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!
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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.
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Managing Director, Resort Brokers Australia
I’ve just been reminded of something Donald Trump said: “If you’re going to be thinking, you may as well think big.” It occurs to me that ‘thinking big’ and ‘big thinkers’ are the common themes running through this edition of The Informer.
Our cover story, arising from my inclusion in a government-led trade mission to China, looks at the biggest tourism and business market to ever present itself to Australia. You can’t get any bigger than China!
We need to expand our thinking, scale up our tourism infrastructure and make a ‘big’ effort to maximise the potential of this enormous market. I’m convinced it will reignite key tourism centres, particularly Far North Queensland and the Gold Coast.
An imminent change to our visa system is also set to spark a surge of foreign investment in the $5-10 million range, particularly from China. And it will come at a time when this market is already firing up.
Resort Brokers is increasingly active in this bracket. We’ve just sold some bigger properties including Brisbane’s prime airport motel, Pegasus Motor Inn, for $9.5m, the Mercure Maitland in the Hunter Valley for $9.2m, and CBD Executive Apartments in Rockhampton for $6.8m.
Large properties just listed with us include the ‘Raffles of the North’, The Hotel Cairns, for $10.5m, Bowen’s Port Dennison Motor Inn for $6.4m, the Barkly Homestead on the Queensland – NT border for $6.5, and a 53-room Muswellbrook motel project for $10.4m.
Big things are also happening in the management rights market. Recently settled was the sale of Sailfish Cove on the Gold Coast, by Glenn Millar and Alex Cook. And we have a few more under contract...
You’ll read more inside about the positive outlook for management rights as we continue our series on the growth of this vital industry. Resort Brokers is scaling up our specialist management rights division in preparation for big things.
A new agent has joined us on the Gold Coast, in response to rising enquiry, and we welcome David Janett, from a management rights background, to look after the southside of Brisbane.
A fantastic new Informer feature is our series on the many faces of the accommodation industry. In this issue, we profile one of the biggest names in Top End tourism, Foxy Robinson – a great bloke whose working class origins didn’t stop him from doing big things and making big money.
Finally, having negotiated nearly 40 years in this industry, through three major booms and busts, I’m always asked the big question: ‘where are we in the current cycle’. I reckon buyers are now itching to make their move, as the climb upward begins. You’ll find a great article by Alex Cook on page 24 looking at what is motivating buyers.
As the upswing comes, Resort Brokers has launched a unique incentive package for vendors who list with us exclusively. Offering valuable marketing bonuses, it underlines our commitment to work with you in a partnership.
Resort Brokers backs sellers with skin in the game. Remember, we’re not ‘listing agents’. We are selling agents.
Please send your feedback to:firstname.lastname@example.org or PO Box 5004, West End Q 4101.
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Mike Phipps Finance
Generally I try and write these articles from an industry commentator point of view. Otherwise it’s too easy to start thinking like a banker and generally that makes for pretty boring reading. Having said that, recent events have caused me to reflect on the lender’s plight when dealing with management rights purchase contracts. While I acknowledge that the chances of anyone feeling sorry for the banks is remote we really need to have a think about current practice in respect of critical contract dates.
I’m sure most readers are familiar with the general contractual arrangements and time lines for management rights purchases. Essentially there’s two contracts, one for the business and one for the manager’s unit. The contracts are signed and dated and the clock starts ticking. From then on, to use the legal jargon, time is of the essence. Other than the contract date there are four other dates which are critical. The verification date, the finance date, the due diligence date and the settlement date. The relationship between all of these dates tends to determine the stress levels and probability of heart attacks among all of the parties involved in the purchase.
The first comment I would make is that occasionally contracts get signed and dated by the purchaser prior to signing by the vendor. If the vendor takes a couple of days to sign then those days are immediately lost in the process.
Once the contracts are signed the purchaser will instruct his solicitor, accountant and banker to get cracking. Discussions with industry professionals combined with my own stats indicate that the verification report and the legal diligence will take 14 days on average. These time frames are achievable provided everything goes to plan and there are no hitches along the way. A recent emerging trend around lack of preparation by vendors in terms of financial records concerns me somewhat but I digress.
