Home' API Magazine : July 2014 Contents 63
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¿ HOW DOES IT WORK?
When you buy management rights, the
price is made up of two components. The
first is the manager’s unit, which attaches
to the rights. Its value is assessed at the
market price, based on other sales within
The second part of the figure is the
business that generates income and
operates from the manager’s unit. This
has two income streams. One is the
caretaker’s agreement with the body
corporate, where you’re contracted
to maintain the common areas of the
complex and ensure the building complies
with various building and safety codes as
per any relevant statutes.
The second income stream comes
from managing a rental pool of units.
This is formed by arrangement with the
“The letting rights basically allow the
manager, through a restricted letting
agent’s licence, to become an onsite
letting agent and do letting of the units
to individuals in the marketplace,”
¿ WHAT DO THEY COST?
The buy-in prices are diverse, according
to Butler. He currently has listings from
$440,000, with a net profit of $45,000 per
year, through to $5 million with a net
profit of $750,000 per year.
“A price range that we’re always looking
for listings is around $1 million to $1.5
million aggregate price.”
The business is valued using a
multiplier on the net operating profit
(NOP). The NOP is the most recent
year’s income less actual expenses,
and excluding depreciation, borrowing
expenses, interest on borrowings, and
wages to the proprietors or payments
to any persons for work which could
reasonably be undertaken by a two-
person resident management team. The
NOP is then multiplied by a determined
figure, or ‘multiplier’, to give a value for
“There’s clearly tiers in this game where,
if they’re making below $100,000 a year,
the business will be sold on a multiplier
of around three and a half to four times.
If it’s between say, $120,000 to $250,000,
it’s going to be... 4 .25 to 4.5, and if it’s
over $300,000 we’re going to be above five
times multiple,” Wolf says.
Butler believes this value calculation
is one of the first tests as to whether
your adviser is a management rights
expert or not. “In management rights
transactions, specialist financiers, valuers
and accountants only consider the most
recent 12 months’ financial figures when
verifying financial results – unlike when
dealing with most small businesses
where the previous three years’ figures
If you only have a set amount of money
to invest, you need to apportion how
much of that you’re willing to dedicate
to the value of the income-generating
business and how much will go towards
buying the manager’s unit.
Two management rights advisers give their top five tips on getting into the business.
Frank Higginson, director at Hynes Legal
1. Use experts
You don’t go to a GP for brain surgery. While that’s a slightly wider
differential than what happens with lawyers, you need to use someone who
has done plenty of management rights – use your local lawyer at your peril.
2. Know the term of the agreements
To quote a very well respected industry valuer ‘certainty equals value’. The longer the term,
the more certain your tenure is as a manager. Confirming the term is one of the key legal
due diligence issues.
3. Understand the by-laws
There should be some standard industry protections contained in these around the use
of lots for competing purposes. Otherwise, you need to understand what the rules of the
body corporate are going to be, as you’ll be the primary observer of them.
4. What is the body corporate like?
Have a very good look through the minutes of both general and committee meetings. You
need to get a feel for the personalities in the scheme, as these will be the key relationships
in the business.
5. Educate yourself
Don’t go in blind. Do your resident licensing course as soon as you can, and if possible even
get through the full licence training. Attend as many industry seminars as you can. You’re
about to invest a lot of money in a business – the more you know about it and the property
market in general, the better.
Sam Hodgetts, CPA and partner at McAdam Siemon
1. Use qualified advisers
Not just any accountant/solicitor/finance broker/agent will do. You need
someone who is across the legislation specifically relating to management
rights. Your advisers need to be involved in the industry on a daily basis.
2. Use the correct business structure
It’s important to establish the correct business structure for your situation
prior to contracts. There’s no ‘one size fits all’ in relation to business structures.
You need to consider your individual current and future situation to get it right from the
outset. The potential legal and tax costs associated with the incorrect business structure
can be enormous.
3. Understand what you’re buying
Understanding your business and the commitment prior to purchase is vital to its success
after settlement. Understand your caretaking and letting agreements and the tasks you’re
required to perform on a regular basis. Educate yourself on the letting side of the business
and the time and knowledge required.
4. Obtain your licence as early as possible
Simply completing the licensing course and requirements will give you a sound
base knowledge of the industry and the letting/sales side of the business. I suggest
participating in the licensing course as soon as possible for all new potential management
rights owners. It’s also important to use an industry recognised specialist trainer, as the
training quality and standards can vary.
5. Management rights is a relationship-based business
Good communication skills and customer service skills are essential to a successful
management rights business. If these skills aren’t your strong point, build them up to a
suitable level or look for a different business opportunity. Associate with other experienced
managers in the industry to leverage off their knowledge and experience.
MANAGEMENT RIGHTS \\ ALTERNATIVE INVESTOR
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