Blog Articles

Understanding NRAS

Wed, 12 Jun 2013 23:57:00 GMT

Since the advent of the Federal Government’s initiative with NRAS (National Rental Affordability Scheme) a couple of years ago, the management rights industry has been endeavouring to come to grips with its impact. That has led to confusion, uncertainty and in more than one case, considerable grief.

The NRAS program was designed to provide an incentive for investors to buy new property to stimulate the building industry and improve the rental affordability in high growth areas for middle income Australian families.

The incentive to the investor is the provision of substantial tax savings over a 10 year period and there are some clear and certain tax advantage for the investors.

The properties can only be rented to tenants with certain levels of income. Most importantly, NRAS is not about social housing nor designed for very low income families. It is, as the NRAS wesite states, designed for middle income earners including key and essential service workers such as childcare workers, nurses, police officers and fire-fighters. NRAS properties can be rented, but at no more than 80% of the current market rent, to private individuals and families with annual incomes of up to $108,169 and in some limited cases even higher upper limits of $135,212. These amounts will also be indexed to the CPI.

There are a very large number of what are known as NRAS providers – not for profit organisations approved under NRAS to manage properties accepted into the NRAS program. There are over 20 operating in Queensland. The NRAS provider comes to arrangements with a developer for an approved number of properties in an approved development to be managed by the provider under NRAS.

Under the provider’s agreement with the Government, the provider is responsible to ensure that the letting of the properties comply with the prescribed NRAS rules particularly that they are let to qualified tenants at the prescribed rents. Unless there is full compliance the provider’s status and the investor’s tax incentives are in jeopardy. It is therefore critical that the provider have a degree of control over how the properties are let and managed.

Different providers require different levels of control. One uses a model where it leases all of the properties from the investors and then appoints the onsite manager as agent to sublet the properties to eligible tenants.

Other models have joint letting appointments with the onsite manager who does all the property management and receives the bulk of the income. Other models simply allow the onsite manager to take letting appointments from investors but under strict guidelines agreed to with the provider.

The obvious issues with NRAS from the perspective of an onsite manager, valuers and banks include:

•   The degree of control the provider has over the investors and the properties – the provider will be in a good position to direct or influence owners as to who should manage the letting of their properties;
•   The potential for the provider to itself take on in the future, as agent, the letting of the properties;
•   The reduced income from the lettings as the rent is at least 20% below market rents;
•   Whether the complex will be able to attract a sufficient number of qualified tenants who meet the NRAS guidelines; and
•   More paperwork to be completed to ensure strict compliance with the NRAS requirements re tenant eligibility and market rents, with some providers insisting on specific software utilisation.

We have acted in a number of transactions involving NRAS properties including for various managers, one of the State’s largest developers and also for a bank funding a purchase. If the full details of the NRAS arrangements are known at the outset there are ways to deal with the above issues so that the onsite manager is protected. That might include a lower payment for the NRAS units, procuring warranties or even restraints from the provider, deferred or staggered payments for the NRAS units, procuring non-competition agreements with the provider or some combination of these or others.

Unfortunately we have also been consulted by buyers of management rights off the plan where they have only found out after signing a contract that a large number of units are part of NRAS, situations that can cause a lot of grief.

Having arranged and partaken in recents forum attended by a major developer, valuers, banks, brokers and an NRAS provider, the way forward is still not crystal clear. In particular, valuers and banks will attribute minimal if any value to letting appointments where the provider has total control of the letting appointments and who the letting agent will be. Again though there are ways of dealing with even these situations to protect the onsite manager as much as possible.

On the positive side, it is important to note that:

•   NRAS units are more likely to remain in the letting pool for a longer time than other investor units as the NRAS investor (and any buyer who remains in the scheme) has the benefit of the 10 year tax incentive;
•   NRAS providers generally do not want to manage the letting of the properties and (as do the NRAS investors) recognise that the onsite manager is best positioned to do that – if the onsite manager is providing a sound service there will be little reason not to continue with that;
•   There has been a resale of at least one management rights business with a large component of NRAS units (albeit not the leaseback model) indicating market acceptance;
•   There are a very large number of complexes with NRAS units and a growing understanding and acceptance of the concept; and
•   The management rights industry is very resilient, tending to adapt to or overcome potential threats and move on fairly quickly.

For a potential buyer of management rights in a complex where there are or is likely to be NRAS units, it is critical to thoroughly investigate the NRAS arrangements and take sound legal advice from a lawyer experienced in dealing with the issues involved.

Terms of the Contract: Financial Due Diligence and Approval of the Lease

Wed, 12 Jun 2013 23:55:00 GMT

Our examination of the main terms of a motel purchase contract continues with an examination of the following conditions:
1. Financial Due Diligence; and

2. Approval of the Lease.

These conditions will be relevant whether you are purchasing the motel business, the freehold investment or both the business and the freehold.

Financial Due Diligence

The purchase contract should be conditional upon the purchaser being satisfied of the financial soundness of the business by a certain date after execution of the contract.

To enable this to occur the contract should provide for the vendor to deliver or make available to the purchaser or the purchaser's accountants copies of such financial data which may be reasonably required.

The purpose of such enquiries is to enable the purchaser to explore the financial viability of the business. Generally this will be required to be provided to the purchaser's financier in order to secure finance for the purchase.

If the purchaser is not satisfied of the financial soundness of the business, then the purchaser will be able to terminate the purchase contract by notice in writing to the vendor.

Care should be taken to ensure that the time frames in the contract within which the purchaser needs to be satisfied with the financial soundness of the business or within which the purchaser needs to terminate the contract are strictly adhered to. For this reason it is important for a prospective purchaser to liaise with their accountant early in the transaction to ensure that the time frames can be met.

Approval of the Lease

The approval of the lease is an important condition for both the purchaser of a the leasehold business and the purchaser of the freehold investment. It is essential prior to purchase of the business that the purchaser understands as much as possible about the lease document and how it works. Not only does this document affect his own activities in the motel business, but is also is an important part of the asset which is sold.

Generally the contract will require the vendor to deliver to the purchaser a true copy of the lease within a certain amount of time of the contract being entered into. The contract should be conditional upon the purchaser being satisfied with the terms and conditions of the lease by the a certain date.

If the purchaser is not satisfied of the terms of the lease, then the purchaser will be able to terminate the purchase contract by notice in writing to the vendor.

Again, care should be taken to ensure that the time frames in the contract are strictly adhered to.

The results of the analysis of the lease in terms of cost to the prospective tenant or landlord should be conveyed to the purchaser's accountant prior to the contract becoming unconditional.

These conditions are for the benefit of the purchaser and every effort should be made to use the time available to conduct thorough enquiries in relation to both the financial soundness of the business and the lease. Such information enables a purchaser to make an objective and informed decision in relation to whether or not to proceed with the proposed purchase.

Turning the Tables on the Great Outdoors

Wed, 12 Jun 2013 23:52:00 GMT

When your children are young, you are sometimes possessed by an urge to involve them in a bonding experience.

No one knows why normally rational adults are seized by these impulses, ones that invariably involve The Great Outdoors for children dread them and hide under their beds at the first mention of ``doing something together as a family’’.

They only thing they wish to do together as a family is to be left in their rooms plugged firmly into social media sites via their laptops.

Once the bonding notion has become fixed in a male’s head, however, he is not easily dissuaded for he sees himself as the head of the tribe whose role it is to fend for his brood in the wild.

The last time I was seized by this particular form of madness was when I recalled, for no reason, a caravan park where I had once stayed in northern New South Wales.

Caravan parks are a link with the past. In an era when many Australians reach for their passports at the mention of holidays, they offer a quintessentially Australian egalitarian experience.

Nowhere levels social barriers like the communal shower block in a caravan park. There, shaving elbow to elbow with complete strangers or waiting for a vacant shower cubicle, all creatures great and small are equal.

"It will be wonderful" I beamed, announcing my Great Outdoors plan one evening.

"I’ll borrow my mate’s motorhome and we’ll have a weekend by the sea. No high rise, no lifts, no breakfast buffet, just self catering and the crash of the surf."

