Tips for Buying Off The Plan by Multimedia AU/NZ

The 10 best tips to consider when buying off the plan There are a number of reasons why people want to buy management rights off-the-plan.

together? Permanent complexes are fairly straightforward. Many of my existing clients hear about a holiday building years before it is completed. Developers often approach experienced managers directly. Warning bells should ring if you have no experience and come across a major holiday or short term building six weeks before it is to be finished!

It is often perceived as an opportunity as there is an expectation that: •

the multiplier will be lower when buying from the developer; and

•

the profit could ultimately be a lot higher than that projected by the developer (especially for short-term accommodation).

It is also important that there is no duty on the initial grant of the management rights, although there is still duty on the unit. Although there is GST on an off-the-plan management rights acquisition, the GST is eventually remitted back to the buyer as an input tax credit. While the legal fees and general delays can be much greater than a normal purchase, the duty-saving more than makes up for that as the duty can be over five percent of the price! Of course there are also risks of buying off-the-plan. But, if the items in this article are considered and acted upon, the risks can be substantially minimised.

Tip number one Trust but verify. The agent and the developer can be an

John Mahoney Mahoney Lawyers

excellent source of information. But, it is critical to distinguish between information and ‘blue sky’. Information can be verified, blue sky cannot. Blue sky includes, for example, unsupported estimates about likely rental or occupancy rates. It is important to identify, check and verify any important assumptions about the business. Do your market research to make sure that the projected rentals are realistic – especially in a saturated market. Get good advice from an accountant with expertise in management rights to help with the verification.

Tip number two Deal with competent and respected people and get good advice early. Importantly, the first person you need to check out is yourself! Do you have the skills to bring this kind of business

Never sign an off-the-plan management rights contract without expert legal and accounting advice. These contracts are never standard. Dealing with an experienced management rights agent is important. Remember, they are the developer’s agent. Nevertheless, experienced agents will not want to risk losing a sale or your future patronage and will usually be honest with you. But remember those agents are not solicitors or accountants! They cannot provide all of the detailed advice that you will need before the contract can go unconditional.

We have seen many transactions fall over, after a buyer has spent considerable time and money, because the basics were not agreed to at the outset. While the final contract will, of course, be quite detailed, it is critical to get a sound in principal agreement up front. We have a comprehensive checklist that we use for working out a clawback/clawforward arrangement. Working these out at the beginning of the matter as part of reaching in principal agreement with the developer can save time, money and angst.

Tip number four Check out the developer and its selling agents. Ideally the developer will have a good track record, find out about the developer’s other complexes. Speak to the managers of those buildings.

Tip number three

What support will the developer offer you? This could include marketing support for websites and advertising, and assistance with identifying and rectifying building defects.

In principal agreement of developer to a clawback. It is important that in principal agreement be reached on critical items such as price, clawbacks, minimum numbers of units in the letting pool to settle and any obvious due diligence issues, before a contract is signed.

Managers often need to spend significant time and money setting up the business and fitting out the office in the months leading up to settlement. Who are the agents selling units in the complex? What have they promised the buyers? Obtain copies of marketing material. RESORT NEWS - APRIL 2019

TIPS FOR BUYING OFF THE PLAN Tip number five Obtain copies of the off-theplan unit sale contracts and disclosure statements. The developer and its selling agents should have copies of these to provide to you. These documents should have all sorts of useful information: copies of survey plans, floor plans, budgets, lists of inclusions, caretaking and letting agreements, by laws and so on.

Tip number six In carrying out initial financial due diligence, find out the likely settlement time frame? Is there enough time to obtain letting appointments from owners? Enough time to find tenants? Some marketing and advertising needs a long lead-in time especially in holiday buildings. Often, the developer or its selling agent will provide you with a projected profit and loss statement. That projection will usually be for the second or even the third year in a holiday complex. As above, make sure your own

accountant verifies the projections and identifies and checks any underlying assumptions. It could take three to six months to fully tenant a permanent complex. My clients tell me it can easily take 18 months or more to achieve projected occupancy levels in a holiday building. Projected profit does not equal cashflow! Depending on the size of the complex, net cashflow (before interest) could be 10 percent or more below projected net profit. Consider preparing separate cashflow forecasts. Again, get your accountant to assist in this regard.