And so, to the poor old bank manager. He needs all these reports in order to assess the deal and make a decision. If a valuation is required to support the finance application then the valuer will want a copy of the accountant’s verification report. Let’s assume that the purchaser instructs all parties as soon as the contract is signed and dated by the vendor. This rarely happens in reality but for the sake of the exercise let’s pretend it’s a perfect world ! The lender will then request a copy of the verification report from the accountant. On average this will turn up in 14 days. At the same time the lender will also request that the purchaser’s solicitor provide confirmation that all is well with the legal due diligence. Again, this process will take about 14 days. So, in a perfect world the bank will have copies of verification and due diligence reports in 14 days from the date of contract. Provided no valuation of the management rights business is required the lender can then complete assessment of the deal, document the proposal, make a final approval decision and provide the purchaser with a letter of offer. This shouldn’t take more than 5 days dependant on business volumes at the time. Having said that it’s important to understand that time frames between finance approval and production of Letters of Offer can vary greatly between lenders. No one will go to unconditional status without a physical Letter of Offer to hand so we commonly see lenders confirming approval but then needing 3 to 5 business days to produce the Letter of Offer.
So, in a perfect world the entire process has taken 19 days. If the contracts have 21 day finance clauses this leaves 2 days leeway. During this time the purchaser and their solicitor need to consider the bank’s offer, formally accept the terms and conditions and notify the vendor’s solicitors accordingly. Based on these timeframes it would seem that a 21 day finance clause in a management rights contract leaves no room for delays, public holidays, transaction complexity or work volume impacts at any point in the process.
Now, let’s consider the same scenario with the added impact of a management rights valuation. The valuer simply can’t complete the report without the accountant’s verification report. It’s true that a substantial amount of work and research can be completed by the valuer pending receipt of the verification report. In the real world that’s exactly what happens. However, the valuer will still require time the study the report and incorporate the outcomes into the valuation assumptions. The final formal valuation report is then completed and provided to the lender. In that theoretical perfect world this will add at least 5 to 7 on to the process. Suddenly that 21 day finance clause is looking a bit shaky.
As these scenarios demonstrate, the actual finance approval process takes about 5 days maximum. However, the bank relies on a number of other parties completing their jobs before a final approval can be achieved.
And here’s the rub. When an over enthusiastic vendor pressures the agent or his lawyer to put a short finance clause in a contract guess who takes the rap. No matter where in the process the time frames blow out inevitably the net result is a finance date extension request. In fact I’ve even seen other service providers in the process request finance extensions to give them more time to complete their part of the overall job. This reflects poorly on the lender when in fact the ball has been dropped further up the line.
So, what to do ? It’s pretty simple. Management rights sale contracts should have a minimum 28 day finance clause. Anything less is simply inviting stress, conflict and ill will. An acknowledgment of the commercial realities and timeframes by all parties would solve most of the problems. Oh, and don’t think you’ve dodged a bullet if you are selling a motel. Similar time frames apply given current lender guidelines for the same sort of financial due diligence reports we have traditionally see in management rights. Motel valuations in regional areas also seem to taking longer than usual these days.
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If you are going to list your management rights business for sale, you need to make sure that it is in as healthy a position as possible.
To ensure that you have ticked off what we see every day in matters that become issues for the purchaser, we have set out below a quick checklist you can use when you are considering selling. If you have ticked all these items, your sale process will be a lot smoother.
1. Are your PAMDA20’s signed by every owner?
Missing PAMDA forms are still the bane of every transaction. Without them you cannot charge commission. Purchasers (and their accountants) will ask for them. Be ready for that question if they are not all there and chase them down if you don’t have them.
2. Are those PAMDA20A’s assignable?
If they are in the current form (effective from 1 July 2009), has the assignment section (section 4.4) been ticked AND initialled by all of the owners? If not, it is not going to be automatically assignable.
If you used earlier PAMDA forms (which is fine for appointments signed prior to 1 July 2009), have the owners agreed to making the appointment automatically assignable by a separate agreement?
Missing appointments, and those that are not automatically assignable, remain the single biggest issues on every sale.
3. Are there any outstanding due diligence issues from when you purchased?
Were there certain things that your lawyers recommended should be corrected in the agreements? Have you done these? If not, be ready to have that same conversation with the purchaser.
4. What is the status of the term of your management rights agreements?
Do you know the term remaining on your agreements? This is very important to any purchaser. Do you need to top your agreements up as part of the sale?
Have you exercised your options and documented that with the body corporate? Failing to exercise an option can have diabolical consequences.
