Management Rights Frequently Asked Questions
A. MLR is sometimes used as an alternative for the term Management Rights. MLR is an abbreviation of "Management and Letting Rights". Both terms are in common use, and are interchangeable.
A. Until recently the licence name in Queensland was referred to as a Restricted Letting Agent's Licence. The reason both "restricted" and "resident" have been used to describe this licence type is because it best describes the nature of the licence.
A manager is "resident" because in 99% of cases there will be a requirement for the manager to live on site in a manager's unit. If the complex is bought in a company name, there is scope to have a company nominee fulfil the "resident" requirement however, this is a complex legal area best addressed by speaking with your solicitor.
The licence also "restricts" the licence holder to letting units in the building associated with the agreement only. (In Queensland, you can also manage in adjacent buildings where the boundaries physically adjoin your own, BUT you need specific agreement from the adjoining Body Corporate to do this.
A. No. The Resident Letting Agent's Licence is "restricted" to management only. You will have to upgrade to a full Real Estate Agent's Licence to be able to sell, as well as let.
A. There are two principal sources of income; you will receive a salary from the Body Corporate (usually paid monthly in arrears) and you will draw commissions from your Trust Account for your rent collection and letting activities. You may earn additional dollars for repair and maintenance work inside your managed units. In some complexes, particularly holiday-style, you may earn extra income from your phone systems, internet access, tour desk, linen hire and cleaning.
A. Permanent complexes cater for tenants on six to twelve month leases. Holiday complexes cater for tenants staying less than three months and sometimes as little as one night. Commission rates are higher for Holiday complexes, but the workload and office hours are more onerous.
A. The banks look favourably on lending for MLR. While there may be minor variations in individual applications, as a general rule you can borrow up to around 60% of the total purchase price including legal fees, stamp duty, etc. The financier will use your Manager's unit and the business itself as full security for your loan. Please contact us if you would like to discuss your own circumstances with one of the banks or finance brokers who are specialists in management rights lending.
A. The fact that banks enjoy lending for Management Rights would indicate that it's very hard to "go broke" in this business. To my knowledge, the majority people who have managed to "go broke" in MLR were companies who purchased multiple complexes and over borrowed. Banks don't like risk and because the two major streams of income are so easy to verify, it is hard to be defrauded when you purchase. It is however, important to use a solicitor and an accountant who specialise in the Management Rights industry. This will ensure against any nasty surprises down the track.
A. Your purchase is made up of two parts - the Manager's unit and the MLR business. The Manager's unit is a special piece of real estate and it is not unusual to have a 10 to 20% price premium than a similar unit in the same complex. The business is valued by applying a "multiplier factor" or "multiple" to the verified net profit. The multiplier can range from mid 3's to over 5. Very occasionally, large complexes with multi-million dollar turnovers which are targeted by corporate buyers break the 6 multiplier barrier.
A. The multiplier is the goodwill factor used to value the business component of the investment. It is dependent on the risk of the business. So a very secure investment with every positive attribute will command a higher multiplier. This of course means you will pay more for the most secure investment, or in other words that your return will be lower because of the lessened risk. So a multiplier is your return on investment (ROI) expressed as a single number. To obtain it you divide your ROI into 100. A multiplier of 4 times net means a 25% return on the business component whereas a multiplier of 5 times net profit sees the return at 20%.
A. The largest "acquisition expense" is Government stamp duty. It is calculated on a sliding scale with a top rate of 5.75% of the business purchase price in Queensland. In NSW, no stamp duty is payable on the business. If the unit is purchased in individual names in Queensland, concessions apply. These rates are subject to change so contact us for an accurate estimate.
The other expenses are:
- Accountant's Fees (for verification of Net Profit).
- Legal Fees.
- Finance Application Fees.
- Search Fees.
- Real Estate Licence Fees.
A. There is no ONE answer to this question. It is very important that you discuss this with your lawyer and accountant, BEFORE you enter into the final Management Rights Contract of Sale. In Queensland, if you have signed the contract in your personal name as purchaser, it can be quite expensive (from a Stamp Duty point of view) to then change everything to a corporate entity. Your specialist Management Rights lawyer and accountant will together give you the correct advice for your circumstances. It is just one of many good reasons to use Management Rights Specialists.
