The Process of Purchasing Management Rights

24 March 08

THE CONTRACTS
When you purchase management rights, you generally sign two contracts – one for the purchase of the management lot (which often, but not always, includes the management office/reception) and another for the purchase of the management rights business.


There are only a handful of real estate agents that handle the sale of management rights. These agencies all are very good at ensuring that there is adequate protection built into the contracts for the benefit of buyers. Management rights are not a business where you can try and force a square peg into a round hole. Everything has to stack up to allow the purchase to proceed. Unlike general real estate agents, management rights agencies will not have buyers sign contracts unless they believe that there is a very good chance that the deal will proceed.


To this end, contracts for the sale of management rights are nearly always subject to:
(a) Financial verification – where an accountant can pour over the books and financial records of the business to ensure that the net annual income stated by the vendor is substantiated and sustainable. An experienced management rights accountant will quickly pick up on income streams that look inflated or expenses that look understated. A period of 14 to 21 days is generally allowed for the accountant to inspect the records and provide a report to the buyer.


(b) Legal due diligence – An experienced management rights lawyer in Queensland or New South Wales will properly guide buyers through the legalities of buying management rights. The lawyer will, during this process, identify issues that may come back to bite a buyer if they are not identified and corrected at the time of purchase. Of particular relevance is the inspection of body corporate records undertaken by a specialist search agent and reviewed by your lawyer. A review of these records will identify building defects or harmony issues and allow you to make a considered decision whether to proceed or not. Experienced management rights lawyers will also ensure that you understand your responsibilities once you takeover the business and help guide you through the process. Essentially, if the documentation doesn’t stack up then it needs to be fixed or the buyer should not proceed. Allow 21 days for the legal due diligence to be completed.


(c) Finance – Again, there are truly only a handful of banks that have a good understanding of the management rights industry and who are set up to process applications quickly and cost effectively. An experienced management rights agent, accountant, broker or solicitor can direct you to these banks. You should start talking to your proposed financier or broker as early as possible – even when you are only thinking of purchasing management rights. Your financier or broker will provide you with its lending guidelines and this early knowledge should simplify the process when you eventually find a building and sign a contract. Sometimes you need banks to be flexible in relation to issues that arise during the purchasing process. Many acquisitions are not straight forward and issues arise. A bank that understands the industry can quickly make decisions that may make or break the matter proceeding.


You should ensure that the contract allows at least 30 days (if not slightly longer) for finance approval. This will allow the banks adequate time to obtain valuations and arrange for the banks’ solicitors to conduct their own legal due diligence in respect to the documentation. Some banks accept a legal due diligence certification from the buyer’s solicitor but will generally only do so if the solicitor is known to the bank as one who is experienced in management rights. This can result in a considerable cost saving.


When you do receive a finance approval letter, you should ensure that a copy is given to your solicitor as soon as possible to ensure that any conditions imposed by the bank can be met pursuant to the terms of the contract. Sometimes banks will impose conditions which will mean that only a conditional sign off of finance can be notified by your solicitor to the vendor’s solicitor.


(d) Body Corporate approval to the assignment of the management rights – All contracts must be subject to the body corporate approving the buyer. Some bodies corporate simply rubber-stamp an incoming manager whilst others will vigorously investigate the background, experience and financials of an incoming manager (or associate directors/shareholders). In Queensland, there is a statutory obligation on bodies corporate to act reasonably whereas there is not a similar provision in the New South Wales legislation. You will often find a requirement for the Owners Corporation to act reasonably in the agreements in New South Wales for this reason.


SUMMARY
Plan, research and surround yourself with experienced industry professionals!


Talk to your proposed broker or financier as early as you can so you are aware of the range of products available to you. Discuss the pros and cons of fixed rates, variable rates or a mixture of both. Discuss with your accountant what part of the loan (if any) should be attributed towards the residential unit and what against the actual business. The structure of your finance can have a significant effect on your tax at a later date.
 

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