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Special Report: Management rights shapes up for long-term fi ght
Management rights shapes up for long-term fi ght
By Grantlee Kieza,
Industry Reporter
The management rights industry is facing its greatest challenge in years with thousands of ‘mum and dad’ businesses in Queensland under threat.
ARAMA CEO Trevor Rawnsley is leading the industry’s defence against an att ack on long-term agreements that threaten the core of the industry. Queensland’s Unit Owners Association is calling on the term for management rights agreements to be reduced from 25 to three years.
Leading management rights lawyer John Mahoney predicts that if the government legislates shorter terms for agreements, it will have an “immediate adverse impact” on their value. involved in the business of management rights to get with the strength and become ARAMA members.
“If ever there was a time to become an ARAMA member it’s now,” Mr Cook said.
“This is a very serious issue and ARAMA is a vital advocacy group. It’s probably the only thing standing between the industry and those who would seek to benefi t from its demise. If you’ve got money invested in management rights, ARAMA are the ones standing up to defend long-term agreements.” Mr Cook said the issue had reached a head because “unfortunately a small percentage of managers are lett ing down the 95 percent who do a great job. “There are a couple of bodies whose solution to the problem is to basically destroy the industry,” Mr Cook said. “That would be ludicrous. Because you’re basically punishing the vast majority of managers who do a great job and all the lot owners who benefi t from their exceptional service.”
Mr Mahoney said any decrease in the earnings multiples that are the basis of management rights values would dramatically reduce personal equity in each business. He said a reduction from a multiple of six to fi ve because of changes in legislation would mean most management rights businesses in Queensland would lose 50 percent of their equity in the business. “If you buy management rights for $1.8 million, based on a multiple of six, and you have put in $600,000, that means you have borrowed $1.2 million,” Mr Mahoney explained. “If that multiple reduces to fi ve, the value of the management rights now becomes $1.5 million. You still owe the bank $1.2 million but your $600,000 is now worth only $300,000. If the multiple reduces to four, your $300,000 is now worth zero. You’ve lost all your equity. And you still owe the bank $1.2 million.”
Mr Mahoney urged everyone involved in management rights to protest “loud and hard” and to contact their local members.
Mr Rawnsley said with some detractors of management rights demanding the government cut the length of agreements to just three years, major changes in legislation could mean the end of “mum and dad” businesses in management rights. “It could mean the end of businesses for several thousand Queensland families,” Mr Rawnsley said. “The Government is asking ARAMA to please explain why new laws that are coming should not limit the terms of agreement to three or five years instead of 25. “But we are putting together a strong set of factual statements that prove undeniably that long-term agreements are in the best interests of a scheme.
“Our detractors will say reducing the term of agreement will be better for the scheme and we say prove it. They can’t because all of the evidence points otherwise.” Mr Rawnsley said ARAMA had surveyed 250 time and motion studies by an independent assessor and discovered that on 87 percent of occasions the resident manager was underpaid. On about 10 percent of occasions the payment was right - that the manager was being paid commensurate with their duties.
He said ARAMA was preparing a “significant submission to refute the calls for shorterterm agreements.” Frank Higginson, from Hynes Legal, said calls to cut the length of agreements was a knee-jerk reaction that would punish the whole industry because of a few difficult relationships with managers. “There are alternative ways to deal with the issues that are driving this, opposed to just bastardising terms and cutting people back,” Mr Higginson said. “You’ve got a whole industry that’s built around legislative certainty and tenure. “There are better ways to deal with the few managers who might not be performing, rather than damage the whole industry. In employment relationships you do performance counselling, and, through a process, you have the ability to shift people on if they are not performing. “The same sort of thing should happen in management rights because the vast bulk of managers are good at what they do but it’s just the odd bad one that is causing the problems. “Length of term has nothing to do with it. You can have a three-year agreement with a bad manager – and for a few even six months could be too long. “But it’s only very few managers who are not living up to their agreement. There is a noisy minority who are opposed to management rights seizing upon that, and their voices are being heard. “So, it’s time for the industry to address these voices.
“The strength of any industry is how it deals with things like this. The vast majority of people in management rights do a very good job but inevitably you would work a bit harder if you knew that you were going to be accountable for poor performance.”
Mr Mahoney said ARAMA was doing as much as they could with their lobbying efforts to avoid changes in the terms of agreement. He said managers could also encourage their unit owners to make submissions to their local member.