5. Do you have up-to-date sales figures?
We cannot stress the importance of having up-to-date sales figures. Most purchasers require a verification of records to within at least two months of the date of the contract. It is very rare to find a financier that requires any less.
Having sales figures that are (say) six months old means that there is more than likely going to be a discrepancy between what you think the net profit is and what it verifies to when done by the purchaser’s accountant. This will more than likely lead to a price renegotiation (or you selling for less than you might otherwise have to if the profit has gone up!).
6. Are there any body corporate issues?
Are you having a ding dong battle with the committee? Are there building defects that have not been dealt with?
These issues will normally be revealed in the purchaser’s due diligence when they look at the body corporate records. Our experience is that if these type of issues are managed up front and disclosed to the purchaser before the contract is signed, then the outcome will be a lot different to the position where the purchaser identifies it during due diligence and then asks the question as to what they were not told in the first place.
7. Are you being realistic on your settlement timing?
Almost all management rights contracts are subject to verification of figures, legal due diligence and finance approval. These usually take about 28 days from the day the contracts are signed to complete. You then need to seek body corporate approval.
A body corporate is allowed up to 30 days from when it gets everything it needs to consider an assignment to make a decision on the assignment itself. This can happen more quickly if the committee agrees.
Signing a contract and expecting settlement in under 2 months (unless you have a great working relationship with your committee), is potentially unrealistic. Making sure you have the right timeframes from the start of the transaction will usually save a lot of panic at the end.
There are a lot of moving parts in every management rights transaction and the unfortunate reality is that it is rare to have a management rights transaction that is straight forward. That said, if you make sure you have sorted all of the above items we can guarantee it will take some of the immediate issues off the table from the start.
If you have any questions in relation to this article, please contact Frank Higginson.
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Inflation. We’ve all been conditioned over decades to fear it as the economic bogeyman. And with the carbon tax now in place, many are warning Australia will face an inflation spike. For accommodation operators, however, there is a way to turn this to your advantage.
Inflation is the rate at which prices rise and purchasing power falls. It can be demand-driven, when the demand for goods and services exceeds their supply. Or it can be cost-driven, when businesses raise their prices to cover higher supply and production costs, in order to maintain profit levels.
The latter is our current concern in relation to the carbon tax – that the tax imposed on major emitters will be passed on down the line, increasing the cost to consumers for just about everything from food to fuel, equipment to electricity.
Most economists agree moderate inflation is a sign of a growing economy. Yet research shows that just about everyone else views it as harmful, something to be feared and avoided. Inflation is seen as pushing up prices ahead of wages and pensions, thus lowering standards of living.
The popular media is perhaps somewhat to blame for this widely-held perception. Inflation is one of the most commonly used economic term in news bulletins. Politicians, central bankers and commentators are always being quoted on the need to keep inflation “under control”, “in check” or “within the target band”.
While Australia’s current inflation rate is quite moderate, there have been numerous predictions that the introduction of the carbon tax, combined with rising wages in the resources sector and a weaker Australian dollar, will put upward pressure on inflation.
Most of us are already watching prices for utilities, insurances and fuel, to name a few, climb at a frightening rate while incomes do not seem to be rising to compensate.
No surprise then that financial advisers are warning us to be adequately protected or ‘hedged’ against inflation. Put simply, this means investing in assets which reduce or negate the adverse effects of inflation.
Property, particularly commercial property, has long been considered a good inflation hedge. Rental rates are either linked to turnover, which rises directly with inflation, or to the Consumer Price Index (CPI). So income tends to rise along with inflation.
In our industry, owners of accommodation properties and businesses are even better placed to not only keep pace with inflation, but benefit from it. Here’s how:
If you have a motel of 25 units, in the recent economic environment where inflation has bumped along in the 1% - 3% range, you would be hard pressed to put tariffs up by much more than $5 a year.
But, if inflation were to rise to say 6%, you could increase tariffs by double that – lifting them by $5 on 1 January, and again by $5 on 1 July. Let’s look at the impact of a tariff increase somewhere in that range – say the mid-way mark of $7.50.
An extra $7.50 per unit per night at the average occupancy of 60% ($7.50 x 25 units x 365 days x 60%) equals a $41,000 increase in turnover.
Of course your operating costs will rise too, at the new inflation rate of 6%. If those costs are assumed to be 40% of gross income, which is usually the case, they would rise by $16,400 ($41,000 x 40%).
