsaustralia.net

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your agreements to include a termination clause. This will allow your purchaser greater flexibility when approaching financiers.

Many financiers in the industry are more selective in relation to who they lend to and on what terms, so it’s important to present your business agreements in the most lenderfriendly form as possible.

Make an asset register Before making the decision to sell, make a comprehensive list of all assets to be included in the sale of the business, so there is no misunderstanding in the settlement process.

Accounting records Firstly, engage an industry professional to prepare sales figures to ensure that figures are realistic and verifiable.

Ask an industry specialist what records a verifier will require and ensure that your records are in a suitable state for a smooth verification. The verifying accountant will have a significant influence over your prospective purchaser in relation to whether they proceed or not, so these steps are vital in order that your business is presented in the best light.

Be sure that your industry

Discuss with your industry specialist what appropriate level of wage assistance should be included in your sales figures.

Wage assistance is probably the most contentious expense in any verification, so it’s important to be realistic in what is acceptable. Remember, if your rights are short-term or holiday, then your labour should (at the very least) include assistance for weekends.

If the rights are permanent, then also be realistic about the staff ing required to manage a large letting pool.

Valuers place a great deal of importance on this expense and if the figure is not realistic, then this will hinder your prospective purchaser’s ability to obtain finance for the purchase.

Discuss the sale with your specialist accountant It’s important to discuss your sale details with your accountant to ensure there are no hidden issues with the sale contract that will cause you distress in relation to capital gains tax.

Capital gains tax is very complex and if the sale is not structured correctly, it may not be wise for you to proceed.

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How to hit the market with a saleable business…

After attending the recent ARAMA Management Rights Industry Expos and listening to expert panelists on the Gold Coast, Sunshine Coast and in Brisbane, the overwhelming message to managers wishing to sell in the next 12 months was to get their business and place of residence in order.

With total transparency being the mantra from lending institutions and industry specialist solicitors, the prediction for finance approvals in 2018 is that it’s going to be tough.

So, in order to assist sellers in being prepared to hit the market with a saleable business, I have compiled some tips on listing your management rights business for sale.

1. Allow time to gather all information, this may take 6-to12 months The reason I say this, is that financiers will require up-to-date accountant’s figures; preferably prepared by a management rights specialist accountant. If you have three years’ figures showing consistency of income, the higher the multiplier will be considered.

2. Choose your agent with care.

A specialist in the management rights industry, that is up-to-date with legislation, is able to guide you through the process and give support/advice when needed Knowledge of industry legislation, licensing, the experience of negotiation and a great data base of clients is valuable to you as a seller. An agent should work with you during the process who will understand your motivation for selling and who will listen… A manager knows his building better than anyone.

This brings me to my next tip…

3. A lot of managers have procedure manuals in place but a lot don’t…

It shows professionalism and, more importantly, it becomes a checklist of duties that are due each day, week, month and even annually.

It should contain your management agreements, showing the caretaking duties and by-laws of your building, phone contacts for preferred suppliers and essential services, along with instructions for software and banking procedures.

It is also an essential tool for reference when you have relief management or when you employ staff in your buildings.

And when you sell, it will ensure a complete handover of your business to the next manager without too much effort and the satisfaction is, it is a complete checklist. Remember, when you took over, you were consumed with so much information.

4. All Form 6 letting appointments should be in place.

Remember, this is the business you are selling, and they are essential at time of verification of records. Up-to-date addendums should be attached with all charges applicable to owners listed. Wording is important with the word ‘service’ not ‘charge’ inserted. Providing a service, such as cleaning, marketing, etc., is different to a charge and profit from these can be utilised, particularly where reception/ marketing is concerned.

part in choosing your building - it becomes their new home.

6. Notify the body corporate chairperson that you are wishing to sell…

This way, there are no surprises and they may be able to help make it an easier transition.

Full transparency is important, providing the relationship is strong.

This can be kept confidential and eliminates the prospect of the body corporate thinking they have been ambushed.

7. Provide comprehensive listing details to your agent…

Due diligence will be thorough going into 2018. Your ‘profit and loss’ needs to be current; you should have a current valuation of the managers’ lot and pool safety certificate compliance.

With agreements, ensure the Gallery Vie clause and any top ups of management agreements are in place. Obtain professional photographs of the building, facilities, managers unit, office and a selection of units that are in the letting pool… a potential buyer may be overseas or remote and having access to photos of the property will make the process that bit easier for everyone involved. Don’t miss an opportunity!

