Queensland -v- The Other States in Management Rights

14 May 10

Management rights are unique business. They are created by developers, sold by developers and profits retained by developers.

 

To give you an example, if I sell my legal practice, goodwill will attract a multiplier of somewhere between 1 and 2 times net annual profit. However, when management rights are sold, goodwill is sold in multipliers 4, 5 and 6 times net annual profit.


So why?


Management rights carry no stock, no work in progress, no outlay of disbursements, no debtors, few (if any) employees, no expensive overheads tied up fit outs and next to no liability issues.


Also, the banks generally love them! They regard the businesses as safe investments as they rarely lose money lending against them (particularly compared with other businesses). The banks see the income stream protected by:
• long term agreements;
• by-laws restricting on-site competition;
• remuneration paid monthly from a party that can never really go broke!


However, it should be understood that not all buildings need or should have resident managers. Management rights work really well in buildings where the owners’ returns are built around holiday letting or in permanent complexes where there are a reasonable proportion of investor owners. I do not however believe that there is a place for management rights in primarily owner occupied buildings as these owners rarely perceive value in having on-site managers.


So why have management rights primarily been a Queensland phenomena?



Queensland has always had a big concentration of complexes built around holiday investment units. Also, there was an early recognition in Queensland for the need to have someone live on-site to maintain the property and drive owners’ rental returns. Of course, Queensland also has a 25 year start on the other States and has extensive legislation bubble wrapping the industry.


In other articles, I will be looking at the laws in the other States in Australia relating to:
• restrictions on developers controlling the entering into of management rights agreements;
• term limitations applying to caretaking and letting agreements;
• the ability to “top up” agreements;
• financier’s rights when lending against these agreements; and
• the use of proxies by developers and caretakers.

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