This announcement was greeted with groans of despair. "Will there be Wifi?" they chorused. "No computers. No Ipads" I cried, triggering a mass exodus from the dining room followed by the sound of bedroom doors being slammed.

The last time I’d stayed in a caravan park had been with a mate and his girlfriend. He was new to the experience and had spent a large amount of money on a huge tent and everything that went with it.

What a shame that when after a drive of several hours we arrived at the park and went to erect his luxurious new tent, we discovered he had left the tent pegs at home.

Negotiating my friend’s motorhome down the highway was easy enough. Parking it the caravan park proved to be more interesting as it was the size of a cruise liner.

After quite a lot of shouting, yelling and contradictory directions which if followed would have seen me parked in the surf, we were plugged into the powered site and ready to set up camp and enjoy the Great Outdoors.

The roof that which extended from the side of the motorhome like a bat’s wing proved to be a challenge and I never did get it right secured properly.

Fortunately, there was no wind. Had there been I had the uncomfortable feeling that the motorhome would have gone sailing through the sky and come to rest somewhere west of Alice Springs.

All, however, had gone reasonably well and quietly pleased with myself, I decided to set up a folding table and chairs, the better to relax beneath the bat wing.

I was ahead on points and had almost wrestled the table into submission when it struck back, snapping shut and trapping my hand.

This hurt quite a bit and sent me flapping around the van site, table still attached to my hand, bellowing in agony.

My partner eventually caught me, crash tackled me to the ground and using her feet, forced open the jaws of the table which had a bite like a saltwater crocodile.

She found a supply of Band Aids and the bleeding staunched, I abandoned the motorhome and announced we were all going to the nearby pub for dinner.

The next morning, the caravan gods smiled upon us. We cooked breakfast without setting fire to anything and with the sun shining from a cloudless sky, walked the 100m to the beach.

The kids spent the day swimming and doing kids’ things that did not involve crouching over a keyboard in a darkened bedroom while we sprawled in our director’s chairs and soaked up the warmth.

At day’s end we braved the communal showers and aglow with that wonderful post-shower feel of freshness that comes after a day at the beach, had drinks beneath the bat wing as the sun cast its last shadows over the park.

"I love five star resorts, " said my partner, "but you might be on to something here. When the kids leave home we should do more of this."
"Jordan", I said turning to my partner’s first born. "When are you thinking of leaving home?"
"Never" he replied. Ah well. It was a nice thought.

Outcomes and Opportunities

Wed, 12 Jun 2013 23:44:00 GMT

Thank you for all the positive feedback on last issue’s cover story about family business.

The Senate Committee has since tabled a weighty report, ‘Family Businesses in Australia – different and significant: why they shouldn’t be overlooked’. The main recommendation (one of 21) is to set up a new federal committee to identify policy issues for attention.

Really, it just highlights how much more needs to be done. If you want to read the detail, you’ll find a copy of the report at www.fambiz.org.au.

Meanwhile, my daughter Trudy (Resort Brokers Sales Manager) and I have been to the HICAP (Hotel Investment Conference Asia Pacific) Update in Singapore. It’s always a real ‘who’s who’ of our region’s hotel industry.

We came away with a very positive impression. Relative to room rates and occupancies across Asia, Australia is holding up very well.

It’s also great to catch up with what’s happening around the traps. Myanmar is enjoying a real tourism surge, thanks to big reforms underway there. Thailand’s Phuket remains a hotspot, and Bali is still flying.

Almost 2.95 million foreign tourists visited Bali last year, up 4.3% on the year before. Aussies, still in love with this enchanting island, make up more than a quarter of that number.

You’ll notice our centre spread showcases some affordable villas in Bali. I know the developers well. Investors in their last project, an adjacent courtyard hotel, are now reaping a net return of over 20%. Not bad for your own piece of paradise!

Closer to home, many eyes are looking closely at investment opportunities in Australia. This month, our new series on hotel groups steps inside Swiss-Belhotel International. Big in Asia and the Middle East, this fast-growing group wants to expand its presence here. Chairman Gavin Faull explains why.

There are certainly some great opportunities now across the whole accommodation spectrum in Australia – hotels, motels, holiday parks, and management rights. Inside, you’ll read my views on the need for more motels.

The caravan park sector is the focus of our cover story, and features strongly in our popular series on the many faces of tourism and accommodation, which this month introduces you to Allan Walls, who’s been a leader in both park broking and operations.

Resort Brokers has become increasingly involved in the caravan park market, and has been very active of late. In fact, in the last 6 months we have sold 7 caravan parks and, as you’ll see in these pages, more quality properties are currently listed.

Finally, I wanted to mention off-the-plan management rights, which are again becoming a big part of our business. New developments, like Sea Pearl at Mooloolaba, Oshen in Yeppoon and Arena, just down the road from us here at South Brisbane, head our list of terrific off-the-plan opportunities. And more are in the pipeline.

I think canny buyers should now be taking another good look at the Gold Coast. Despite a disappointing Easter due to some rough weather, it will always boast 30 kilometres of the world’s best white sandy beaches. Demand for Brisbane management rights has been high, so maybe it’s time to head down the highway!

Good reading! There’s something for everyone in this issue.

Please send your feedback to:
carlacook@resortbrokers.com.au or PO Box 5004, West End Q 4101.

COVER STORY:
There aren’t many of us who don’t have heartwarming memories of holidays spent in a caravan park. So what made those holidays so special? Australians may have recently been venturing overseas more than ever before. But they are also returning to the simple pleasures … family, friends and good-time holidays in our own beautiful backyard.

Park for a Holiday and Let the Good Times Roll

Wed, 12 Jun 2013 23:36:00 GMT

There’s something special about a caravan park holiday, something hard to put your finger on. It’s a magical appeal no other accommodation type seems to hold. Selling this ‘X factor’ is the key to a promising future for an industry with its roots in the past.

It’s almost two years now since Informer first covered Australia’s enduring love affair with caravan parks. (‘Accommodation on the Move’, July 2011).

“Once regarded as a bit old-fashioned, caravanning is enjoying a resurgence,” we reported. In fact, we went so far as to assert that, more than just shaking off its former conservative image, the caravan park holiday was becoming the epitome of cool.

So what is the ‘X factor’ inspiring so many people to return to a style of accommodation that was really in its prime in the 1960s and 70s?

It’s not just about a great location, although no one would deny most parks have that in spades. Nor is it purely about the laid-back accommodation style, or great facilities. Even the sum of all these elements still doesn’t quite seem to explain the allure.

Actually, we think the secret ingredient is fellow holidaymakers.

What makes a caravan park holiday truly memorable is the social experience, camaraderie with other guests, immersing yourself for a little while in a community whose single-minded purpose is to relax and have fun.

“When you arrive at a hotel or motel, you don’t knock on the doors of other guests to say g’day, do you?” says Resort Brokers Australia managing director Ian Crooks. “You either go out to have fun, or you are contained within your four walls.

“But when you drive into a caravan park and pull out your deck chair, your neighbours wave hello, offer you a drink, want a chat. It’s just a great atmosphere, a sociable experience no other accommodation environment can match. Lifelong friendships are made in caravan parks.”

Business analysts at IBISWorld estimate Australia’s caravan parks and camping grounds industry generated revenue of $1.31 billion in 2011-12, up 1.1% for the year. It contributed to an estimated average annual growth rate of 1.3% for the five years to 2011-12.

Australian Bureau of Statistics (ABS) data (Caravan or Camping in Australia Snapshot 2012) tells us there were 1,638 caravan parks (with 40 or more powered sites) nationwide as at mid 2010. All up, the figure is somewhere over 2,300.

ABS figures also show around 90% of all caravan and camping visitor nights were spent outside capital cities, highlighting just how important this sector is to regional Australia.

Significantly, our caravan and campervan fleet is continuing to grow strongly. RVM Australia, the peak body for our RV manufacturing industry, says total production of caravans and RVs has been running at over 20,000 vehicles per annum for three years.

“This is the third massive year in a row – 29% above the level reached in 2009 – and early signs for 2013 suggest we can expect another boom year,” said RVM Australia CEO David Duncan.

“Clearly, people want relaxing, economical and sociable holidays that RVs make possible, with these boom years achieving more than four times the output we had in the mid-1990s.”