That means, thanks to the higher inflation rate, your profit will be $24,600 higher. Not only is that great news for your bottom line, it enhances the value of your property. An extra $24,600 per year would add $80,000 in extra value to your lease!
So our message to the accommodation industry is this: don’t be afraid of inflation. Inflation builds equity. Harness it. Put it to work for you.
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DIFFERENT PATHS LEAD TO ACCOMMODATION OWNERSHIP
If you set out to profile a ‘typical’ motel or management rights owner, you would soon find ‘typical’ is not a word that applies. So, who are the people who drive our industry? Where have they come from? And how did they get here?
No formal qualifications are needed to enter the accommodation business. Certain licence requirements must be met. And training in hospitality and management can be valuable. But no traditional career path really exists.
Resort Brokers’ consultants meet dozens of motel and management rights owners day in, day out. We are always struck by the depth and diversity of the characters behind Australia’s dynamic accommodation industry.
Many come from senior public and private sector backgrounds – former executives, bureaucrats, bankers and professionals. Some have hospitality backgrounds, but most have no previous experience. From plumbers to pilots, tellers to teachers, they come from all walks of life, and often from very humble beginnings.
John ‘Foxy’ Robinson, for example, a titan of the Northern Territory’s accommodation scene, began his working life as a boner at the meat works. After starting with a small caravan park in Katherine, he went on to develop a multi-hotel complex around Darwin Airport. Last year, he sold two of the properties to a Sydney Hotel group for a reported record $70 million.
Another success story that springs to mind is that of Tony and Jackie Segat. After entering the industry in 1978 with a small $30,000 motel lease, they went on to own multiple motels in New Zealand and Australia, before doing very well in management rights. Tony started out as a migrant construction worker.
This month, informer introduces the first in a new series of articles exploring the many faces of our accommodation industry. We hope you enjoy meeting some of your inspiring colleagues and hearing their stories.
The series begins with Richard Arbon, a straight-talking former farm boy turned management rights mover and shaker.
Healthy crop under management
Richard Arbon left school mid-way through Year 11. They were a man short for the shearing, and he was destined to be a fifth generation farmer. His family’s farm near Balaklava in South Australia’s mid-north was a long way from Queensland’s coastal resort cities.
These days, Arbon Property Management commands a management rights portfolio which, at various times, has ranged from 15 to 25 properties and stretches from the glittering Gold Coast to tropical Cairns.These days, Arbon Property Management commands a management rights portfolio which, at various times, has ranged from 15 to 25 properties and stretches from the glittering Gold Coast to tropical Cairns.
It would be easy to describe Richard’s story as a ‘rags to riches’ tale. He has battled a few times to keep the wolf from the door. But really, it is a story of determination driven by necessity, of self-belief and perseverance.
As a young bloke on the farm, being a Gold Coast businessman would hardly have seemed conceivable. Not that you get the impression Richard would have been daunted by the prospect. It’s just that it wasn’t on his radar. “I was brought up to take over the farm,” he says simply.
Football, on the other hand, was on his radar. “I was very keen on football, though. So I moved to the city, to Adelaide, and played A-grade for Woodville in the SANFL. That was 1987 and ’88,” he says, seemingly unaffected by this impressive achievement.
But country life beckoned again. More to the point, Richard had his eye on the future, and he knew football stardom was not a secure long-term prospect. “I saw some of my footy idols retire with very little money or prospects,” he said. “That’s not the future I wanted. I retired, got married and bought a mixed livestock and cropping farm on the York Peninsula.”
Life on the land is never easy. But the rough patch that hit the Arbons from 1989 was enough to break anyone’s spirit. First they were in an horrendous car accident, then interest rates climbed to 22%, and drought ravaged the land, followed by flood and mouse plague. One after another the live sheep trade, wool and grain prices collapsed.
“I’d borrowed heavily and the farm wasn’t able to support the debt and our growing family,” Richard said. “We struggled to make ends meet. It was a turning point. I had no choice but to look off-farm for our security.”
Always a strong shearer, Richard could make decent money in the sheds, and his wife was a nurse. Over time he developed other businesses, including what turned out to be a successful venture, buying a liquid fertiliser franchise.
In fact, he did so well, the fertiliser company invited him to go to England to help set up the UK operation. Now, this is where you might expect a young farmer with a wife and three children under four years old, to hesitate. Not Richard.
“We leased out the farm, put all the machinery in the shed, took what money we had, and poured it into this business opportunity. It was hugely successful …. until my business partner took me for everything I had!”
