Some Management Rights Just Aren’t Worth It

Well, another new year has rolled around. Hopefully the year ahead will see a lot less volatility in the world on a number of fronts.

Some better economic and climatic news would be most welcome for a start!

While some things will change, one thing will remain constant: some complexes simply should not be operated as a management rights business. Most people could name a couple. These are the complexes you looked at two years ago that are still on the market, that agents just can’t seem to sell,and that the bank has looked at three or more different buyers.

The characteristics that make such sites unsaleable are readily identifiable. For example, they may have one or more of the following characteristics:

• Standard Module with agreements that are running down

• A body corporate that will not agree to a top up or module conversion

• A small building size or letting pool

• A low net profit

• 50% or more of the asking price being the manager’s lot.

These attributes will shrink the pool of suitable purchasers.

Where the price of a complex is heavily weighted towards the non-income earning real estate, the building’s yield will be much lower than a comparable site where the weightings are reversed. If buyers are looking at the complex from an investment point of view, most will opt for the higher yielding site. In addition, the business will probably not generate enough income to service the debt required to acquire the site. If there is enough to service the loans, outside employment would probably be required to provide enough funds to live on.

There are a couple of solutions that can be considered for these types of sites. The first is to consider whether it is worth retaining the management rights operating model. This is particularly the case for a permanent site. The caretaking can be managed by contracting out the gardening and common property maintenance work while the letting can be handled by a real estate agency. While some lot owners may be set on having on-site management, it may not be viable; the manager may need to earn more than is currently being generated by the complex. One of the few avenues available to the lot owners who wish to retain the on-site manager is to increase the body corporate salary. However, this means increasing levies that most bodies corporate are unwilling to agree to.

Another option would be to remove the manager’s lot from the equation. This would result in a vastly improved yield for the operator. As the manager still needs a roof over their head, the agreements would need to allow for this situation. The manager may still live on site in a rented lot or may live offsite. Where they rent on site, it may be advisable to establish a longer-term lease. A financier will look closely at this arrangement and may ask questions if there is only a six month rental agreement in place. They may also require a lower gearing level than when a manager’s lot is part of the transaction.

The ‘live offsite’ arrangement can be handled a couple of different ways. First, if the manager already owns real estate in close proximity to the complex they may continue to live there. The other solution is where the complex is run by managers of a neighbouring building. This arrangement however, takes time and a lot of co-operation from the respective bodies corporate, as well as changes to each set of agreements to recognise the new arrangement. Each building retains its own set of agreements but appoints a common party for the caretaking and letting associated with each building. Expert legal guidance is essential in this situation.

One of the keys to making this set-up financially viable is removing the now redundant manager’s lot/s from the equation. The lot/s can either be let out to increase the letting pool or preferably sold off. Consolidating a couple of smaller buildings in this manner may have other flow-on effects through economies of scale in terms of staffing, equipment, administration and storage. It can also lead to sharing of facilities and discounts from suppliers through purchasing in bulk.

In the end there should be a solution for most sites but it will take lot owners and managers that are willing to work together for the best outcome for all involved. 

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