by Nick Smith - Red 10 Finance
29th September, 2020
The finance is there, just be prepared
Borrowing money to purchase a management rights has always been available from the banks, however after the conclusion of the Royal Commission into banking, it has become even more of a specialist field. In addition to this, for some banks there is still the spectre of the QCAT ‘Gallery Vie’ decision. This doesn’t mean that those wanting to buy into the industry are unable to borrow money, it just means that if you are considering it, you should obtain specialist advice and ensure that it is advice that suits your own personal circumstances.
The banks have their own individual lending policies for management rights as they are still viewed as a good risk, and with record low interest rates, it may just be the right time to make that purchase or even review existing facilities for current owners.
In February 2019, the Royal Commission was concluded, and as we know, it was noted that most banks were not making sufficient enquiries into the suitability of loan servicing to be able to 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. While responsible lending has been around for a long time, the actual recording of information was sometimes lacking. Having all the information upfront is more likely to assist with the speed of decisioning a loan application.
The ‘Gallery Vie’ situation is an interesting one, 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 been adversely affected by either of these two events.
Every bank is different from the next, and their policies differ, so what one will do another will not; that is why it is recommended to use the services of an experienced finance broker who will ensure that you get the best advice.
And when you are ready to make the application, be sure that you are sufficiently prepared. The banks are far more detailed (and pedantic) in their requests for information from a prospective borrower now and require a lot longer to analyse the applications than previously. Be prepared to provide information on all existing arrangements from home loans to car loans and credit cards, and the gathering of sound business and personal references won’t go awry.
Some of the bank offerings/questions may 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 – 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 at a record low, 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 two 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 rights in NSW, VIC and NT 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 then proceed to a full contract where the obligatory clauses – 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 – will be included.
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, especially if there is a request to value 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 purchaser.
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 manager’s 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.
So when is it a good time to talk to an accommodation specialist broker or a banker? The short answer is, the earlier the better. A specialised broker/banker will be able to guide you on the likelihood of obtaining finance, virtually at the outset, using their experience and knowledge of the market and the current requirements of the banks.
Some final tips on purchasing/financing:
- Do you have management rights/property experience? What is your business plan, how will you run the business?
- Talk to a specialist finance broker early to see what type of complex is likely to be affordable for you including the amount you may be able to borrow.
- Decide what strategy you have for repayment of the facilities, whether Interest Only or Principle and Interest or a mixture suits your personal circumstances.
- Find out whether 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!