What are Management Rights?
Management rights traditionally includes:
- Ownership of real estate in a community title scheme (which usually includes an office or the right to use an office);
- A contract for caretaking of common property in a body corporate ; and
- An authorisation to let lots in the scheme.
There are a number of variations on the above. Some management rights do not include real estate. Some are caretaking or letting only. It is important that you understand what it is that you are buying, before committing to the investment.
Management rights apply to different types of property developments including units, townhouses, resort style developments, student accommodation and retirement villages.
The decision to invest in management rights might include investment return, lifestyle choice combined with the security of purchasing real property with the business.
There are many different types of management rights available, including:
- Holiday letting
- Residential or permanent letting
- Brand new management rights (off the plan)
- Established management rights
Holiday letting involves the management rights to short term let units, similar to operating a resort or hotel. The building must be promoted to attract holiday makers usually for short stays. The advantages of holiday letting includes a greater return on investment as managers make their money on rent collection (which is traditionally higher for short term stays). A manager can also make money from service charges such as cleaning and linen hire and commission from ticket sales. You need to have an understanding of how to market tourism and be prepared to promote the property. Location is important with these types of management rights and so too are the facilities available (i.e. gym, pool, spa etc). The disadvantages of holiday letting include the fact that it is a more complex business to operate. You need to have good management and marketing skills and understand cash flow as the business is affected by peak and off peak periods.
Residential or permanent letting involves finding tenants, collecting the rent, looking after the property and maintaining a good relationship with the lot owners. The advantages of permanent letting include a more steady income stream. Less marketing is required and the front office requirements are far less than holiday letting. Permanent letting does however have a lower rate of return per unit compared to holiday letting. There are usually some owner-occupiers in the complex and you are in competition with local real estate agents to find and place tenants and manage the property.
Buying off the plan means that you are buying the management rights business from a developer as part of the development. Buying off the plan is a more complex process as the documentation has to be very specific about what you are buying and there is no standard form of documentation. If you want to negotiate any changes to the documentation this needs to be done early on as the developer may have to re-disclose to those buyers and this may trigger termination rights for the buyers of those units, depending on the requested changes. The business is not as certain as buying an existing management rights business as the income is only a projection. It is very important that you know how many units will be in the letting pool and it is important that the documentation is drafted to protect you. You will be setting up the business from the ground up and may have to deal with building defects and delays in settlement. One of the benefits of buying off the plan is that the purchase price is usually lower.
Buying an established management rights business takes a lot of the uncertainty out of the business. The number of units in the letting pool will be known (at least at the time of the sale) and you will be able to see the past financial performance of the business. You need to be mindful of the age of the complex and whether any major works might be required (including to your own unit) and there may be a history of dispute within the body corporate and/or with the existing manager that you may need to manage.
Investing in management rights involves the same considerations as any other investment decision. You need to be comfortable with the value of the business; your skills in operating the business and be aware of and understand the risks and opportunities involved in buying management rights.
To find out more about management rights, read our further articles in the series:
- Caretaking and Letting Agreements
- Smart questions to ask before you buy management rights
If you are considering purchasing management rights, please contact us on 07 5443 9988 or [email protected] and we would be happy to assist you in understanding the documentation and guiding you through the process.
Argon Law is a Sunshine Coast law firm based in Maroochydore. We are commercial lawyers with many years of experience in business and property and are eager to assist you in any way we can.
Always ensure you seek professional advice for your specific circumstances. The above is not advice and is intended to be general in nature only.