It’s pertinent at the beginning of a new year that the Q&A focus on the preliminary steps taken by potential entrants to the accom industry (and more specifically management rights), so I sat down with Mark Ryall, founder of MRM Finance about the steps typically taken with his clients.
Q: How should the management rights business be set up?
Before signing a management rights purchase contract, it is important to consider what business structure will be the most suitable to operate the business. ie. The unit is generally registered in personal names as the principal place of residence in order to save stamp duty vs a family trust for asset protection and taxation benefits.
Professional advice should be sought pertaining to all options, as well as discussing the implications of each and every aspect including asset protection, taxation affects, and the costs of administration to ensure that you are fully informed before signing the contract.
Q: What happens regarding financial due diligence?
A full financial due diligence will need to be performed for both you and the financier prior to purchase. This should be completed by a specialised accountant with extensive industry knowledge who will attend the complex and validate the prior 12 months of operating income and expenses to determine the net operating profit.
A thorough due diligence report will detail all findings and will also provide valuable information to the purchaser regarding the commercial business operation.
Important: Using the services of a non-management rights accountant can result in the financier not accepting their reports, and for you, as the client, having to redo the investigation at your own cost.
Q: What do I need to do about the agreements?
When purchasing a management rights business, you will need to engage a specialised lawyer to undertake the legal due diligence on the agreements.
The lawyer will review the agreements, by laws, history of the building and provide you with a comprehensive report outlining their findings. In most cases, this report will be required by the financier.
Note: As with the financial due diligence, it is imperative that you engage a legal firm with specialised experience in the management rights industry so as to ensure that all legal aspects of your agreements are valid.
Q: What bank accounts will I need to open?
The bank providing the finance for the management rights purchase will typically require you to establish the required trust account and general account through them. They will also establish internet banking services for you to access all accounts, and allow you to pay owners each month from the trust account via their online platforms.
The financier will require a copy of the Office of Fair Trading application / certificate to open a trust account.
In addition to these services, you will need to set up merchant facilities, to provide a facility for guests to pay for accommodation or services via credit card.
Q: What will I need to provide to the banks?
Evidence of your assets and liabilities
Business plan and resumes
Previous tax returns
Copy of trust deed (if applicable)
Statements covering existing loans
Confirmation of clear Tax portals
Personal and bank statements to confirm repayment history and general living costs
Q. How long do banks require to approve a loan
The timeframe for financiers to assess a loan has increased over the last 2 years due to the compliance requirements on every application.
The average time for finance approval is two weeks after the bank has received the financial verification, legal due diligence, valuations, supporting information and applications
Q: Will I need to provide information to the bank after settlement?
Financial covenants will normally be required by the bank with their finance approval. These covenants can include:
- Provision of letting pool numbers quarterly or yearly
- Provision of financial / taxation returns (annually)
- Ratio of profit vs income
- Completion of audit certificates
- Provision of taxation obligations
- Copy of insurance policies (public liability)
Q: How much can I borrow?
Some financiers will still lend up to 70 percent against the combined purchase price of the unit and business. Some financiers will still provide interest only terms for three years. (subject to affordability)
Using a specialised finance broker will give you to access to financial policies regarding all banks.
Q: Why do I need a trust account?
The trust account is used for payments received from guests and tenants paying for accommodation or services that are held on behalf of owners/investors, and distributed to owners during the first week of each month.
The trust account must be audited three times a year by a certified auditor, and the certificate must be supplied to the Office of Fair Trading each year.
Q: How will I manage the trust account?
There are various software packages to assist with operating the trust account that will effectively manage:
- The receipts of payments from guests and tenants
- Calculate the amount of payment to the owner
- Calculate the amount of payment to the resident manager
- Three-way balancing
- Deposits held
- Owners ledger
- Tenants ledger
- Owners summary reports
- Overdue payments
Q: What training is available for new entrants?
Once the person who is intending to enter the industry has secured the right trading licenses – and RLA or full real estate license, they should as a minimum complete the Management Rights Industry Training Program (MRITP) training offered by ARAMA and then even the operational and compliance training in building management and caretaking available through Australian Building Management Accreditation (ABMA) Building Management Code.
