Tips for Financing Management Rights by Multimedia AU/NZ

TIPS FOR FINANCING MANAGEMENT RIGHTS

Financing management rights:

pick your team wisely By Nick Smith, Red 10 Finance

Borrowing money to purchase a management rights has always been available from the banks, however, with the current Royal Commission into Banking and the QCAT ‘Gallery Vie’ decision, it has become more challenging. This doesn’t mean that you are unable to borrow money it just means that you should obtain specialist advice to do so. In December 2017, the Royal Commission was announced, and Banks were forced to relook at the way they conduct their business including the way that they 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. The ‘Gallery Vie’ situation is also a consideration 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

Red

F I N A N C E

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 generally been affected by either of these two events. The banks now request a lot more detail in the

information from a prospective borrower including existing arrangements regarding home loans, car loans and credit cards, and generally require more time to analyse these applications. Utilising the services of an experienced finance broker or banker will ensure that you get the best advice.

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RESORT NEWS - NOVEMBER 2018

TIPS FOR FINANCING MANAGEMENT RIGHTS

Some of the bank offerings/questions 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 to 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 between 4.5 to 6 percent, 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 2 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

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at management rights in Queensland predominantly but there are a few who will lend to management ights in New South Wales 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 proceed to a full contract where the obligatory clauses will be included. 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. 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 if they are valuing 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 purchase. 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 managers 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. When asked about when the best time is to talk to an accommodation specialist broker or a banker, well the short answer is, the earlier the better. A specialised broker/banker will be able to guide you on the likelihood of obtaining finance very early using their experience and knowledge of the market.

Final tips on purchasing/financing: •

Talk to a specialist broker early to see what type of complex is likely to be affordable for you including the amount you may be able to borrow.

•

Find out whether or not 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! RESORT NEWS - NOVEMBER 2018

TIPS FOR FINANCING MANAGEMENT RIGHTS

Why we will never achieve value certainty By Peter Spranklin, Spranklin Legal

Furthermore, and when negotiating, this method, consider questions such as: When is an appointment lost? Is it when a notice is served? Is it when a property placed on the market? Is it when a property has settled?

An endless challenge for the legal profession is to deliver ‘certainty’ for a client. As somebody who spent time working in an accountant’s office prior to undertaking a legal career, I have always found that this push for certainty in the legal world to be at odds with the fundamental riskreturn principle that applies in the financial sphere. A key by-product of that difference is that solicitors are often asked to achieve certain, desirable contract outcomes from circumstances that do not lend themselves to that result. Many buyers, irrespective of whether the party is a first time or return investor, have discussed with me during pre-contract discussions their preference for a provision that varies the consideration should the letting pool reduce in number (never the reverse). It is a rising trend, which also demonstrates a considered buyer. If we exclude off-the-plan transactions for the purpose of this article, there are a number of factors that have instilled this concept into existing business discussion such as: •

rental market competition;

•

the continued transition of letting appointments from PAMDA Form 20a’s to POA Form 6’s given the different notice periods that apply; and

•

the length of contract, to name a few.

In other words, a buyer is seeking to balance risk of the perceived overpayment for a business come settlement even before the transaction has commenced. Whilst the logic is completely understandable, in one sense I do find that approach to be somewhat perplexing because you are effectively asking a seller to accept your price and then in almost the same breath, seeking

Retention

to push that price south or hedge the risk of buying (if circumstances dictate). With this approach a buyer is pursuing ‘value certainty’. There is nothing wrong with that, but there are other influences that need to be assessed.

of offer a defined number of letting appointments being a pre-requisite to funding.

The tips or observations that I want to provide in this piece are to demonstrate that there are several options available to achieve that ideal outcome of ‘value certainty’. In each case, attention should be turned towards these possibilities but always have regard to a seller’s attitude, which can and should vary. At first, let us consider the bank attitude towards letting pool sizes. Banks naturally understand that variances are a part of the sector, which leads to their terms of offer permitting variances of anywhere between 5 and 20 percent in the letting pool size before a re-valuation is necessary. Overwhelmingly, the most common application is 10 percent.

• • •

Such terms of offer apply notwithstanding the presence (or otherwise) of a clause that deals with a price variance. The point that needs to be remembered is that the bank applied variance relates to the letting pool size from the end date of the verification period until settlement. In only one instance have I experienced a lend whereby a bank drafted into the letter

With the bank approach in mind, the legal options most utilised are as follows: settlement day adjustment retention conditional letting pool size

Settlement day adjustment Allowing for a price adjustment on the settlement day is by far and away the most common method. Sometimes this is referenced as a clawback. Strangely, I often find that risk averse buyers have no issue with working this type of provision into a transaction based on a seller’s purported net profit. This approach regularly needs to be re-considered. There are many and varied findings that can be interpreted from a buyer’s verification report, so the starting point must be to wait for the buyer’s report before determining the per letting appointment value. As alluded to in the introduction, an accountant’s work often contains elements of creativity with estimates applied to their assessment. Therefore, a buyer adopting this approach should expect a seller to scrutinise the accountant performing the verification procedure.

There are instances where the composition of a letting pool is known to have a concentration of ownership, be that due to the complex being newly developed or because a one or more parties’ own multiple properties within the complex. On these occasions, consider negotiating a retention for application on the settlement day so that time can be offered to ascertain whether, for example, property sales (pending or otherwise) are made and appointments lost or gained. Consider the timeframe for the post-settlement retention period, the time can and should vary all facts being considered. However, keep in mind that depending on the seller’s discharge requirements on the day of settlement, this proposal may not always be plausible.

Conditional letting pool size As mentioned earlier, banks very rarely stipulate that a minimum number of appointments must be available to the buyer on the settlement day, but that is not to say that a condition precedent to settlement cannot be established. If you do view this as a preferred method then consider that a loss of two or more letting appointments is probably the starting point from the seller’s perspective, as opposed to one. My final tip for buyers is to stay positive during the thought process. The industry contains consultants that understand the concepts and seek to provide advice that help to offer value certainty. Note that I said “offer” and not “assured”. Good luck. RESORT NEWS - NOVEMBER 2018

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