8. Ensure your inventory of equipment is up-to-date! and include leases if applicable Computers, printers, etc., should

Lyn Pearsall Management Rights Specialist MR Sales

have brand names and, if possible, serial numbers to eliminate any confusion over what comes with the business.

Furthermore, check your agreements in relation to the ability to live off-site, many managers want to remotely operate their businesses or operate several buildings from one head office. You should also know whether your complex allows pets and the requirements surrounding this issue. This alone can prevent settlement at a crucial stage.

These things may seem trivial but it is essential your agent has 100 percent knowledge of what is being offered for sale for presentation to the savvy purchasers of today.

2017 saw a bumper year in management rights with record sales being achieved; however, the fall-over rate of contracts was also high with one-in-four contracts not proceeding to settlement.

Let’s make sure we as sellers and agents work together as a team and engage only associated management rights specialists to get it right in 2018.

5. Presentation is a big one!

The building will be in firstclass presentation, why not your apartment? Present your apartment as a clean, uncluttered, comfortable home. It might benefit from a coat of paint, minimalise/ store/pack-up unwanted furniture: you then have half the packing done when you sell and have to move.

Remember, that is so important when you live on-site. It has to be welcoming to the new buyer and the apartment plays a big

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AUSTRALIA’S LEADING MANAGEMENT RIGHTS BROKER Specialising in Management Rights Sales Australia wide Thinking of Buying or Selling?

Phone: 1300 928 556 Email: sales@mrsales.com.au

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TIPS FOR SELLING MANAGEMENT RIGHTS

Maximise the value of your business Assuming you want the best price for you MLR, ensure all property, accounting and legal matters are covered before listing.

Property issues: Besides whether a prospective buyer ‘likes’ the property as a future home, there are two components for every management rights buyer to take into account when looking to purchase a management letting rights: 1.

The residential component; and

2.

The commercial component.

When purchasing a management rights, it is important to establish what you do and what you do not own.

The process the valuer takes and the consideration we have follows.

Residential component The residential component is not unlike the valuation of any residential property, whereby the living component of the unit is compared directly to other residential units, either within the subject complex or to external properties that are in a similar location.

The residential unit will typically have one of the following title scenarios: •

•

Group Title Plan – The group title lot is effectively a parcel of land inside a townhouse, villa or housing complex/estate.

The property within the boundary of the group title lot is wholly owned by the proprietor, i.e. including the building and any yard that surrounds the property.

Building Units Plan – Under a BUP, the proprietor only owns what is within the BUP or building area.

In most cases, this would

include the living and balcony or patio areas; however, in some cases it only includes the building and the patio or balcony or even the off ice may be exclusive-use.

•

Survey Plan – The BUP and GTP have been replaced by survey plans.

The main difference with modern survey plans and the BUP and GTP above, is the lot entitlement and by-laws are within the CMS. Aside from this, a building format survey plan mirrors the BUP as above and standard format survey plan the GTP.

Commercial component A property’s commercial area can vary considerably, and they range from a small business that has no off ice or reception, to those complexes that have an extensive off ice/reception, restaurant, bar and conference facilities.

The added worth of the commercial entitlements can vary significantly between holiday letting and permanent letting management rights complexes.

The inclusion of a separate off ice/reception are very important for management rights complexes and without these facilities, the business could not really function; however, permanent complexes can survive with facilities of lesser scale.

Community management statement The first aspect the valuer will refer to is whether the property is indeed the legal manager’s unit.

While the CMS provides a number of important functions, the most of interest to the incoming buyer should be that it will have clauses that say something like:

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Tod Gillespie

Chris McKillop

Director, Herron Todd White

Director, Herron Todd White

“Lot 1 may be utilised as both a residence and an off ice for the conduct of the caretaking/ management of the common property and letting of the lots within the complex.

Furthermore, no other lots may be utilised for letting purposes other than the owner/occupier of Lot 1.”

Without this clause, other owners in the complex may be able to operate a letting business in competition with the incumbent manager. Your legal due diligence will cover this.

The next of importance from a valuer’s perspective is what exclusive-use areas have been identified within the CMS. This will be explained further below.

On title The most valuable form of tenure for these is ‘on title’, where they are wholly-owned by the proprietor of the lot.