The Arbons were back at square one. Worse than that. They were on the other side of the world, penniless, with no family support, and a fourth child due in a matter of weeks. Richard’s trademark determination was about to be severely tested again.
With difficulty, he managed to bring his family back to Australia. At least, at the farm, they still had a home. And, he eventually worked his way through the legal mire left by the UK crooks who perpetrated the elaborate swindle that blind-sided him.
“It set me on the back foot for four years,” Richard said. It was also the catalyst for a big life change. “I put the farm on the market straight away. I just needed a new start.”
Looking for a way forward occupied most of the four years it took to sell the property. He began business studies at university, but soon realised that a slow climb up the ladder was not the answer for a man in his 30s with four children to support.
“The prospect of a job, or placing our future in someone else’s hands, wasn’t something I knew or trusted. In business, I felt I could control my own future. So small business was my only real option,” Richard said.
“I looked at hundreds. But my biggest problem was finance. You have to buy goodwill, and not too many financiers would lend on the thin air that is goodwill.”
Then, by pure chance, a visiting family friend from Queensland introduced Richard to the concept of management rights. “It just clicked. I could see I would actually be able to borrow enough to buy management rights, and I felt sure it was something I could do.” Furthermore, there was the back-up security of a caretaker’s salary.
Two days later, Richard hopped a plane to the Gold Coast and started his search. It was early 2001. By May, the Arbons had bought the management rights at a 217-unit residential complex, Sailfish Cove.
Even that was not without a heart-stopping hiccup. “I arrived from South Australia, all our belongings in two trailers, my wife and (now five) children following by plane, drove in to settle the sale and the owner had changed his mind!” In the end, the deal went through.
Living on site with five children wasn’t exactly ideal, though. “The kids just thought the whole place was ours, and all the other residents were visiting us,” he laughed. “They’d keep disappearing into other people’s houses.” After 18 months, it was clear they needed to move off site.
But, with everything tied up in the business, they couldn’t afford to. Richard’s solution? “The only way to grow was to buy another management rights. I bought Central Brunswick, a serviced apartment hotel in Brisbane’s Fortitude Valley. Talk about chalk and cheese!”
While Richard speaks calmly of this time, it’s clear he was on a steep learning curve, and it was very hard work. Still, he was not afraid of either. And a pattern for growth was emerging.
After turning around the Brisbane property, he moved to sell it and signed up to buy another at Main Beach. Again his mettle was tested. Just as the purchase went unconditional, his sale fell over. Nail-biting times. In the end, a three-quarter share in Central Brunswick was sold, and Richard was yet again on the lookout for opportunities.
Arbon Property Management has flourished under Richard’s confident stewardship. He still has his very first management rights and owns, either outright or in partnership, many others across the Gold and Sunshine Coasts, Brisbane, Whitsundays and Cairns – permanent and holiday, corporate and student complexes.
“I’ve always believed determination is the key. You can always put in the hard work, and acquire the knowledge you need, but you have to have the belief and determination to succeed,” Richard said. “In my case, need was the primary driver. With five kids to look after, the farm just wasn’t going to do it. My children gave me the energy to succeed.”
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by Alex Cook, Resort Brokers Australia
One of the most enjoyable parts of my first year selling management rights on the Gold Coast has been meeting many of the resident managers who run our industry from the front line. A firm believer in getting out of the office and speaking to people face to face, I’ve been lucky enough to have many long chats with RUM’s about the state of our industry. Indeed, this is how I have learnt much of what I know today.
Always on the look-out for an interesting topic of conversation, I’ve recently been asking managers for their thoughts on a recent discussion paper put forward by Paul Lucas MP (Minister for Local Government and Special Minister for State) entitled ‘Management Rights in Community Titles Schemes’. Much to my surprise, very few managers had heard of it, even less knew much about the content.
Let me provide a quick background to the paper. Many have heard of the Unit Owners Association of Queensland (UOAQ), an industry association who according to their website aim ‘to advance the interest of unit owners’. One of their principal areas of activity at present is the lobbying of Government for a complete review of the management rights industry. In fact, some would argue that the UOAQ has been hijacked by a minority faction who takes issue with our industry and that the lobbying has become more of a vendetta than anything else.
