Advertising levies: the unwritten rule
It has been an unwritten rule for many years among accountants, and probably valuers and banks, that a manager cannot make a profit from advertising levies or at least if the manager does, that profit is not taken into account when assessing the net profit of the business.
The rationale for the rule is that monies paid to the manager for advertising is to reimburse the manager for advertising expenses incurred by the manager. So if there might be anything left over from what the manager has collected after meeting the advertising expenses, that excess belongs to the owners, not the manager who must account in some way to the owners for that.
The rule makes some sense, or at least it did in the past where advertising took the form of paid advertisements in newspapers, magazines, brochures and other publications. However, in today’s world, advertising consists of much more than that. For example, a manager’s website is a critical tool in advertising, marketing and promoting a complex. A modern, sophisticated and attractive website can generate significant increases in occupancies and returns to owners.
Developing, maintaining and utilising a website and partaking in other social media promotions and activities are just some of the labour intensive work that a manager does to advertise, market and promote a complex. While any actual expenditure on a website designer and a software provider would be properly regarded as an expense, there is a huge component of labour (by the manager or the manager’s staff) that cannot be classified as an expense and therefore not paid for from the conventional concept of advertising expenses.
The impact of that is twofold if advertising is treated as an expense from which the manager cannot profit. First the manager, not the owners, must meet those labour costs. Second, such costs will reduce the net profit, which in turn will reduce the value and sale price, of the business.
I have consistently maintained that if advertising is treated not as an expense to be reimbursed but as part of a service of advertising, promotion and marketing to be provided by the manager, then these adverse impacts are overcome. Where the letting appointment is properly structured in this way, the manager is providing an overall service that involves expenditure by the manager and the provision of labour, time and effort.
Where advertising is treated in this way, there is no need to account separately to owners or others for any actual expenditure. All advertising levies collected belong to the manager and any excess above what might be actually expended should be taken into account for profit calculation purposes.
It is important that the fee or charge be properly described, that the POA Form 6 is properly completed and that there is proper disclosure of these things in the letting appointment (as for example in the ARAMA addendum drafted by Mahoneys).
While I am aware that accountants continue to take a conservative approach to this issue and are reluctant to accept that a manager can make a profit from advertising levies, I am confident that their position is slowly changing. I am also confident that if advertising, promotion and marketing are part of a ‘bundled’ fee or charge as contemplated in the various articles ARAMA and I have published recently (where most of the manager’s fees, charges and commission are bundled into one all-encompassing percentage amount), there will be general acceptance by accountants of profits from these activities.
I have worked with a large number of managers who have moved to the bundling concept for their letting appointments. The success they have enjoyed, and the rewards this will bring them when they sell (and not just from the higher profit generated through dealing with advertising this way), convince me that this trend will continue.
John is one of the founding partners of Mahoneys and is now the firm’s chairman and the head of the property law team.