Should these areas NOT be ‘on title’ within either the GTP, BUP or survey plan, their use and ownership would be determined by way of either exclusive-use or occupational authority.

Exclusive-use Exclusive-use is found within the community management statement, where each lot is nominated in a schedule along with any areas that have been deemed as exclusive-use for that lot and identified in a plan that would be annexed.

Exclusive-use is considered the next most valuable ownership scenario after being on title.

Occupation authority Occupation authority is granted

by way of either the caretaking or letting agreements or both and the proprietor’s interests in the area that is granted is terminable. When the agreements expire, so does the permitted use of that area.

This is the least valuable of the tenure scenarios in Queensland as its use is terminable, i.e. has a defined date when you can no longer use it.

Examples to be wary of We have valued property where the manager has shown us various areas that they are adamant are either on title or exclusive-use. However, in some cases, the areas we have been shown are either common property or owned by another unit owner within the complex.

Examples of negative property issues for both buyers and sellers are: •

A games room with income-to-manager was built in two car spaces owned by two other units

•

A linen room was constructed in another unit owner’s car space

•

The off ice was surveyed incorrectly, so 50 percent was exclusive-use and 50 percent had to be granted occupation authority as it was located on common property.

Such scenarios will cause the incoming manager angst and possibly loss of profit, plus most likely upset the body corporate committee and any owners that are directly impacted.

If any of the rooms that are necessary to operate the

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management rights business are ‘common property’ only, and should there be any dispute with the body corporate, it would be possible for the onsite manager to be refused access to those areas. This could severely inhibit the successful operation of the management rights business.

The best advice is to seek clarity from the start. We would recommend that any issues discovered, are dealt with in the assignment documents prepared by solicitors, as a condition of the contract of sale. For example, a common property store room should be documented within the assignment documents as ‘occupational authority use’.

Business issues Agreements – Management rights businesses achieve high values because of the stable and recurring nature of the income.

The right to earn this income is based on 3 sets of agreements: 1.

Caretaking agreement with the body corporate

2.

letting agreement with the body corporate

3.

Form 6 or PAMDA forms - individual letting agreements with each lot owner.

These agreements should each be reviewed to ensure that

they are current, any options have been exercised, fees and charges are up-to-date and have been executed by all relevant parties.

Asset register – Identify what assets are being sold as part of the walk-in/walk-out business and prepare a detailed list of these assets. Consider what these assets are worth: do you have clear title to these assets and proof of ownership.

Accounting records – The trust account and general account accounting records should be kept up-to-date so that any prospective buyer can easily trace income through the system and into the sale figures for the business.

Unit owner charges (Form6/ PAMD) – Unit owner charges should be reviewed on a regular basis, generally yearly, to ensure they are up-to-date, competitive in the marketplace, and inline with the Form6/ PAMD agreements and what is being charged through the trust account system. A common mistake is for the manager to increase these charges without updating the agreements.

Taxation – Make sure you discuss your sale plans with your accountant as the income and capital gains tax rules surrounding sales of businesses are complex and a badly

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structured sale transaction may result in you paying more tax than necessary.

are required to efficiently run the business to achieve the net profit.

Net profit assessment (AKA sales figures) – All vendors should have a ‘sale basis’ profit and loss statement for the business prepared by a specialist management rights accountant (with PI cover for such reports). The P&L should be for the previous 12-month period and no more than three months old.

One-off income - Income must be recurring. One-off income items should not be included.

Any new income streams will need a clear explanation as to how they are maintainable into the future.

Wages – Can be a very divisive matter. Whether it be cleaners, reception, gardening or maintenance, the net profit includes all wages “other than those performed by a two-person management team.

The vendors must be honest as to how many “other” staff

I recommend any manager considering selling their MLR business to contact the most experienced, qualified professionals for specialist advice.

This is particularly necessary for the myriad of accounting issues and only a specialist management rights accountant with professional indemnity insurance cover for verification reports should be consulted.

Peace of mind for your property decisions Management rights and unit valuations for all major financiers, presale advice and due dilligence for buyers

Gold Coast, Brisbane, Ipswitch & NSW North Coast Tod.Gillespie@htw.com.au Sunshine Coast, Reg Qld & NT Chris.McKillop@htw.com.au Australia’s largest independent property advisory group

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