Tip number seven Establish price calculation and related assumptions. What is the breakdown between body corporate remuneration and letting income? What expenses have been allowed for? What is the expected occupancy? What are the other income sources (electricity supply, internet services, parking fees)? Is it appropriate that those income sources be included in the

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projections for sale purposes? Nobody ‘buys’ GST. The figures quoted for remuneration and the off-the-plan management rights price, are usually plus GST. The unit price would normally include GST. One of the things that you need to determine is how much each unit is worth in the letting pool. For example, if the projected letting income from a unit is (say) $6000 and the multiplier on your purchase is 4.5, then that unit alone is worth $27,000 to your letting pool.

Tip number eight Initial legal due diligence: you should make sure your lawyer has a copy of the unit contract and disclosure statement very early in the negotiations. There will be items of critical importance that need to be resolved before the contract can be signed. Your lawyer should identify any immediately obvious issues in the agreements. Developer’s solicitors frequently use ‘off-the-shelf’ caretaking and letting agreements. Often, we see permanent townhouse complexes with agreements that seem drafted for a high-rise holiday building and vice versa. High risk items that might need to be considered include, for example, strict office hours, or work that is of a specialist nature. Are the duties, office hours and remuneration appropriate? What are the rubbish removal arrangements? Is it a holiday or permanent complex? Are the courtyards accessible for maintenance? What degree of office fit out will the developer supply? Consider PABX, internet, electricity supply, car parking, furniture packages and the like. Developers are usually highly reluctant to make any changes to the caretaking and letting agreements. That is because any changes have to be disclosed to all the other buyers. If those buyers are materially prejudiced by the changes, then they are allowed to terminate their contracts. Developers usually don’t want to risk that. It is important for buyers of off-the-plan management rights to distinguish between their

‘wish list’ and ‘deal breakers’. Given the understandable reluctance developers have to making amendments to the documents, my view is that if there are significant pre-sales, only deal breaking amendments should be put to the developer.

Tip number nine Minimum available units in letting pool at settlement? A critical question that is sometimes ignored is, “how many units do I need in the letting pool to settle?” You can have the best clawback clause but if there are not enough sales to investors, the business might not stack up even with a major price reduction. This can be a difficult issue for all parties: you may not want to settle unless a certain percentage of units in the complex are sold to investors who have signed a POA Form 6 with you. In a holiday complex, consider if you require a minimum number of units to be fully furnished.

Tip Number 10 Clawbacks are probably the biggest single bone of contention when buying off-the-plan management rights. Some developers simply refuse to consider clawbacks or minimum numbers to complete. If that is a commercial risk that you are prepared to take, then in some ways that can be a relief. It can certainly save a lot of negotiating, legal costs and delays! But most managers would require a clawback. Consider the example in Tip number seven. If you are expecting 50 units in the letting pool and there are only 45, the value of that discrepancy is 5x $27,000, that is, $135,000. Ideally, other features of clawback clauses include: not paying for units retained by the developer or its associates, only paying on receipt of a signed POA Form 6 letting appointment from an owner who has completed the unit purchase, only paying for completed, furnished units (if applicable) and a credit for appointments lost (other than due to your poor performance) during the clawback period. All of these items are negotiable. RESORT NEWS - APRIL 2019

TIPS FOR BUYING OFF THE PLAN

’ n a l p e h t f f o ‘ g n i y Bu r o l i a t o t y t i n u t r o p an op s s e n i s u b your Selling and buying ‘off the plan’ management rights businesses nationally is a specialist skill that requires the combined approach of professional specialist brokers working closely with developers, industry accountants, valuers, lawyers and financiers who are focused on the big picture. Management rights agreements allow operators to earn income from caretaking, maintenance and letting services while providing a professional service. The industry incorporates permanent and holiday / tourism letting along with other varying letting types, with some management rights even going into retirement villages and storage sheds. ‘Off the plan’ opportunities are available throughout the country, and very often specialist brokers initiate them with developers through their respective