There’s that word again – ‘sociable’.

IBISWorld contends caravan parks and campgrounds have risen to the modern-day tourism challenge, reinventing themselves to become a more important component of total tourist accommodation in Australia.

“This includes improving facilities for families and other specific tourist groups with a particular focus on cabin and on-site van segments,” their May 2012 Market Research Report stated.

“New quality facilities are usually available at lower tariffs than competing hotels and motels, but still offer attractive profit margins.

“The caravan parks and camping grounds industry survived the economic slowdown in better shape than other tourist accommodation providers by offering a combination of low-cost and high-quality accommodation.”

Park owner and Big4 Holiday Parks director, Allan Walls, says the dramatic evolution of parks into comprehensive holiday and resort destinations has been critical.

“The range of activities provided within the property allows families to holiday in complete relaxation and security for as long as they want,” he said.

“A family of three generations will meet up at a holiday park at Christmas. Everything they need is right there for children, young adults and older family members. They can simply relax and enjoy each other’s company knowing everyone is catered for, the children have lots to do in a safe environment, and they don’t have to keep packing up and moving on.”

He raises an interesting point – that of inter-generational appeal. Younger age groups are now discovering a style of holiday already loved by their parents and grandparents. Any notion that a caravan park holiday was for fuddy duddies is well and truly debunked.

According to the ABS Snapshot, exactly half of the 8.5 million domestic caravan and camping visitors in Australia in 2011 were aged 30 – 54 years, while around one quarter were active seniors aged 55 to 70 years.

This latter sector grew rapidly in 2011, with visitors increasing by 12% to 2.6 million. Compared to 2000 estimates, trips by active caravan and camping seniors were up by 90%, while nights were up 23% and expenditure was 77% higher.

Here comes the huge baby boomer brigade, an unstoppable and hugely valuable population segment which, like families, will be vital to the caravan park industry.

Already, caravan parks have instant appeal to this cohort. Studies show baby boomers want adventure, experiences and the opportunity ‘to get to know Australia’. They are hitting the road, staying in caravan parks.

Research also shows the key to attracting boomers is to appeal to their ‘forever young’ mindset. What better way to remain young than to revisit the holiday experiences you enjoyed so much in your youth?

Some forecasts suggest the number of RV travellers will increase by more than 60% over the next 10 to 15 years.

Of course, that’s not to say there are not challenges to be met. The high Australian dollar and availability of cheap international airfares are difficulties faced by our entire accommodation industry.

But there is also an increasingly evident shift toward holidaying at home, and a yearning expressed by many for simple, stress-free pleasures. These are trends that should be encouraged, and needs that can and must be met by the industry.

The caravan park sector is expected to change shape considerably. The number of establishments will continue to decrease as some sites are converted to higher and better return uses.

Larger operators such as Discovery Holiday Parks (formerly Beston) and Aspen Parks have bought up many operations, while other park owners are supported by major member organisations such as Big4 Holiday Parks of Australia, Top Tourist Parks of Australia and Family Parks Australia.

These companies and organisations clearly see growth potential in the industry. But success for all operators will require strong business plans and management practices.

This means implementing highly effective marketing strategies, promotional partnerships with other tourism operators and attractions, customer relationship management, effective performance monitoring systems, and up-to-the-minute online booking facilities.

A great deal of helpful information and resources are available through peak industry bodies and at major industry conferences and events.

Just last month, an industry partnership was formed between the Accommodation Association of Australia (AAA) and the Caravan, RV Accommodation Industry of Australia (CRVA), giving CRVA members an enhanced industry voice and access to a range of services, including workplace relations support.

For every business, the key to success is knowing your USP (unique selling proposition) – the attribute that most sets you apart from your competitors – and selling it effectively.

In the caravan park industry, that USP, is its ability to provide guests with a memorable shared social experience.
Allan Walls summed it up: “We, as an industry, face challenges from many other accommodation providers in Australia. But they are never able to provide the friendships that our industry provides.”

Opportunity knocks on motel room door

Wed, 12 Jun 2013 23:32:00 GMT

Accommodation occupancy rates in Australia are rising, yet growth in room numbers remains low. Over time, the laws of demand and supply have pushed prices higher. But investment in accommodation has not kept pace.

I now see a very strong case for accommodation investment. Motel development has stagnated for too long. Australia needs at least 100 new motels, of 30 to 40 rooms each, in key locations now. But the investment must be well-targeted.

According to the latest figures released by the Australian Bureau of Statistics (ABS), the national occupancy rate for hotels, motels and serviced apartments (15 or more rooms) rose to 65.8% in 2012, up from 65.3% in 2011.

For someone who has been in the industry for as long as I have, these are impressive figures. For the 20 or so years up to the mid-2000s, the traditional average occupancy rate hovered around 57 – 59%.

The industry’s other key performance indicator, revenue per available room (RevPAR), has also climbed. ABS data shows it rose from $103.83 in 2011 to $107.99 in 2012.

Anecdotally, I can tell you average room rates in most areas have increased by about $25 net of GST in the past four years, driven by the accommodation shortage.

National figures show a steady and encouraging upward trend. But we need to drill deeper, looking at the detailed regional results to identify where the opportunities lie.

Australia’s accommodation industry is a patchwork landscape with its cities and regions subject to diverse economic factors and influences.

Queensland, Western Australia and the Northern Territory recorded the greatest trading improvements from 2011 to 2012, again reminding us of the importance to our industry of business generated by the resources and energy sectors.

In Queensland, for example, while the average daily rate (ADR) statewide has risen by almost 12% over the last five years, the regional results vary wildly.

According to figures provided to the Informer (March 2013) by M3 Properties, the 5-year change in ADR swung dramatically from a rise of 41.5% in the resource boom-affected Central Queensland region to a fall of 9.4% in tropical North Queensland, where they’ve had to contend with the double whammy of the GFC-driven tourism downturn and natural disasters.

In the regions impacted by mining and energy industry fluctuations, the supply issue is complex. In times of peak construction activity, for example, local motels are never enough, and mining camps are established to meet peak accommodation needs.

The motels are still busy catering for executive and regular business and holiday guest demand.

But when the mine construction activity scales back, the camps pack up and leave. Remaining operations personnel, however, still need accommodation and they turn to the motels. There are never enough.

So why is it that these prime opportunities have largely gone begging? Why have developers been slow to fill the supply gap?

One of the biggest hurdles is often State and local authority red tape, involving lengthy development approval processes and associated costs.

That’s why I’m so impressed with new modular and pre-built motel delivery options featured recently in the Informer. The time and cost savings offered by both the R.I. Kenco Spa Modular Building Systems design and Podfirst’s motel units present innovative, viable solutions to our motel supply needs.

R.I. Kenco’s Italian-designed and pre-fabricated Modus units arrive flat-packed. With a build time of just eight weeks from start to finish, you have a new motel in place for around $50,000 - $60,000 per room.

In the case of Podfirst, the architecturally designed, pre-built masonry motel rooms are delivered as connection-ready pods, from $42,000. They have reinforced, concrete-filled wall panels over a concrete slab floor, with sub-floor services, all ready to plug in.

Forecaster Deloitte Access Economics anticipates room occupancy rates in Australia are going to further increase from 65% to 68% by 2014.

While international visitor numbers are rising, more and more Australians are choosing to holiday at home. And our own population includes a large bubble of baby boomers who’ll be spending more and more time in pursuit of leisure.

Tourism Australia, in 2009, announced we needed to deliver 40,000 more accommodation rooms by 2020. But according to their State of the Industry 2012 report, there’s only been a net increase of around 730 nationally since then. That’s a huge shortfall.

I can honestly say, the long-term outlook for motels is stronger now than any time in the almost three decades I have been in this industry. Opportunity is knocking.

Dealing with the Office of Fair Trading

Wed, 12 Jun 2013 23:28:00 GMT

By Frank Higginson 10 Apr 2013

Representatives of the Office of Fair Trading (OFT) are a necessary evil. They are needed to keep the various industries they regulate clean and tidy. Bad apples ruin it for everyone, so when they come knocking, don’t be afraid, just be ready.

