Financing Management Rights:

In Queensland & N.S.W., there are usually two contracts that are entered into with a management rights purchase.    The first is for the purchase of the real estate component - the Unit or Villa or Townhouse. The second is for the sale of the business.        Both contracts are conditional upon 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".

Not all Banks & Financial Institutions lend on Management Rights. Those that do, have a very low level of failed loans as the Business has a history of stability and predictability.

The Real Estate Contract is just like any other Real Estate purchase. Loans are common up to 80% and sometimes more, repayments can be interest only or interest & principal.

Financing the Business has greater restrictions and Banks may not lend more than 50% of the contracted business value.   Loans usually call for repayment of principal and interest and the term of the loan is usually restricted to the number of years remaining in the Body Corporate agreement.  Full repayment therefore coincides with the expiry of the agreement.    In practice, agreements rarely expire as a competent manager will negotiate "top-up terms" as their original term begins to run low.  This of course protects the Managers Capital invested in the Business.

Banks need to be comfortable that the Unit is worth the contracted price, and here, the "norm" is 5-10% above the value of others in the complex (reflecting it's added value of being the only one unit from which the complex can be managed, plus any further amount which needs to be added for additional rooms "on title". This would usually be an office and perhaps storage rooms.  Other factors may be "exclusive use" rooms or areas such as private outdoor entertaining areas, more upmarket renovations etc.

To assess the fair value of the Management Rights Business, the Banks will require that "due diligence" on the business P&L 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 just the figures relating to the most recent 12 months of trading.                   The reason for this is that older figures may well be irrelevent to the current level of business being transacted.    Factors that can change over time include the size and makeup of the "letting pool", tariffs & rents and of course the Body Corporate remuneration which is usually tied to CPI adjustments. Your Bank will want to see the due diligence report where your specialist Accountant  has been given access to all Trust Account records and applicable general ledgers so that a check can be done on all figures supplied.  Letting agreements are also checked to confirm that they are in order.

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

You must also take into account your buying costs. Stamp duty,  legal  & other buying costs will add 5-6% 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 more if you have additional security to offer or if you have additional income from other sources.

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

Also see "About Management Rights" on my website www.terrymcmiles.com