Although no connection to the UOAQ’s lobbying effort is divulged, we are now presented by a paper put forward by a Member of Parliament that seems to point to exactly what they are looking for, namely a total reassessment of the principles that underlie the management rights industry as we know it. More importantly, rather than providing a balanced discussion of the industry, many feel that it leans heavily towards many of the drastic reforms advocated by the UOAQ.
There is insufficient space in this article to outline all of the views put forward in this paper, but for the sake of catching your attention I’ll mention a few of them.
One of the most potentially damaging suggestions is that the length of current regulation modules (whether Standard or Accommodation) are unnecessarily long. It states that ‘some lot owners….feel ‘bound’ by typically long-term contracts’. In a summary of ‘stakeholder views’ at the end of paper, it states that while some believe the regulatory framework to be ‘in balance’, some believe that major change is required such as limiting management rights contracts to 3 years. I’m sure there is no need to discuss the devastating impact this would have on the management rights industry.
Another ‘view’ is that the extension or topping up of contracts should be prohibited. It suggests that ‘bodies corporate grant such requests (for extensions) almost by default’ and ‘that it is extremely rare for a body corporate to vote against such requests’. We all know that the reality of the situation is quite different. An extension is granted in a democratic way by unit owners who wish to secure and encourage the ongoing efforts of a good manager. Plenty of scope exists for owners to deny an extension should they not be satisfied with the services provided by the manager.
It also expresses concerns that ‘the extension of rights is often a prelude to the sale of the rights, resulting in a windfall gain for the resident manager’. The author of this paper clearly has little knowledge of the current state of the management rights market. In recent times there have been very few sales that result in a large capital gain for the resident manager. When this is the case, it can usually be attributed to an extremely hard working manager turning a poorly run complex into a thriving one. More to the point, extensions are a critical way of securing a substantial monetary investment and creating an environment where managers, owners and committees can work proactively together without fear of their relationship coming to an end.
Don’t worry; there is no need to start losing sleep just yet. At the moment this discussion paper is just that, a discussion paper. Those that have instigated it are a small minority and will undoubtedly remain so. There are many times more stakeholders who will oppose the reforms suggested in this paper - RUM’s, solicitors, accountants, agents, politicians, financiers and unit owners themselves to name a few.
Nonetheless, it is important for everyone who has a vested interest in the management rights industry to read the paper, be aware of its content and respond to it. The nature of a discussion paper is to invite all ‘interested individuals and organisations to make a written submissions’. The paper and the submissions it receives will be discussed by people who may influence government policy. You can count on the fact that members of the UOAQ will be making submissions, please make sure you do too.
As a parting word, I’d like to push home the fact that the management rights industry in Queensland is something we should be proud of. Rather than having to endure misguided people pulling it to pieces, we should be showing it off to the world as the optimum model for how things should be done.
The discussion paper and contact details for submissions can be accessed at
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Phil and Kathy Taylor have the “can do” attitude that a lot of Kiwis and Aussies justifiably pride themselves on. , Even though they had no experience in the tourism industry, they were prepared to give running management rights a go. Phil came from a corporate background working for an Irish multinational food ingredients company and Kathy had worked in administration for years, starting with the BNZ in NZ and recently completing an advanced diploma in accounting. In between they had renovated five houses and operated three retail businesses. This varied experience coupled with a hands-on approach have made running there management rights a successful venture.
I asked them why they choose to buy ……………………, near Coomera on the Gold Coast, which consists of 48 residential houses. They said they did a fair bit of market research, looking into franchises and other types of business and decided that a residential management rights suited them because it had a body corporate salary and the houses rented well in fact at times they have had a waiting list. The …….. is surrounded by private schools. They rarely have problem tenants as most are either single mums with kids , happy with the security provide by the gated complex or else D.I.N.K’s or S.I.N.K’s Double/Single Income No Kids.
As well as the management rights they have a rent roll of 45 properties in close proximity to them. Together these two businesses provide a good return on investment, they don’t have to carry any stock, there are no debtors and they are the first to get paid. Phil is a handyman who fixes everything from a leaking tap to a broken window. This means that maintenance and repairs don’t get out of hand and are cost effective it also allows him the opportunity for an informal inspection of the property. Kathy sends out the reports and manages all the book work. They work well together have a good combination of skills and enjoy dealing with people, and they tell me that being a Kiwi has not been a disadvantage at all.
