by Nick Smith - Red 10 Finance
22nd November, 2018
Financing management rights: pick your team wisely
Borrowing money to purchase a management rights for sale has always been available from the bank’s, however, with the current Royal Commission into Banking and the QCAT ‘Gallery Vie’ decision, it has become more challenging. This doesn’t mean that you are unable to borrow money it just means that you should obtain specialist advice to do so.
In December 2017, the Royal Commission was announced, and Banks were forced to relook at the way they conduct their business including the way that they decision an application for a loan. There are now more detailed checks on every aspect of the client and the complex, to ensure that the bank is not offering an unsuitable contract.
The ‘Gallery Vie’ situation is also a consideration that has been around since the QCAT decision in April 2015. Understanding whether you are purchasing a complex that has had the termination clause amended in its agreements can ultimately decide who is likely to lend you the money. Some of the banks are looking for the agreements to be amended immediately before settlement, some require a deed of assignment and some require nothing, depending on the applicant and the complex.
To reiterate though, this is not bad news, the banks are still regularly lending to management rights, and the amount they will lend has not generally been affected by either of these two events.
The banks now request a lot more detail in the information from a prospective borrower including existing arrangements regarding home loans, car loans and credit cards, and generally require more time to analyse these applications.
Utilising the services of an experienced finance broker or banker will ensure that you get the best advice.
Some of the bank offerings/questions include:
- What business experience do you have, are these skills transferable to enable you to successfully operate a management rights business?
- Is the net profit enough for you to borrow money and for general living expenses?
- Banks will require you to have a deposit of between 30 to 40 percent of the purchase price excluding costs, however this can be equity in a real estate asset or cash.
- They can offer ‘interest only’ facilities if that suits your particular circumstances or they may require principal and Interest repayments. This can also be dictated by the amount you borrow and the length remaining on the agreements.
- Interest rates are fluctuating daily but as at the date of this article they were between 4.5 to 6 percent, depending on the lender, amount borrowed and the applicant. The banks will also look at sensitising the application too for rate increases and net income reductions. This can be in the format of 2 percent above the actual rate and a 10 percent reduction in the net profit.
- Most of the banks offer full service solutions, so business trading and trust accounts, internet banking and credit and debit cards and usually a relationship manager.
- Lenders will look at management rights in Queensland predominantly but there are a few who will lend to management ights in New South Wales as well.
The process of purchasing a management rights, will usually take the format of an offer and acceptance between the purchaser and the vendor, this will proceed to a full contract where the obligatory clauses will be included. Such as the verification of the income stated, the legal due diligence and the date that finance must be obtained by and of course the date of settlement.
The date that finance must be obtained by has by virtue of the first paragraph of this article become slightly longer than it was a few years ago. One of the key elements of this, is the valuation report for the bank, that can take a fair amount of time if they are valuing the business as well as the managers unit.
The verification of the net income will be carried out by your selected specialist accountant who will ensure that the income is as stated by the vendor. However, this income also needs to be sustainable for the new purchase.
The banks also use this report to have a valuation report prepared, that will identify to the bank the value of their security for both the business and the managers unit.
Legal due diligence, which your appointed specialist lawyer will carry out, will give you the confidence to know that the agreements have been checked for their validity and their requirements for you as a manager as well.
When asked about when the best time is to talk to an accommodation specialist broker or a banker, well the short answer is, the earlier the better. A specialised broker/banker will be able to guide you on the likelihood of obtaining finance very early using their experience and knowledge of the market.
Final tips on purchasing/financing:
- Talk to a specialist broker early to see what type of complex is likely to be affordable for you including the amount you may be able to borrow.
- Find out whether or not the complex is ‘Gallery Vie’ compliant or not and if not, let your broker know as soon as possible to give you some options.
- Use a specialist lawyer and accountant for your legal due diligence and income verification
- Understand the requirements of you as a manager, the office hours, caretaking duties and requirement to live onsite.
- Ask questions!