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Management rights partnerships – why so different?
Management rights partnerships – why so different?

by Trent Pevy 18th July, 2018

Management rights partnerships – why so different?

Undoubtedly, one of the biggest changes in the management rights demographic over the past ten years has been the boom in syndicate and consortium purchasers.

 

Commonly referred to as ‘partnerships’, these buying groups are especially suited to large buildings and a low interest rate environment.

 

Speaking both as a lawyer for partnerships and as a participating investor myself, partnerships provide many opportunities:

 

  • - the chance for an enthusiastic/experienced resident manager to operate a building larger than their budget would allow;
  • - allowing a transition from active manager to silent investor;
  • - an ability to diversify portfolio risk across different building types and locations;
  • - if structured correctly, the prospect for investors to use different investment vehicles such as self-managed superannuation.

 

One of the peculiarities of management rights partnerships is how often participants are current or former operators. This is normally a positive, providing knowledge and advice on hand if needed. However, it can also occasionally challenge the concept of what is expected of a silent partner, with unwanted interference not unheard of. What becomes reality can be influenced not only by the expertise of the transaction management consultant in assembling the partnership, but also through relevant education and advice from the lawyer engaged to assist.

 

Every partnership, the personalities involved, the building being purchased, and the environment in which they operate, are different. Our knowledge base grows on every transaction without exception, no matter how many hundreds of partnerships we act for. What works, and what occasionally doesn’t, all shapes our approach and recommendations as to how a partnership should govern itself.

 

Our strong transactional volume ensures our advice to partnerships is always cutting edge. Nowhere is this more relevant than in the drafting and negotiation of the partnership agreement. Whether there be two partners or 20, our skillset helps partners turn what could otherwise be a murky sea of unregulated grey into a more friendly legal landscape of black and white. Although it may be destined for the ‘bottom drawer’, the partnership agreement is an integral piece of insurance in minimising the likelihood and cost of a protracted legal dispute if things go wrong.

 

Broadly speaking, these are the rules of the partnership, made by the partnership. Structure, duties, rights, responsibilities, exit strategy and the manner in which profit and losses are dealt with, are all key components. But so too are issues unique to management rights, such as fulfilling the requirements of agreements with bodies corporate, trust accounting and licence compliance, reporting and audit requirements, and documenting the importance an active onsite partner plays in a silent partner’s initial decision to invest and the long term value of the business.  None of these matters should be taken for granted or assumed.

Management Rights partnerships

The negotiation of the partnership agreement is the only true time during a purchase transaction where the partners’ individual interests differ – especially that of the active onsite partner and the silent partners. The active onsite partner’s return from not only the investment of its equity but also the investment of its time requires careful understanding to ensure expectations are correctly set and maintained. Balancing these interests and addressing them early on is a key part of our engagement. It is also one of the reasons why we always favour a face to face partnership meeting well before an acquisition is beyond the point of no return.

 

Aside from assisting the partnership in framing its partnership agreement, we tailor every component of our traditional transaction lawyer role to ensure its relevance to a partnership setting. Whether it be taking instructions or ensuring a partnership does not get bogged down in key dates, we proactively work with the partnership’s other consultants in keeping partners informed and abreast of the strengths and threats to their potential investment. Liaising with the partnership’s prospective bank as to the security it expects to receive from partners is a good example, particularly where banking and approaches to personal guarantees differ markedly.

 

Similarly, the body corporate consent process requires even more planning and flexibility in approach than is usually the case. Armed with findings during the legal due diligence process, we aid our partnership clients in deciding how best to present themselves and their collective structure to body corporate committees and its legal representatives. Our goal is not just to achieve consent, but to do so in a cost effective and non-invasive manner. 

 

It is well recognised that management rights and accommodation industry businesses are the domain of expert accountants, lawyers and financiers. This is magnified further when it comes to partnerships. The foundation to any successful partnership investment is a thorough understanding of both the business and the partnership itself, something we contend can only be delivered by experts operating daily in this space.

 

With personal attention, experience and unmatched accessibility, we welcome the opportunity to navigate a partnership and its partners through what need not be a stressful gauntlet.

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