For the last few months we have been contacted by more and more clients about spot visits conducted by the OFT. They usually are looking for what they call the ‘big four’:
1.   Your licence on ‘conspicuous’ display (above the front door is the traditional spot – but it can be elsewhere. It just must be visible when people enter your premises);
2.   Your licensee name and category printed in font 1.5cm high on display;
3.   A statement that you are subject to a Code of Conduct (click here for the Code) and the fact that is available; and

4. A simple and easy to use complaints resolution policy in place (but not necessarily on show). If you need one of these let us know.

Leaving aside those simple ones, the OFT has a mandate to make sure that you are conducting your letting business in accordance with law. Some of the more common issues that we see arise in an audit are:

The right entity – All PAMDA20A’s must be in your name or the prior ones must be legally assigned to you. Yes, we bang on endlessly about that, but it is important – you cannot let a lot (or charge a commission) without a written agreement from the owner of the lot;
•   The right charges - Make sure that everything you are charging is listed in your PAMDA20A. If not, you need another written authority to raise those charges (like a separate written agreement);
•   Licence conditions - Make sure you are adhering to any conditions of your licence (i.e. for a resident letting licence – that you are actually residing on site);
•   Staff licencing - If necessary, make your staff also licenced as required; and

• Audits – Make sure you have had all your statutory audits.

Remember that the OFT only regulates letting. They have nothing to do with caretaking. You won’t ever get them chipping you about not maintaining the lawns or hosing the driveway.

If you do get a visit, some simple rules for dealing with the OFT are:

1.   If they do drop in for a spot check, answer their questions honestly. Having said that, don’t be afraid to tell them you need to seek legal advice (especially if you are not sure about your position).
2.   It follows that you should never, ever lie to them.
3.   They can require you to (within a reasonable period):
•   Produce documents about your letting activities (ie. PAMDA 20A’s, copy of your licence, trust account documents); and
•   give information about an offence if they believe on reasonable grounds that an offence has occurred.

A failure to provide information as required is an offence that could lead to a fine or, at worst, imprisonment.

4.   You are entitled to seek legal advice to assess your position, but you should do that immediately. Do not get caught thinking as that makes you look guilty – it is a right you are entitled to, and our experience is that it is far better to give a considered response than a haphazard guess.
5.   If you do get formal correspondence from the OFT, then seek immediate legal advice. Sometimes the issues can be resolved quickly and painlessly but sometimes you might need to prepare for a fight.
6.   Do not ignore their follow up correspondence or emails. They are not like a salesperson – who might get discouraged by someone failing to come back to them. They simply won’t let go – and ignoring them is a sure-fire way to stay on their radar.

Negotiation and Price : Can Anyone Win?

Wed, 12 Jun 2013 23:23:00 GMT

Because I spend a lot of time with new clients from the moment they start thinking about a purchase inevitably I end up getting asked for an opinion on price. The question is usually accompanied by a request for my thoughts on how negotiable the vendor might be and at what price point the first offer should be made. To be blunt none of these matters are really any of my business. However, if you put yourself out there as some kind of industry expert then in my mind you have an obligation to a client to give what feedback you can. To me purchasing an asset is all about striking a fair deal without insulting the vendor on the way through. There seems to be a need in some people’s minds to have to denigrate the asset being purchased in order to justify a low initial offer. This is often referred to a tyre kicking and in my view it’s not a good look.

Buying and selling a management rights, motel or caravan park is an emotional process. It’s one of the few business transactions that usually includes the sale and purchase of the business operator’s home. For many purchasers it’s tempting to try to find fault with the asset under consideration in order to drive down the vendor’s expectations. No business is perfect but pointing out the faults to the current operator is not the way to build rapport during the negotiation process. If you are going to use any negatives as a negotiating lever than also acknowledge the positives and keep the emotion out of the process. There’s an old expression that says never negotiate from a position of high emotion or high need. Approach the process in a cool and calm manner with a focus on not insulting the vendor and in many instances the outcome will be to everyone’s liking. Of course, if the asking price is wildly out of market cut to the chase and find out of there is room for negotiation. Use market statistics and recent sales data to justify your position and if the vendor is clearly still living in 2007 move on.

Speaking of market statistics I’m seeing a growing number of purchasers doing their own real estate valuation research. The internet provides a plethora of information for the intending purchaser and many seem to think that looking at general unit sales data is the best way to decide on the value of a manager’s lot in a strata scheme. It’s a start but the process is also flawed. As we know the managers unit in a scheme is like no other. It will have attached to its ownership the exclusive right to operate a letting business together with other exclusive rights in respect of common property. In my opinion the only way to truly determine the value of a managers unit is to have it formally valued. In fact, I am seeing a growing number of vendors and purchasers agreeing to do just this and then contract the sale accordingly. The trick is to ensure the valuation is done by a bank accredited management rights valuer for mortgagee purposes. Not a difficult process but critical to a successful outcome.

Part of the purchase negotiation process often involves any number of parties taking a view of what the banks will accept. There seems to be an urban myth out there that the banks have certain criteria in terms of multiples and yields that they simply won’t go past. This is nonsense. The truth of the matter is that the lenders will have an asset independently valued and will lend against that value. If a punter wants to pay over the odds that’s fine, it’s just that the deal will require a higher level of equity as the bank will lend on purchase price or valuation, whichever is the lesser. While on the subject of bank policy don’t be tempted to tinker with the unit and business value splits in your management rights sale contracts. These contracts should reflect as near as possible the actual market values of the assets being sold. To have the right overall price and then play with the value splits is not good enough. In many cases the bank will only value the unit so if it’s been overstated in the contract we will have a problem with funding. The bank lends against the valuation of the unit and the contract price of the rights. If the valuation of the unit comes in low because the contract price has been loaded then the overall lending available to the borrower will fall and potentially crash the deal. Not a good outcome for anyone.

Finally, if you think it’s a great business but you can’t quite get to the asking price then say so. Acknowledge that the asking price seems fair but also acknowledge that you can’t pay that price and put forward your best offer. I am surprised at the number of times a vendor will accept a lower offer from someone who acknowledges the value and is honest enough to simply say they can’t quite get there. Even if you are not instantly successful with this approach you may be surprised a couple of months down the track when the property hasn’t sold and you have maintained a good relationship with the vendor.

Sales Process

Wed, 12 Jun 2013 23:12:00 GMT

In recent editions of The Informer, readers will have read a couple of articles concerning important actions that resident managers should take to maintain the value of their management rights. One article, centered largely on short-term management rights businesses, focused on the importance of working with unit owners to upgrade, refurbish and improve their investment units. Another article, applicable to all management rights business, focused on the importance of topping up the caretaking/letting agreements to maintain a healthy length of tenure. If you are a management rights owner and haven’t read these, I highly recommend checking our website (all Informer articles are now archived and available to be read online).

These articles were intended to provide advice and help for the ongoing, day-to-day running of your business. The suggestions made would be equally relevant on the day you bought your business to the day you sold your business. In light of this, of thought it was pertinent to highlight a couple of the crucial steps necessary just prior to putting your management rights on the market. You’ve done all the hard now; in the years that you’ve owned the business you’ve cleaned up the complex, renovated a good proportion of the units, increased the income, and successfully achieved a 5 year top-up (hypothetically speaking, of course!) Now what? What can you do to smooth the marketing and sales process? I’d like to focus on 2 key areas.

First of all, you must get an industry specialist accountant to verify your trading figures for the purpose of sale. A professionally prepared, up-to-date P&L is essential for an easy sale process. Time and time again, we come across managers who have prepared their own figures. We are told that ‘they are definitely correct’ or that ‘if they’re wrong, it will come out in due diligence’. Take it from us…you are doing yourself a big disservice. Please don’t take this an insult. It’s not that we don’t trust you. It’s a question of presenting your business to the market it the best possible way you can.

Many buyers are instantly dissuaded when they are provided with a vendor prepared P&L. Although some will proceed to an inspection, many will not even bother to look at a business without it. In particular, experienced buyers who have owned management rights before will often not consider businesses that have not taken this critical step. The idea that ‘it will all come out in due diligence’ just doesn’t fly with many buyers. The simple fact of the matter is that once a sale is agreed and contracts are signed, a considerable amount of time and money will be invested. If there is a discrepancy in the figures that cannot be rectified, all this time and money is wasted. Many buyers are not prepared to take this risk. After all, there will be plenty of other businesses with professionally prepared figures that they can look at.

