Published: 30 August 2006.

"Know the smart questions to ask the agent so you can compare what's available and find what's right for you."

What is the net profit of the business?

Management rights sell as a multiple of the net profit. For example, if the net profit is $100,000.00, then the management rights might be valued at say, four times that $400,000.00 plus the value of the manager's unit and equipment. Finding out the net profit is important.

Net profit should be calculated on the basis of income less expenses. Do not include in the expenses the owners' "wages", bank interest or income tax. Make sure the income does not include illegal payments like "kick backs" or secret commissions from suppliers that are engaged by the manager to work for the owners.

How many owners are in the letting pool?

The letting pool is the name given to the group of owners who use the letting service. The name is misleading as it implies that income is pooled and paid to people equally. This is not the case. Management rights work on an individual accounting basis. Every owner receives the income for his or her unit less the expenses for that unit. Still, a group of owners who let are called the pool.

You need to know how many are in the pool. You should also ask about the others. Are they live in owners, lock ups or are they with outside letting agents? You can learn a lot about a business by asking these questions.

The number of outside letting agents will be your key to how well the building is being run at the moment. More than a couple of outside letting appointments would be abnormal. This might be your chance to improve the business by winning those owners from the outside agents.

How long do the agreements have left to run?

Management rights have a definite beginning and a definite end. Usually they are set up for five years with a five year option to the manager. At the end of this time there is no requirement on the body corporate to renew the agreements. It is up to you to negotiate a renewal with the body corporate at the appropriate time. Obviously having a reasonable period of certainty is important.

How much is the body corporate salary?

We have already discussed the caretaking function and the salary payable from the body corporate. When inspecting management rights you should be aware of the amount of the body corporate salary. Does it increase each year? Does it take account of GST? Is it adjusted to "market" at the beginning of each option period? What does the manager have to do for the salary? These are the questions to ask.

Is the office on title or common property?

You will recall that your unit is on a title which you own and the common property is shared with other owners and controlled by the body corporate. Some management rights are created with the office/reception area for the business on your title. Others have an office/reception area on the common property.

If the office is on the common property, then you need to establish your right to use the office. You should have "exclusive use" of the area under one of the body corporate by laws or under an occupation authority from the body corporate.

Ownership of the office/reception area or having control of it under exclusive use can be important to renewing agreements with the body corporate at the end of your management rights.