Mr Cook said threats to the 25-year terms were coming about during a wide-ranging, long-term review of strata living by the state government. “It’s reviewing strata in all areas, from issues surrounding pets, smoking, debt recovery,” he said. “The review is a four-stage process. We’re up to Stage 3 now, and that includes management rights. “We had the first meeting on June 23, and we’ve been asked to put in submissions. “ARAMA is going above and beyond to present a united front. “Stage 1 of this process started 18 months ago so there’s going to be a lot of discussion over the next 12 months.” The Management Rights Lawyers
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“There might need to be some concessions in some areas in order to protect the tenure we have in management rights, and we may have to take a pragmatic approach. But the industry is in the safest possible hands with ARAMA.” Lynda Kypriadakis managing director of Diverse FMX asks, although it’s daunting for traditional caretaking service providers is there another way of looking at this? She says at the end of the day “it’s all about gett ing the right building management fi t” and suggests that the industry needs to “consider why there is an appetite developing in some quarters of residential strata properties for alternatives to long-term caretaking agreements and management rights”. She said: “For those lot owners who are no longer satisfi ed with long-term caretaking agreements the trend is heading toward shorter-term agreements for specialty scopes of works. “The traditional caretaking agreement is an allencompassing ‘do all’ arrangement where the caretaker typically delivers the cleaning, gardening, pool care and minor handyperson works, while supervising and arranging the specialist contractors to do the specialist repairs, maintenance and construction works on common property. But now some lot owners are looking to break up the caretaking contract into separate specialist trade contracts, for cleaning, gardening, pool care, handyperson, building contracts and so on… Set up with shorter terms from 12 months to 3 years. “They view that this change will give them greater control and fl exibility over service delivery and improve outcomes in terms of the condition of common property with cost savings. “Other bodies corporate would like to see it made easier to enforce the ‘move on’ provisions in circumstances where an underperforming caretaker is unable to resolve breaches under a 25-year agreement. This would be a win-win for the body corporate and caretaker where the former can retain quality outcomes and control and the latt er can retain the long-term agreement.” Leading fi nancier Mike Phipps, who assists syndicates to run large management rights businesses, said the government was reacting “to a very small but very vocal group” calling for shorter terms. He states that research confi rms security of tenure, combined with clear performance expectations (and clear remedies), together with a positive management relationship leads to bett er outcomes.
He said it was imperative managers proved to their committ ees and owners that they were doing a good job. “The call for reduced terms is coming from people who don’t want management rights in their building, and in my experience in buildings where they’ve managed to get rid of onsite managers and bring in external caretaking services (because they think it will save them money) it’s almost never worked. “At the end of the day it doesn’t matt er how long the agreement is, if you have very robust regulations to get rid of a manager who is not performing. If they’re no good, who cares if the agreement is one year or 25? If they’re doing a really good job, you want to keep them.” Mr Phipps said if a manager had skin in the game (if they’ve invested in the business) they would almost always do a bett er job than an outside caretaker. “That skin in the game should drive exceptional standards but unfortunately some managers have gone to sleep at the wheel,” Mr Phipps said. “The politicians are listening to the squeaky wheel and I’m not sure that many politicians really understand management rights.” Mr Rawnsley said time and motion studies were essential for managers to show their value against market rates. He said it had been proven time and time again that having an onsite manager gives a building or complex bett er service for a cheaper rate than any team of outside providers. “We had a Deloitt e report that clearly showed that long-term management was in the best interest of a scheme because owners and committ ees get more stuff done for the same amount of money,” Mr Rawnsley said. “Now we’ve got a real threat where government is considering reducing the term of those agreements and somehow expecting prices for services to drop. They won’t. “Without a resident manager, committ ees and owners will be paying three times as much for the same services.”
Mr Mahoney said history had shown in Queensland that an onsite manager was the most eff ective way to manage holiday apartments. “ARAMA is doing an excellent job of putt ing forward what needs to be put forward to the government to get them to listen,” he said.
“I don’t think they’ll listen to those who are saying that the term should be three years, but there could be some changes particularly to assist bodies corporate deal with the very small percentage of poorly performing managers.” Mr Cook predicted a long fi ght over the issue. “We want these issues dealt with by legislative tweaks rather than destroying the industry,” he said. “There is a lot of talk about shorter terms in other states, but there are 3600 management rights in Australia and 3300 of them are in Queensland. We have legislation here that has been developed over 50 years so you can’t compare it with other states.
“Management rights has been a very successful business for everyone involved in it in Queensland, and it’s an industry that the state should be really proud of.”