A. Just about anyone! What career you had in the past is not as important as the sort of person you are. Management Rights is a "people" business, and if you are a "people-person" you will do well. If you are a grumpy old so-and-so, and it pains you mightily just to give someone half-a-smile, don't go into Management Rights! Not only will you be more miserable than you already are, but so will all your owners and tenants.
A. Your duties as a Resident Manager will be spelt out in the formal agreements you have with your Body Corporate, but broadly, there are two main functions - Caretaker and Maintenance and Property Letting.
Your Body Corporate salary recompenses you for keeping the lawns and gardens in top condition, and all other common areas such as stairwells, foyers and swimming pools, spotless. You also have to keep the Body Corporate informed on any matters relevant to the complex, and to see to it that the by-laws are observed. The expenses associated with looking after the "common property" such as pool chemicals, fuel for mowers, repairs, etc. are generally the responsibility of the Body Corporate, not of the Resident Manager. You are, however, responsible for organising and supervising any necessary repairs.
In your capacity of Letting Property Manager, you collect the rent from tenants or guests and thereby earn commissions from your rental owners for the letting and management of their units. At the end of each month, you reconcile your rental accounts, take your commission and other legitimate costs from the rent collected then pay your owners the balance. Of course, these days, a simple computer program does most of this "end of month" calculation.
A. The Body Corporate is made up of all the individual unit owners in a complex, acting collectively. A simple analogy is that of a company, with the unit owners being the shareholders. Where a company has a Board of Directors, a Body Corporate has a Committee. As a Resident Manager, it is most important that you maintain good relations with the Committee of your Body Corporate.
A. In Queensland, under the BCCM Act, all Resident Managers are automatically "ex-officio" members of the Body Corporate Committee, meaning they are a member of the body corporate committee and can attend all formal committee meetings (including being able to speak at those meetings) but cannot cast a vote at these committee meetings. They can, like any other owner, vote at Annual General Meetings and Extraordinary General Meetings.
A. Well to some extent the good news is that the situation referred to as the "3,2,1 rule" was abolished in legislative changes which came into effect on 30 August 2008. The change was made because there was no certainty with the application of a transfer fee payable to the Body Corporate on the sale of the management rights business. The charging of a fee was at the discretion of the Body Corporate and could still be charged to a long serving manager if he had obtained a new agreement. The old clumsy rule has now been replaced with a "Transfer Fee" which is more equitable and certain.
A. The Body Corporate will now charge an outgoing manager 3% of the sale price of the business component (i.e. excluding the value of the manager's unit) of a management rights sale if the manager has been in that role for less than one year. If the manager has been in the role for between one and two years the fee will drop to 2% and if the manager has been there for longer than 2 years there will be no fee charged. The elapsed time is calculated by reference to two dates. The start date is the date on which the Resident Manager first SETTLED the purchase of the management rights at the complex. The end date is the date on which the body corporate APPROVED THE ASSIGNMENT of the management rights contract to the next Resident Manager. There is a "hardship provision for unforeseen circumstances" in the Act, e.g. if a manager's partner has died, etc. but this sort of application must be supported by documentation and is a hard test to pass.
A. In Queensland, a Body Corporate is not allowed to benefit financially from the sale of the Management Rights to the complex i.e. they are not allowed to sell the Rights themselves and pocket the proceeds. That said there is no compunction on a Body Corporate to extend the agreement. However past experience indicates that if a manager is doing a good job that such extensions are a matter of course. Either way they cannot charge for an extension in Queensland.
A. We live in an increasingly specialised world. Your family solicitor may be a very nice person, as may be your family accountant, but that does not mean they have the necessary expertise to give the best up-to-date advice on your MLR purchase. Likewise, a residential real estate agent who dabbles in MLR is seldom qualified to give you advice on the latest trends in the industry.
Ensure you maximise your opportunities and mitigate your risks by surrounding yourself with a qualified and experienced team of advisors.
Should you have any more questions, or require further information on your options call:
Col Myers - Partner
SMH Lawyers +61 7 5552 6666