Just as importantly, by getting a professionally prepared P&L, you are protecting yourself during the sale and subsequent due diligence period. If the P&L prepared by the buyer’s accountant differs from the one provided by the vendor, the vendor will be in a far better position to argue the toss if their figures have been professionally verified. Moreover, what if the vendor underestimates the level of their net profit. If a buyer’s accountant reports that the business is making more that it was sold on, this will never be passed back to the vendor. Let’s say you sell your business, based on your own figures, is sold on a net profit of $150,000 and a 4.5X multiplier. If, in actual fact, it is making $155,000, you’ve just lost $22,500!

Secondly, it is an incredibly wise idea to get an industry specialist to value your managers unit. Although perhaps not as important as getting a professional to verify your figures, it will generally always pay in the long run. In regards to the marketing period, it will certainly help attract buyers and make them feel comfortable when it comes to the offer stage. Although many buyers are knowledgeable about multipliers applicable to businesses, they will rarely have a clue as to what residential prices should be. Even most of us at Resort Brokers would freely admit that we are not experts when it comes to pricing manager’s units. Getting a professional valuation will give buyers confidence that there are buying at the right price, and that the sale will get past finance approval.

As well as providing the buyer with confidence, a professional valuation will also instill a high degree of confidence in the vendor (and the agent). After all, if a professional has indicated that a unit is worth a certain price, it is very difficult to argue against this. As broker, if a unit has a valuation on it, out attitude will always be ‘that’s the price, take it leave or leave it’. There is simply no room for negotiation. I can testify that the vast majority of buyers of accepting this. This enables us to put the unit negotiation to one side and to concentrate on the more difficult job a negotiating the business price. Once a sale is agreed, having the unit valuation in place will greatly reduce the chance of a sale falling over.

This is an important point that all vendors should be aware of. Any agreed sale will almost always be subject to finance approval. Depending on the size of the business, banks may or may not opt to value the business (general only large management rights businesses require valuation). However, all banks will value the managers unit during their approval process. It is simply unavoidable. If your unit is overpriced but you manage to find a buyer willing to pay the asking price, it will inevitably come to a head and create a difficult situation during due diligence. If the managers unit does not value up to contract price, the price will need to be renegotiated or the sale will fall over. Bearing in mind that finance approval comes right at the end of the due diligence process, there will be a huge amount of time an energy spent by this time. Why not avoid this stress by getting the valuation done before going to market?

It goes without saying that the reason many managers choose not to get their figures verifies and their unit valued is to avoid what they see as an unnecessary expense. The point of this article is to point out that these two important steps actually amount to money well spent. Not only will they help you to get a better price and ultimately save you money in the long run, but they will also greatly reduce the stress involved in the whole sales process. For anyone who has ever sold a business or a residence, a method of reducing stress is certainly worth following!

Feel the Passion

Wed, 12 Jun 2013 23:08:00 GMT

Gavin Faull, Chairman and President of global hotel management group Swiss-Belhotel International, explained the group’s approach this way: “You don’t see a Swiss-Belhotel. You feel it.”

He is referring to the essence of the brand, a feeling when you walk through the door of being cocooned in an atmosphere of serenity, certainty and wellbeing.

The brand is not described by rigid design guidelines or structural style. It is communicated through assured quality, hospitality excellence, efficiency, security and discretion.

Founded in 1987 and headquartered in Hong Kong, Swiss-Belhotel International is today recognised as one of the world’s top 100 hotel management groups and among the fastest-growing. It provides professional management services in all aspects of hotel, resort, serviced residences and golf club operations.

Swiss-Belhotel International began as a small hotel consultancy set up by a former head of The Peninsula Hotels group, with whom Mr Faull had previously worked. Gavin Faull went on to be CEO of Kingsgate International Corporation, a publicly-listed hotel and property company in Australia and New Zealand, before joining his former Peninsula colleague at SBI in 1990.

“With my Hong Kong partner, I bought Swiss-Belhotel International in 2000, and that’s when it became a fully fledged hotel management company,” he explained.

The transition led to rapid expansion. Today, with a growing portfolio of more than 114 hotels, resorts and projects, Swiss-Belhotel International manages properties in China, Vietnam, The Philippines, Malaysia, Indonesia, Australia, Kuwait, Bahrain, Iraq, Oman, Qatar and Saudi Arabia.

In addition to its corporate head office in Hong Kong, worldwide operations are supported by regional sales and development offices in China, Vietnam, Indonesia, Thailand, Australia, New Zealand and United Arab Emirates.

Mr Faull says that successful growth owes to the group’s firm-held view it should work with property owners as partners – not displace or dictate to them, but rather collaborate in a way designed to maximize their returns and realise their investment potential.

“Our management philosophy is unique. We develop our staff, we embrace our guests and build customer loyalty. We welcome the participation of owners, work with them, and lift properties to the next level by adding Swiss-Belhotel International’s unique values.”

The group’s motto underlines the approach: “Committed to excellence in service and management.” Another oft-cited catch-cry sums it up … “passion and professionalism”.

They say their fusion of Swiss hospitality professionalism and Asian passion and service is what truly sets Swiss-Belhotel International apart from other hotel management companies.

It comes back to that essential ‘feel’, the Swiss-Belhotel International hallmark.

While each property is individual and distinctive, designed to express the unique attributes of its location and cultural influences, the reassuring constant is hospitality excellence, simple, warm and welcoming.

At present, Swiss-Belhotel International carries six brands: Grand Swiss-Belhotel (five-star hotels), Swiss-Belhotel International (four-star hotels), Swiss-Belresort (mid- to upper-scale resorts), Swiss-Belresidences (serviced apartments), Swiss-Belinn (three-star hotels), and the newest addition, Zest Hotel (two-star hotels) introduced in Indonesia two years ago.

“There is no need to make branding complicated,” Mr Faull insists. “We have our core four-star brand, and all names leverage off that. They all reinforce each other. We build and value customer loyalty across the spectrum.

“The simple fact is, the same person has a need for different levels of accommodation at different times and under different circumstances. It may be four or five-star when the company is paying, or three-star when he or she is paying for the family.”

The group is strongly focused on progressively and substantially increasing its property portfolio and promoting a globally recognised brand through a strong market presence and extensive sales and marketing networks.

Naturally China is a significant growth market. And Indonesia has been particularly strong. Swiss-Belhotel International has been named that country’s Leading Global Hotel Chain for the past three years in succession in the annual Indonesia Travel and Tourism Awards. It also claimed the 2012-13 award for ‘Most Favourite 4-star Hotel’.

In Australia, the brand is represented only in Sydney at The York by Swiss-Belhotel, where the group acquired management rights some years ago.

While growth here has been subdued, Mr Faull now believes the time could be right for expansion ‘down under’. Informer spoke to him just as he was leaving Hong Kong for Melbourne, to look at a project.

“I do see growth prospects in Australia,” he said. “Post GFC, there is now more capital around, but the appetite has not been there for the hotel industry yet, largely because hotel development has a long incubation period.

“Most of the recent investment in hotels in Australia has been acquisitions, with little new product being developed, with the exception of Perth where the room supply shortage was and remains acute.

“But for many reasons – because there has been little development, because of Australia’s economic strength, the fact that tourist and business travel is growing and the Chinese middle class are now travelling there – I think the time could be right.

“I’m considering becoming an equity investor myself.”

As the group pursues opportunities in Australia and the Pacific with the same ‘passion and professionalism’ that has driven its growth in Asia and the Middle East, we could soon be ‘feeling’ more of the elegant influence of Swiss-Belhotel International.

For more information visit www.swiss-belhotel.com

The many faces of the tourism industry - Allan Walls

Wed, 12 Jun 2013 23:05:00 GMT

It is pure coincidence that the first sales business opened by Allan Walls in the early 1970s specialised in selling caravans. Ultimately, it wasn’t caravans so much as caravan parks that would come to dominate his successful business life.