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PART 2 IN OUR SERIES COVERING THE GROWTH OF MANAGEMENT RIGHTS
The Resort Brokers' Informer continues our series on the evolution of the management rights industry. Valuable insights are provided by industry advocate, SP&G Lawyers partner John Punch.
After its entrepreneurial beginnings on the Gold Coast in the 1960s, management rights flourished along with Queensland’s dynamic tourism and property industries. By the late 1980s, it had taken its place as a valuable industry in its own right.
Then came a period of challenge when management rights owners would find themselves defending their businesses. Some attacks, John Punch acknowledges, were well-intentioned. Others were borne of petty jealousies and power plays.
Initially, the sniping related mostly to whether managers were honestly declaring holiday rentals to absentee owners. “Even though they were obliged to bank every dollar into owners’ trust accounts, suspicions of managers doing cash deals were easily fuelled,” Punch said.
“But, with the introduction of Fair Trading laws and better oversight of compliance by managers as licensed real estate agents, the situation was fairly easy to correct. There were a couple of prosecutions and these had a salutary effect.”
As Punch rightly explains, if managers cheat owners by not declaring letting income, they destroy their own goodwill, eroding their business value. Agents, accountants and lawyers soon convinced any errant manager that goodwill value would pay them far more than any hidden deals.
But the next legal barrage was far more intense and of far greater consequence.
“In the late eighties, began an extraordinary era of litigation,” Punch recalls. “In particular, one lawyer and body corporate manager embarked on what could only be described as a mission to rid property owners of management rights.”
Cases were well-researched to exploit loopholes, and a series of actions were mounted in an attempt to break down the management rights industry. While building managers struggled to individually fund their defences, body corporate committees financed their cases using the pooled resources of unit owners.
One defining case related to Ocean Breeze Noosa, represented by SP&G Lawyers. “The body corporate had allowed the manager to buy, consenting to assignment of the agreements, then six months later tried to kick him out, effectively saying his management rights were void. The manager had no choice but to take them on.”
SP&G prevailed in court. “We proved that, as well as what was written as law, there were equitable principles involved, and that the body corporate’s actions were inequitable,” Punch explained. “The judgement in favour of the manager ordered the body corporate to pay over $1 million compensation, costing unit owners dearly.”
A raft of cases tested various aspects of the law: Was the manager’s agreement subject to the same term limitation as the body corporate manager’s? Did body corporates have the power to make letting agreements? Were agreements limited in time?
Decisions came down on both sides, appeals followed and some, including the watershed Surfers Palms North case, went all the way to the High Court. “I think the whole process confused judges at the time,” Punch said. “And the tourism industry, which just wanted to get people into buildings, was the meat in the sandwich.”
It was the catalyst for management rights owners to unite for the first time, thanks largely to John Gardner who formed QRAMA (later ARAMA). It was 1991, and a fighting fund was raised to lobby the government for better laws.
“Everyone saw the need – body corporate managers, banks investing in the industry, the REIQ, developers. The Queensland Government had to act, so they issued a Green Paper to study what was needed generally in strata title laws.”
During a long process, all parties came to the table. Eventually the Body Corporate and Community Management Bill 1997 was presented to Parliament. Though, not without drama on the floor of the House.
An independent MP moved an amendment to bring in transfer fees, giving the body corporate a cut of the consideration if management rights were sold within three years of agreements being extended or assigned. The Government needed the Independents’ votes to get the legislation through.
The Bill was finally passed, after eight years of work to satisfy all interests, providing a legislative framework which accommodates the establishment, operation and management of community titles schemes. It was unique in Australia and led the way.
It did more than just serve and protect management rights. It enshrined the rights and entitlements of all owners, and clarified the position of body corporates in regard to appointing contractors, committees, bankers, insurers and the like.
It produced for the first time a 25-year term for management rights and brought in modules of legislation recognising different types of buildings. It gave depth to developments by allowing the layering of schemes (principal and subsidiary body corporates).
These laws, so well thought out over time, set the scene for prosperous times ahead in tourism and property development. And they provided the stable platform for a new era of investment in management rights, which we will look at in our next issue.
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- Understanding NRAS
- Terms of the Contract: Financial Due Diligence and Approval of the Lease
- Turning the Tables on the Great Outdoors
- Outcomes and Opportunities
- Park for a Holiday and Let the Good Times Roll
- Opportunity knocks on motel room door
- Dealing with the Office of Fair Trading
- Negotiation and Price : Can Anyone Win?
- Sales Process
- Feel the Passion
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