The NRAS Dilemma

AccomNews Tuesday, January 22, 2013

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Since the advent of the federal government’s initiative with the National Rental Affordability Scheme a couple of years ago, the management rights industry has been endeavouring to come to grips with its impact.

That has led to confusion, uncertainty and in more than one case, considerable grief.

First some background. The NRAS program was designed to provide an incentive for investors to buy new property to stimulate the building industry and improve the rental affordability in high growth areas for middle income Australian families.

The incentive to the investor is the provision of substantial tax savings over a 10 year period. The incentive the investor receives is just under $10,000 a year, to be indexed over the 10 year period. The federal component (approx $7500) is paid as a refundable tax offset (meaning it reduces the investor’s tax bill) or if the investor does not pay enough tax it can be received as a tax refund. The state’s contribution (approx $2500) is non assessable and exempt for tax purposes meaning no tax is paid on it or if the investor pays less tax than the $2500, it is paid as a refund. So there are some clear and certain tax advantage for the investors.

The properties can only be rented to tenants with certain levels of income. Most importantly, NRAS is not about social housing nor designed for very low income families. It is, as the NRAS website states, designed for middle income earners including key and essential service workers such as childcare workers, nurses, police officers and fire-fighters. NRAS properties can be rented but at no more than 80% of the current market rent, to private individuals and families with annual incomes of up to $108,169 and in some limited cases even higher upper limits of $135,212. These amounts will also be indexed to the CPI.

There are a very large number of what are known as NRAS providers – not for profit organisations approved under NRAS to manage properties accepted into the NRAS program. The NRAS provider comes to arrangements with a developer for an approved number of properties in an approved development to be managed by the provider under NRAS.

Under the provider’s agreement with the government, the provider is responsible to ensure that the letting of the properties comply with the prescribed NRAS rules particularly that they are let to qualified tenants at the prescribed rents. Unless there is full compliance the provider’s status and the investor’s tax incentives are in jeopardy. It is therefore critical that the provider have a degree of control over how the properties are let and managed.

Different providers require different levels of control. One of the biggest providers in Queensland is the Queensland Affordable Housing Consortium whose first model was a lease under which it leased all of the properties from the investors and then sublet the properties to eligible tenants. That ensured that QAHC maintained total control over the management of the properties. QAHC also developed another model known as the direct delivery model where the investor appoints QAHC as the investor’s attorney and QAHC acting as attorney arranges for the direct letting of the properties to the eligible tenants.

Initially all of the sublettings under the lease model and the lettings under the direct delivery model were done through QAHC’s own property management division. Following the appointment of the onsite manager (remembering that these are all new complexes and tenancies were being arranged before the complexes were complete), QAHC would in the case of the lease model, appoint the onsite manager as agent and in the case of the direct delivery model, assign its letting appointments to the onsite manager.

Other NRAS providers include 4 Walls, AMC and Aspire but there are over 20 in all operating in Queensland. Each offer different models. Some obtain joint letting appointments with the onsite manager who does all the property management and receives the bulk of the income. Other providers simply allow the onsite manager to take letting appointments from investors but under strict guidelines agreed to with the provider.

The obvious issues with NRAS from the perspective of an onsite manager, valuers and banks include:

• The degree of control the provider has over the investors and the properties – the provider will be in a good position to direct or influence owners as to who should manage the letting of their properties;

• The potential for the provider to itself take on in the future, as agent, the letting of the properties;

• The reduced income from the lettings as the rent is at least 20% below market rents; and

• More paperwork to be completed to ensure strict compliance with the NRAS requirements re tenant eligibility and market rents, with some providers insisting on specific software utilisation.

We have acted in a number of transactions involving NRAS properties including for various managers, one of the state’s largest developers and also for a bank funding a purchase. If the full details of the NRAS arrangements are known at the outset there are ways to deal with the above issues so that the onsite manager is protected. That might include a lower payment for the NRAS units, procuring warranties or even restraints from the provider, deferred or staggered payments for the NRAS units or some combination of these or others.

Unfortunately we have also been consulted by buyers of management rights off-the-plan where they have only found out after signing a contract that a large number of units are part of NRAS, situations that can cause a lot of grief.

Having arranged and partaken in a recent forum attended by a major developer, valuers, banks and an NRAS provider, the way forward is still not crystal clear. In particular, valuers and banks will attribute minimal if any value to letting appointments where the provider has total control of the letting appointments and who the letting agent will be. Again though there are ways of dealing with even these situations to protect the onsite manager as much as possible.

On the positive side, it is important to note that:

• NRAS units are more likely to remain in the letting pool for a longer time than other investor units as the NRAS investor (and any buyer who remains in the scheme) has the benefit of the 10 year tax incentive;

• NRAS providers generally do not want to manage the letting of the properties and (as do the NRAS investors) recognise that the onsite manager is best positioned to do that – if the onsite manager is providing a sound service there will be little reason not to
continue with that;

• There has been a resale of at least one management rights business with a large component of NRAS units (albeit not the leaseback model) indicating market acceptance;

• There are a very large number of complexes with NRAS units and a growing understanding and acceptance of the concept; and

• The management rights industry is very resilient, tending to adapt to or overcome potential threats and move on fairly quickly.

For a potential buyer of management rights in a complex where there are or is likely to be NRAS units, it is critical to thoroughly investigate the NRAS arrangements and take sound legal advice from a lawyer experienced in dealing with the issues involved.