Four decades later, Allan Walls is widely considered to have been one of Australia’s foremost caravan park sales specialists, and a great contributor to the industry he came to love.

Though now retired from business broking, Walls is a national director of Big4 Holiday Parks of Australia and owns three caravan parks, one of which has won its State holiday park tourism award for five consecutive years.

The caravan park industry has followed an evolutionary road, changing enormously in Walls’ lifetime. And it has benefited greatly from his professionalism and expertise.

Allan Walls’ business roots go back to the 1960s, when his first job was as an accounts junior with Elders forerunner, Australian Estates. He then spent five years working as a public accountant before his instincts led him to pursue opportunities in private enterprise.

After a brief foray as a wholesale grocer, he saw greater promise lay in the sales arena. Within a short time of opening a caravan and boat sales outlet at Benalla in Victoria’s north, he was well on the way to success.

That business became one of Australia’s largest York Caravan dealers. Remarkably, it was also the nation’s biggest Flightcraft boat dealer, selling one-third of that company’s entire production from inland Benalla, a town close to several significant lakes.

“During this very successful period, we became one of Channel 6’s (then regional Victorian TV) largest advertisers, which contributed to the success of our business,” he recalls. “Eventually, I sold out to my partner, to pursue other opportunities.”

It was then Walls had the chance to buy a half share in Westmore Real Estate, a Benalla business brokerage that “mostly sold milk bars, general stores and the odd small motel.”

Again his keen business instincts were spot on. “I saw the need to expand to broader horizons. Being based in a regional town was, to some extent, a handicap to business.

“So, in 1989, I purchased one of Victoria’s largest business broking houses, Tower Business Agency. Tower was well known and the name opened many doors to larger and larger sales,” he said.

“Our motel division grew bigger and bigger, to the stage that we stopped selling small businesses.”

It was at this point on his enterprising journey that the caravan rolled back into view.

“Out of the blue, I received a phone call asking why we didn’t sell caravan parks and the rest, as they say, is history.”

Pivotal to Walls’ increasing focus on the caravan park industry was his purchase of another brokerage firm, Clark Walker, which specialised in caravan park sales.

“Sales of caravan parks became the largest part of our business and, having also opened an office in Melbourne, the business morphed into Tower Business and Real Estate.”

Ultimately, agreements with interstate business brokers led to the formation of Tower Group Australia, which became a familiar presence at most industry events and conferences across the country for many years.

An example of the acumen with which Walls developed his business, and his genuine desire to engage directly with his market, was his move to establish relationships with peak industry bodies.

Tower signed on as a long-term sponsor of the Victorian Caravan Parks Association, and worked with them on a major education initiative.

“We jointly ran seminars around four times a year for potential caravan park buyers, holding them at Melbourne’s RACV club,” he explained. “I was then invited by the South Australian Caravan Parks Association to conduct seminars in Adelaide too.

“We developed a good round table of experts, including solicitors, accountants and park operators, with the goal to provide prospective caravan park purchasers with some background in the industry prior to purchase.

“Most seminars were sold out, with all proceeds going back to the respective associations, so it was of great benefit to the industry while allowing me and my staff to build terrific rapport with park buyers and sellers, and learn a lot too.”

Walls says this direct interaction with the industry was not only a key business tenet, it led to his passion for and ultimate direct involvement in caravan parks.

“Travel was an essential part of the business, as our policy was to meet as many people as we could on their home ground,” he said. “On the invitation of then Big4 chairman, Bob Barham, we became a major sponsor of Big4 Holiday Parks of Australia. Tower also sponsored Top Tourist Parks and Family Parks for many years.

“These associations, the travel, and my eventual love of the industry led me to purchase three caravan parks – two in Tasmania, Big4 St Helens and Big4 Ulverstone, now in partnership with my son Jarrod, and Mulwala Shoreline Caravan Park in south-eastern New South Wales.”

It is Big4 St Helens Holiday Park that has won Tourism Tasmania awards every year since 2008, making it a finalist at the national tourism awards for five consecutive years.

Boasting accommodation options ranging from luxury villas to powered and unpowered van and camping sites, plus myriad facilities including games room, adventure playground and giant jumping pillow, it represents the modern face of the industry.

“The evolution of the caravan park industry has been dramatic over the past 25 years, from humble camping areas with very basic or no facilities, to 5-star resorts,” Walls says.

Many are now one-stop shops for entertainment-packed family holidays, often with large indoor heated pools, state-of-the-art playgrounds and kids clubs, magnificent camp kitchens and restaurants.

As both an advocate for the caravan park industry and a direct stakeholder, Walls well understands the opportunities and obstacles park owners face.

“Sadly, the difficulty in balancing the value of the land, which often occupies the best location in town, with the income achievable leaves some operators with no option but to sell or subdivide their park, as the land has a higher value as a development site,” he said.

One of his own parks, the Mulwala Shoreline not far from Benalla where it all started, is facing that very destiny.

Walls rails against the practice of many local authorities to now allow caravan and RV users to camp in roadside stops free of charge, under what the “misguided impression” that this is somehow good for tourism.

While councils (ratepayers) pick up the considerable tab for maintaining these so-called ‘free’ sites, they are competing against park owners who carry significant overheads while contributing to local economies and providing vital local jobs, he says.

It is certainly one of the dominant challenges being tackled by the industry today. But, as you may have gathered, Walls isn’t one to shy away from a challenge.

While achieving so much on his caravan-related business journey, he has also found time for competitive pursuits requiring quite a different set of wheels.

His passion for motor sport has seen him race Commodore Cup cars around Australia. His pride and joy is a 1988 Holden Walkinshaw.

He has also completed the grueling Bathurst 24-hour race, and taken out a class win in the Classic Adelaide four-day tarmac rally.

But, back to business. All in all, Allan Walls says his life associated with caravans has been tremendously rewarding. And he remains filled with optimism for the future of the caravan park industry.

“I have been most fortunate to meet many great people, many of whom have become enduring personal friends.
“Australians love holidays, Australians love Australia, and they love a chat,” he says, referring to the camaraderie enjoyed in the caravan park environment. “So we as an industry will continue to prosper.”

Strategies for Managing your Business

Fri, 03 May 2013 05:40:00 GMT

by Tony Rossiter B.Com, CA – Holmans

Caution: Small Business Scammers

The number of scams targeting small businesses has grown in recent years and the importance of owners preparing for possible threats is something to be considered.

Without taking the necessary precautions and being in the know about the most common signs to look for, businesses are left exposed and vulnerable to a variety of scams. Mum and Dad businesses are at the top of the list – Management Rights operators and Moteliers are a prime target.

Scams targeting small businesses come in many different forms and often scammers will go to great lengths to convince businesses that their offers or requests are legitimate. Since a lot of these scams look like the real thing, many are able to take advantage of busy office environments and succeed in stealing company money. Some of the most common scams getting around at present include the following:

Refunds scams

These will usually request a confirmation of personal details or an upfront payment in order to reclaim overpaid fees or tax. The scammer will usually pretend to be from a government agency, bank, telecommunications company or private law firm.

To protect a business from such scams, personal information should only be given out to those that are known and trusted or to those that were in fact contacted by the business owner or employee themselves.

Searches at abr.business.gov.au can provide ABN numbers and Deductible Gift Recipient (DGR) details to confirm that the organisation is legitimate.

Over-payment scams

A scammer will purchase goods and services from a company and send a cheque, money order or credit card payment for more than the agreed price.

The scammer will then request a refund for the overpaid amount in hope that the owner will do so before realising that the cheque in fact bounced or that their money order or credit cards were phony.

Office supply scams

These will involve the receipt and billing of non-ordered goods that are usually and regularly purchased by the business. Such items may include paper, printing or maintenance supplies and advertising.

The caller will claim to be the company’s regular supplier and offer “limited time only” offers that are in fact overpriced and of bad quality.

Requesting an order number, inspecting the quality of goods and checking that they were actually ordered before paying any invoice is good idea.

Direct entry / unauthorised advertising scams

A scammer sends a subscription proposal, disguised as an invoice or renewal notice, for listings and advertisements in magazines or on questionable websites and business registers that were not authorised or requested.