Mike Philpott MR Sales

networks. So, here’s the tip: use professionals, you will get the desired results and benefits. Buying ‘off the plan’ can present exciting opportunities, and can be a real win-win for all the parties involved, especially for developers and property owners who may not be aware of the inherent benefits for the complex or sales. In the past,

unlike Queensland, developers in New South Wales and Victoria preferred to appoint in-house facility managers with a number of the sales agents retaining managements. This resulted, in many instances, in disjointed developments that did not realise the true potential for all the parties involved. As a general rule, banks love management rights as it is seen as a safe industry that adds value to a property as well as being backed by a professional legal framework protecting consumers. Management rights is a true value-add industry / opportunity that benefits all, especially the complex and unit owners. Renowned developer, Harry Triguboff is a prime example. His development company Meriton, is a leader in the industry and has a number of significant developments in New South Wales and

Queensland benefiting from the implementation of management rights. So how does it work? Management rights transactions are initially struck between the property developer and the future operator. The purchase price is based on income projections, traditionally created by a specialist industry accountant who will produce a projected income report rather than on historical trading figures. Once a formal offer is submitted and agreed with the developer, contracts containing specialist documents are signed, and the deposit paid. Funds are not transferred until settlement, ie. when the complex is up and running and the manager starts receiving an income, the timing of which varies from state to state, depending upon the legislation applicable.

AUSTRALIA’S LEADING MANAGEMENT RIGHTS BROKER Specialising in Management Rights Sales Australia wide Thinking of Buying or Selling? Phone: 1300 928 556 Email: sales@mrsales.com.au

RESORT NEWS - APRIL 2019

TIPS FOR BUYING OFF THE PLAN

If ‘off the plan’ sales are managed well, they can add real value to the entire development. The developer is able to coordinate services in a more professional manner through a central location, and have a established representative on site. The body corporate and the unit owners have a centralised communication point that has a vested interest in acting in the best interests of the complex. The manager, is an owner in the complex with a long-term agreement and the long-term benefactors are the unit owners in the complex as a whole with the enhanced levels of capital appreciation and growth as a result. If things are well planned and with good communication, the process of buying ‘off the plan’ can be a very simple one as it is a far different process from buying an existing business. One of the key benefits is being able to create exactly what the business will look like on settlement, and have the opportunity to add enhancements that add value through the process. When you buy a unit, and hopefully a separate office on title or exclusive use, off the plan, the purchase contract for

“Buying ‘off the plan’ can present exciting opportunities, and can be a real win-win for all the parties involved that unit and office will show you what it will look like when it is built. The contracts will include plans and specifications of the unit itself so you can see what you are buying. On the business side of things, there will be a number of management rights agreements and a specified number of units in the letting pool. The skill in drafting or negotiating an ‘off the plan’ management rights contract is to ensure that what is purchased, is delivered. Some of the aspects that should be incorporated in the agreements are a sunset date for delivery of the development, or individual stages. As with any business, a minimum number of lots is required to make the business viable and working this into the contract is

important. Buyers should also only pay for units in the letting pool and have a claw-back or claw-forward arrangement included in the contracts. If this is all done well, a buyer can avoid paying stamp duty on the business purchase with stamp duty payable only on the real estate. In New South Wales and Victoria, stamp duty is not payable on business sales, but in Queensland it traditionally is. As a general rule, ‘off the plan’ management rights are valued at a reduced multiplier to that applied in the sale of established complexes, but this can vary on location. The upside obviously lies in the ability to build the business value and a community. Buyers are also often able to work with the developer during construction

and fit-out, with an eye to operational aspects and create a win-win for all involved that enhances the functionality of both the operation of the business and property generally. Once managers have an agreement the upside is considerable, as is the responsibility. The buyer will be responsible for renting a large volume of units in the quickest period of time, while securing the best tenants and rents possible for the overall development returns. It is important for managers to be thorough as they too live in the complex and have a vested interest in the end result. For this reason, the initial meeting with the developer can be compared to a job interview, preparation is essential, but the benefits are worth it for everyone. Some of the transactions involving ‘off-the-plan’ management rights include the 175-unit One A at Erskineville, the 100-unit Ashfield Central for $2.2 million, the rights to the 320-unit twin tower Chester, the Ella development in Brisbane for $4.6 million and another Newstead apartment project, 220-unit haven, for $3.14 million. RESORT NEWS - APRIL 2019