Maximising the gross revenue of a property development is one of the most important factors in setting up your project to be profitable. Did you know that gross revenue for a townhouse or unit development is often more than just the sum of the sale price for each lot? By properly structuring and selling the Management Rights for the complex, you can ensure you achieve the highest revenue possible for your development.
What are Management Rights?
You have probably heard about Management Rights before, however you might not be familiar with what exactly they are. The term ‘Management Rights’ in Queensland usually refers to two documents entered into between the body corporate and the manager. These two documents (sometimes combined into one) are as follows:
- Caretaking agreement
- Letting agreement
Basics of a caretaking agreement
A caretaking agreement is a document that outlines the duties to be performed by the manager and the amount the body corporate is required to pay the manager in return. These duties are usually the day to day cleaning and care for the complex such as sweeping, mopping, gardening and arranging qualified tradespeople to carry out works.
The amount payable by the body corporate under a caretaking agreement can be quite significant, especially in larger body corporate schemes. The annual remuneration for a caretaker is often $1,300 per lot or more. This mean for a complex of 100 lots, the caretaker will likely be paid a fee of approximately $130,000 or more.
Basics of a letting agreement
A letting agreement is a document that empowers a letting agent to carry out a letting business from the complex. This document may also include a right for the letting agent to use an area in the complex (legally called an occupation authority area) to carry out these services.
A body corporate does not pay a fee to the letting agent for its engagement. Instead, owner’s that choose to use the services of a letting agent will pay fees to the letting agent pursuant to a separate agreement. This separate agreement is usually in the form of a POA Form 6 between the letting agent and the lot owner.
How to maximise the value of your Management Rights
The developer usually has a high level of control over the terms of the Management Rights and it is important that they are drafted in a way that maximises their value. An inexperienced developer or property development lawyer can result in the value of the Management Rights being significantly reduced or even worse, making them essentially worthless. So what should you look out for?
Appropriate caretaker’s remuneration
Setting the caretaker’s remuneration is a delicate balancing act that needs to take into account a number of competing factors. These factors include the extent of the caretaker’s duties, current market rates and trying to minimise body corporate levies to make the development more attractive to buyers.
Setting the caretaker’s remuneration to top of market rates may be an attractive way for a developer to try and maximise the value of the Management Rights as the value is often calculated as a multiple that takes into account the caretaker’s remuneration.
Conversely, setting the caretaker’s remuneration too high will result in body corporate fees that are too high compared to competing developments. This may result in less buyer interest and a reduction in sales.
If in doubt, there are experts that can assist in providing advice on the appropriate level of caretaker’s remuneration for your particular property project.
Consider whether the manager is required to live on-site
A manager would traditionally live in the complex and work as an ‘on-site manager’. The requirement for the manager to live on-site would usually be dealt with in the caretaking and letting agreements and there would usually be hours of operation where the manager is required to have the on-site office open.
The requirement to live on-site is generally tied into an obligation to own a caretaker’s lot in the complex. This means the cost of buying Management Rights is significantly increased as the manager needs to buy the Management Rights business as well as the manager’s lot.
As time goes on, it is becoming increasingly common for caretakers and letting agents to not have an obligation to live in the complex. This structure is far more appealing to manager’s and investors alike and often results in a higher sale price for your Management Rights.
Incentive for buyers to use the letting agent
The value of a Management Rights business is generally a multiple of the caretaker’s remuneration plus a fee for each owner that appoints the letting agent within a certain period after settlement. The fee per appointment can often be $10,000 or more. By incentivising owners to use the letting agent during this period, you ensure you maximise the value of your Management Rights busines.
The most common way to incentivise an investor to use the letting agent instead of an outside real estate agent is to provide them with a rebate or rental guarantee that is conditional upon them using the letting agent.
Adequate occupation authority areas
Ensuring the manager has appropriate office space and storage areas is vital to ensuring they can effectively carry out their duties. In turn, this then assists in making the Management Rights more attractive to your buyer.
While it is common for a manager to have an on-site office, developers often overlook storage needs. This is even more the case for large complexes or buildings that may require multiple storage points to avoid having to carry items large distances. A key example of this is for large towers where it is often a good idea to have OA storage areas spaced throughout the levels of the building so that a separate vacuum cleaner and cleaning materials can be stored in each. This saves someone having to go down to level 1 to clean something on level 40 each time there is a need.
The duties of the caretaker need to be carefully drafted to balance the interests of the caretaker and the body corporate. You need to ensure that the caretaker is required to carry out all of the duties that ensure the complex remains neat and tidy, yet also ensure the duties are no so onerous that it makes it difficult for the developer to sell the Management Rights.
Your property development lawyer is integral to providing you with guidance on the duties that are appropriate.
Got more questions?
At McAndrew Law, we are experienced in drafting Management Rights agreements that maximise the value of your development. Call us on (07) 3266 8555 or get in touch with us online to get started. We offer a FREE initial consultation to discuss your needs.
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