These are often overseas requests and, although sometimes appearing to be free, will demand payment after the subscription is signed off on. The scammer may even call to confirm details of a pre-booked advertisement or offer a “free trial” for which they will in fact charge you for later.

Company records should always be checked to ensure that these orders were actually placed and any ‘free trial’ offer should be checked for hidden terms.

Domain name scams

A business will be sent an unsolicited invoice for an internet domain name registration or renewal. The notice could be from a domain name supplier attempting to trick them into signing up to their service, or from a scammer trying to steal money.

Businesses should always match renewal notices with their current domain name and look for differences such as “.com.au” instead of “.net.au”.

To ensure that a business is protected, business owners should also:

- Keep their filing and accounting systems well organised so that they can easily detect bogus accounts;
- Limit the number of people authorised to place orders and make payments for the business;
- Ensure that computer firewalls and protection software is up to date; and
- Report any known scams to the appropriate government agency by visiting the SCAMwatch website

ATO Crack-Down on Cash

Businesses that fail to declare or report all their cash transactions will be exposed as the ATO continues their crack down on the cash economy.

An estimated 110,000 taxpayers who are suspected of participating in the cash economy will be contacted by mail in efforts to deal with under-reported or omitted income, and cash transactions used to hide or evade tax obligations.

Business taxpayers will be identified through one of the ATO’s cash economy indicators:

- Small business benchmarks;
- Data matching; and
- Allegations of tax evasion by members of the community

The majority of letters sent will be to businesses identified as reporting outside the small business benchmarks for their industry. Letters will contain information on how their business transactions compare with key benchmark ratios, the selection process for business auditing, how benchmarks are used to calculate default assessments and how they can correct their mistakes or make voluntary disclosures.

Eight thousand letters were sent to businesses that had reported transactions outside the small business benchmarks for their industry and plenty more are to come. Taxpayers are encouraged to review their records to ensure they have correctly reported all income – especially cash transactions.

Personal Property Securities Act (PPSA)

The Personal Property Securities Act (PPSA) came into effect in October 2011, dramatically changing the way security is taken over personal property, impacting many businesses and individuals nation-wide.

The PPSA reform requires all forms of security interest, in respect to personal property, to be registered under the Personal Property Securities Register, a new and single online register controlled by the Insolvency and Trustee Service Australia.

Replacing almost all existing Commonwealth, State and Territory laws and registers, the PPSA affects such securities as:

- Company charges;
- Motor vehicles;
- Stock mortgages;
- Crops and livestock;
- Bills of sale;
- Intellectual property;
- Licences;
- Household items;
- Business and retail stock;
- Financial instruments such as shares;
- Business equipment; and
- Other securities, both tangible and intangible, which affect personal property rights

Those that are refinancing, leasing assets, selling goods on credit or providing them on consignment should be most aware and should take the necessary steps to protect the interests of their business and to ensure compliance with the new provisions.

Businesses and individuals will need to:

- Review their business arrangements between group entities;
- Review their terms of supply;
- Review their financing arrangements and contracts;
- Identify the assets that will be affected by the new laws;
- Identify any transactions which need to be registered;
- Update their procedures for making new transactions;
- Update their existing arrangements, not currently considered to be security interests, and ensure that they are registered;
- Review and redraft their standard terms; and
- Ensure that registered security interests do not exceed expectations

Businesses and individuals with ownership of an affected security interest and those that use retention of title arrangements in their business operations, or have used one which will remain in place when the PPSA commences, should seek professional advice now.

Failing to prepare for and accommodate these new laws may result in a loss of assets.

Terms of the Contract

Fri, 03 May 2013 05:03:00 GMT

David Burrough, Partner - Hillhouse Burrough McKeown

We explored the pitfalls of pre contractual negotiations in last months edition. We will examine the terms of a contract and issues arising from those terms over the next few editions. A starting point is Goods and Services tax. The "supply of a going concern" is deemed to be GST free under the A New Tax System (Goods and Services Tax )Act 1999 ("the Act").

A "Supply of a Going Concern" is defined as:

(a)   a supply made for consideration;
(b)   where the purchaser is registered for GST purposes;
(c)   where the vendor and the purchaser have agreed in writing (i.e. in the contract) that the supply is a going concern;
(d)   the vendor supplies to the purchaser all of the things that are necessary for the continued operation of an enterprise; and
(e)   the vendor carries on the enterprise up to and including the day of supply (i.e. settlement).

In order to ensure that the sale of a motel business and its land and buildings are a GST free "supply of a going concern" there are numerous aspects that should be taken into consideration. It is common to have a business structure in which one entity owns the land and buildings and a separate legal entity operates the business from those premises under a lease. The sale of the business is an enterprise which includes the sale of the plant and equipment and goodwill together with forward bookings. The enterprise must be capable of continued operation by the purchaser so that it is a supply of a going concern. Provided that the vendor assigns the lease of the premises to the purchaser it will be making a GST free supply of a going concern.

Consider the same business structure where the land and buildings are sold. It is the activity of leasing the property that is considered the enterprise. Again this enterprise must be capable of continued operation by the purchaser so that it is a supply of a going concern. Provided that the property is supplied with the lease of the business in tact it will be making a GST free supply of a going concern.

In the event that the business and the motel are owned by one entity the motel must be sold subject to a lease for the business in order to be a supply of a going concern. The lease must be in existence for at least one day. The sale of the business can only occur on the following day.

Where a sale is subject to GST there are a number of adverse consequences particularly for the purchaser. The vendor is able to pass any GST on to the purchaser. The purchaser has to pay stamp duty on the GST as well as the purchase price. In any event most contracts will require that a purchaser be registered for the purposes of GST. If a purchaser is not registered for GST purposes they are not able to obtain a refund ( input tax credit) or acquire a GST free supply of a going concern.   Clearly there is a minefield of issues raised by the GST and we strongly recommend that you seek professional advice.

How Long is yours - You Might Be Surprised

Fri, 03 May 2013 04:52:00 GMT

How valuable are your agreements? And what happens if you don't keep them topped up?

For those who don't know more than 72 per cent of all resort accommodation complexes in Queensland operate under a management rights agreement with a body corporate structure.

Often buying into management rights is a multi-million-dollar investment , often the biggest asset of a buyer and the value of this investment is linked to a number of factors including the length of tenure left of these agreements at the time the asset is purchased and then again on a sale.

It has become evident in the last few years that buyers, financiers and Valuers are placing much more emphasis on the length of agreements that almost every other facet of the business. For the majority of time management rights have been in place accommodation module agreements with 14 or 15 years remaining on 25 year agreements was seen as acceptable and many sales took place under that amount of tenure. Standard module (10 year agreements) have almost always had to be topped back to 10 years in any sale process.

Managers often have the largest single financial interest in the complex linked directly to performance of the business underpinned by numerous factors notwithstanding the tenure of their agreements.

Unit owners on the other side are also affected by the managers performance and as in most complexes the yield is no more that 2-3% and if the onsite manager doesn't perform they can quickly lose faith with the manager and not be in a position to spend on updating their apartments or when the time comes choose not to extend the manager’s tenure.

Now this is where the dilemma lies . Managers rely upon Body Corp AGM votes of unit owners to ‘top-up’ the managers’ tenure ensuring the manager’s ongoing equity and investment. In most cases the AGM vote is by way of secret ballot and is not based on any performance criteria and is often based on perceived bonuses the managers will receive with the top up and some are starting to say they can't see why they need to support it if the managers not performing.

It's no secret management rights a far more complicated than they were 10 years ago with new workplace health and safety rules, local and state government compliances, insurances risk management, and the list goes on.

Often management rights are mixed use combining investors owner occupiers, both short term and long term rentals and those outside the managers letting resulting at times in opposing views and the direction and responsibility of the onsite managers performance.

Here lies the challenge, professional managers in well run complexes showing strong performances still have no guarantee there agreements will be topped up at any AGM now or in fact ever. There have been several recent cases on both the Sunshine and Gold Coasts where agreements have been allowed to lapse by owners unhappy with the performance of either the managers or the perceived value for money they are getting for the supply of caretaking services.

