So you want to buy management rights?
‘Management rights’ is the industry name for a business arrangement between resident managers of strata titled properties (complexes comprised of units owned by different entities) and a property developer or body corporate made up of unit owners.
Two agreements are key to owning management rights:
Each management rights agreement is as unique as its property.
How long will you have the management rights?
There are some differences state-to-state, across the board. In NSW, there tends to be a 10-year maximum, with the exception of agreements made before 2003. In QLD, the term length depends on which regulation module governs the scheme; standard modules work a maximum of ten years while the accommodation module operates up-to 25 years.
Who would you let the units to?
This depends on whether the complex is established as permanent, short-term or mixed-use.
Permanent complexes let units to people who wish to live in them for at least six months.
Short-term complexes let units to holiday-makers or business travellers; these operate much like hotels or motels. Mixed-use complexes let units to a combination of both.
Things to keep in mind with ‘off the plan’
A property geared up mostly for permanent lettings will be less focussed on office or reception space for managers than a property more open to short-term lettings. This is something to factor into any management rights purchasing decision: residential and commercial components can vary widely but are always vital. Any property valuer must take both components into account, so often a management rights specialist will have this role.
Buying ‘on’ or ‘off’ the plan is another crucial thing to think about. ‘Off the plan’ essentially refers to properties that are not yet operational. Usually, buying off the plan means buying management rights from a developer; there is less information to go on as there is no business history for that property, etc., so buyers have to be more careful and mitigate the larger risk.
Off the plan management rights businesses do tend to be cheaper, which is a selling point, but the purchases have tougher negotiations. The contracts need to be drawn up very specifically, so there is no question about what exactly the buyer is purchasing, what it will look like and how it will operate. Don’t be too quick to believe everything an agent or developer says; although their information and advice is critical, assumptions about future occupancy should always be taken with a pinch of salt. Look for statistics.
Have your accountant or legal representatives verify any financial projections and see if you can obtain your own for comparison.
Particularly when you are looking to figure out potential profit projections, it is imperative to generously allow for expenses. It is more likely if you are a relatively in-experienced manager, but expenses can be unforeseen or overlooked. Body corporation remuneration, letting income, various fees and income sources should also be included.
A sensible way to approach buying off the plan is to research the developer in question. Have they completed any other developments? How well are those management rights businesses doing now? If you can talk to other managers, that would also be incredibly useful. Find out any points of difference between previous developments and the development you are interested in; location, short or long-term letting, and style could all share insight.
Have you had experience as an accommodation manager before? If not, this is something to consider as well. An extremely involved holiday complex is going to require a lot more commitment and responsibility than a permanent letting complex. Developers are also known to contact experienced managers well ahead of time, so if there isn’t a lot of competition for the management rights it might be a case of asking why.
Along with obvious considerations like the number of units in the property, it’s important to find out about marketing channels and advertising support. Will you receive help with any of this from the developer? It is not unusual for managers to have to spend time and money setting up the front desk; often, this includes establishing a marketing premise, property management system, etc. If you are dealing with an experienced developer who can help arrange these things, all the better. Otherwise you need to do some research to find out what you need to install or put in place.
The software installed within the complex will dictate much of the day-to-day operations so it is a very important factor to consider. Marketing, inventory and accounting, staff scheduling, reservations and housekeeping maintenance are all things that will rely heavily on whatever system is selected and put in place. Swapping systems can also be a headache so it’s important to have all technological questions answered in the first instance.
Once again, this leads into whether the property is geared up for short-term or permanent lettings. Depending on the complex type, the marketing strategy will differ substantially and the developer should have some material on this for you to access. Another thing to request is a copy of any unit sale contracts and/or disclosure statements.
These could prove extremely useful, particularly if they include survey plans, bylaws, caretaking and letting agreements, etc. They are an essential part of any initial due diligence, which is so important with off the plan purchasing.
Everything listed in these contracts should be looked at closely in the negotiation process. From property maintenance regulations like window cleaning and fire safety, to waste removal, parking, wifi, garden and office space; these are all things that will have a huge impact on a manager’s day-to-day life, so they should be looked at carefully. Figure out what you need and want as a manager, so you know where you can compromise and where you will not.