Its critical to treat these agreements "like Gold" and to maintain a strong rapport with your body corporate managers and unit owners at all times to maximize your chances of getting the top up you require at the time you really need it

Don't wait until your agreements are down to half the original term, be proactive every few years seek a top up, consult your lawyer to ensure its done properly timely and legally and motions to do so are in correctly and on time.

If you don't and leave until you agreement term is low you could be jeopardising much of the future value of your asset when you go to sell. It's that serious - don't leave it until it's too late as under the new guidelines you can only apply for a maximum 5 year top up in any year and that still might not be enough to retain your current value.

Family Business: Economic Lifeblood Brings Unique Challenges and Rewards

Fri, 03 May 2013 04:44:00 GMT

Family. It is the fundamental unit of society. For many, it is also the foundation on which their business is built. Family businesses, in all their shapes and sizes, dominate the private sector in Australia.

Few might stop to think global giants like Toyota and Samsung are family companies. In Australia, the names Pedder (automotive), Angove (wine), Cooper (brewing), Haigh (chocolate) and Kennard (equipment hire) are substantial family brands.

They are part of our $4.3 trillion family business sector, the nation’s biggest employer.

There was a time when a ‘family business’ was the only kind of business. BDO Australia (accounting) reminds us family business has dominated commerce since the dawn of trade. “The family business model is the oldest and biggest business model in the world.

When Japan’s Kongo Gumi closed its doors in 2006, it ended more than 14 centuries of continuous family operation. The company had been in the business of building Buddhist temples since the year 578, making it the oldest family-operated business in the world.

Family Business Australia (FBA) tells us family businesses account for 70% of all businesses in Australia. So the sector has a major, direct bearing not only on the strength of private enterprise, but on the health of our whole economy.
Recognition of this has grown only fairly recently in Australia. The sector is now gaining more attention from the wider business community, academia, and finally government.

As Informer goes to print, a Senate inquiry into family business is preparing to table its report in Parliament. “This inquiry aims to put the spotlight on the family business sector and to provide Parliament with the information it needs to support Australian family businesses into the future,” said Deputy Chair Senator Sue Boyce.

According to the Federal Department of Tourism, which lodged a submission, a significant number of Australia’s 238,000 tourism businesses are family-operated. Families are certainly a driving force in the accommodation industry, where a family partnership can be the ideal model for handling 7-day operational demands.

Best Western Wyndhamere Motel in Shepparton, Victoria, has been owned by the Mangiameli family since 1979. Current hosts Sebastian and Cam grew up in the industry, gaining a strong work ethic from their parents Sam and Rosa, who handed over the business in 1997.

Now Sebastian and his wife Connie, and Cam and wife Angela, have taken the business to new heights. A wing of executive spa suites was added in 2006, along with a major upgrade to Sebastian’s Restaurant. Then followed a new motel façade, development of Wyndhamere Apartments, and refurbishment of all remaining rooms.

“The business has undergone major changes throughout the years, but the one constant you can guarantee is that the Mangiameli family will continue to provide the service guests have come to expect over the years, well into the future,” the family says.

That level of pride and long-term view is perhaps the greatest difference between family businesses and the rest of the commercial world.

“As they tend to take a longer term view, interested in growing the family wealth and having a different set of strategic goals compared to non-family-owned private companies, their long term economic contribution is significant,” KPMG’s 2012 Private Companies Survey concluded. “For many family businesses, the ability to plan long term can give them a huge competitive edge.”

Resort Brokers Australia managing director Ian Crooks agrees. He has discovered the overwhelming personal and business rewards family involvement brings. For more than 20 years, Crooks was solely responsible for steering the company ship.

Now, with his wife Karin, three grown children and a son-in-law all in senior roles, Resort Brokers has emerged from the GFC stronger than ever. And Crooks doesn’t mind telling you he’s happier and more motivated than he’s ever been.
“There are six people who care deeply about the business and about our staff’s welfare and wanting them to do well. By sharing the load, we are far stronger, and it’s the happiest situation I’ve ever worked in.”

KPMG’s survey also showed family companies were often able to be more innovative. ”The agility with which a well-run family business can take decisions quickly means that many are in a better position than the corporate sector to ride out economic downturns.”

Richard Jay Laundry Equipment, established in 1969 by the late Richard Jay and his wife, now has the second and third generations working in the business. Australia’s only family-owned national commercial laundry equipment supplier has been quick to expand and diversify.

Richard Jay imports and distributes the quality Maytag range. More recently, the family launched Equipe Solutions to import dispensing solutions, became the Australian and NZ distributor for LG commercial laundry equipment, and established a third company to offer finance and breakdown service packages on new laundry equipment.

“All three companies are growing and we are always on the lookout for more opportunities,” said marketing manager Libby Baldwin (nee Jay).

For many of the 38 organisations, advisers, academics and family businesses who made submissions to the Senate inquiry, the sector is long overdue for attention. “Australian governments have thus far failed to recognise and appreciate the importance of the family business sector, let alone introduce innovative policy,” FBA told the inquiry.

At the very least, the inquiry is almost certain to call for more official ABS data to be gathered to inform policy debate and decisions. Currently, virtually all information on family businesses has been gathered or sponsored by the sector itself.

So let’s look at what is known. One of the key challenges is communication between family members. Differentiating between work and home – maintaining family harmony balanced with the competing demands of business – can be tricky.
Crooks says, while the family hasn’t laid down formal rules at Resort Brokers, conflict is avoided because each family member has a distinct role. “We respect each other’s expertise and don’t stray into the other’s field.
“I will admit, though, it can be all consuming. We are always talking and thinking about work. Sometimes it can be hard to get some proper downtime.”

A 2010 MGI Survey found 86% of family enterprises do not have set rules, 72.1% do not hold regular family meetings, and 57.7% do not have a formal board of directors.

Richard Jay is one company that does. “We have a board and management team which meet every month,” Ms Baldwin said. “It is most important to have an effective business plan along with a board and management team.”

Some submissions to the inquiry spoke of a lack of appreciation for the importance of business structure, governance and risk management. As one put it, family enterprises often grow “organically and reactively rather than proactively.”
It remains to be seen whether the government might attempt to address this through either regulation or education. Ultimately, generational change is expected to raise the level of formal management.

A 2010 KPMG Survey of the Next Generation of Family Business showed a high proportion of the next generation has tertiary qualifications, and most are more highly trained than their predecessors. The survey also found the next generation’s top priorities for change and growth were business strategy, governance and management structure.

Which brings us to the next big issue concerning family business – succession planning. Some have gone as far as suggesting Australia is facing a looming leadership crisis, with control of most family businesses vested in aging owners. FBA says studies show 81% of owners intend to retire in the next 10 years, generating a wealth transfer worth $3.5 trillion.

Family business exit planning is essential, but also fraught, given the relationships involved. Surveys show around 40% intend to pass on the business, but 60% would consider selling. Sometimes the interests of both the current owner and the wider family might be better served by selling to realise the business value.

That’s not the case at Resort Brokers. “We definitely have a written succession plan,” Crooks said. “It is vital to set up the business soundly and to get professional advice.”

What comes into play here are the other issues that dominated virtually all inquiry submissions – funding and taxation challenges unique to the family business situation.

PWC Private says most family businesses think there are unfair obstacles that threaten their long-term competitiveness. “Family businesses want the government to level the playing field in regards to accessing finance, and removing the tax advantages enjoyed by (public) corporations,” PWC said.

Many are hoping the report will call for a review of tax rules affecting trusts, which are commonly used in private family businesses as a way of protecting the family’s assets. Family businesses can be hit with stamp duty and capital gains tax bills on the transfer of assets, even though the transfer to the next generation may not generate cash in the same way a regular business sale does.

Deloitte Private recommended the government consider “structural reform of the taxation of trusts and the taxation of family groups to create certainty and simplicity.”

Submissions also called for the appointment of a Minister for Family Business, greater promotion of family business-specific education, and helping family businesses source qualified independent (non-family) directors.

What is clear is how much Australia needs to value and support its family businesses. Research has shown the attributes of family business are viewed very positively and many people prefer dealing with family businesses.

The Senate inquiry has at least shown the government wants to be better informed so they can tailor policy specifically to a sector that is literally the nation’s economic lifeblood.

To access family business resources, visit www.fambiz.org.au.