Published: 31 March 2008.

Contributed by Dave Alexander of Suncorp - Management Rights Finance

There is a common misconception in some sectors of the management rights industry. It goes something like this: “I understand Queensland Management and Letting Rights therefore I’ve got a handle on the industry generally“. While there are similarities to the Queensland model in other states, there are also many traps for young players. Having said that, there is some real value to be had in New South Wales for the well researched investor. If the old adage about seeking expert advice is true for Queensland then it’s doubly so in New South Wales. Choose your financier carefully and ensure they have a working knowledge of the New South Wales legislation. Also make sure they have access to an expert management rights valuer with experience interstate. The legislative environment in New South Wales is not as well progressed as Queensland and this is reflected in the multipliers. However, lenders who have taken the time to understand the New South Wales market remain comfortable with providing finance for selected good quality properties.

There are many considerations relating to purchasing management rights in New South Wales. From a lender’s point of view two of these are critical.

Firstly, unlike Queensland, the Strata Schemes Management Act in New South Wales does not allow for a lender’s rights and responsibilities. In Queensland the Body Corporate and Community Management Act addresses the obligations of the Body Corporate when a lender is relying on the management rights agreements as security. The corresponding legislation in New South Wales does not currently do so. As a result a Deed of Consent must be entered into between the Bank and the Owner’s Corporation. Those of you with experience in the industry will recall that prior to 2003 these Deeds were also used in Queensland. The problem that often arises is that the lawyers advising the Owner’s Corporation will request changes in the Bank’s Deed of Consent. The outcome is that often there ensues a back and forth process of negotiation around the content of the Deed. The process chews up time and money as the parties attempt to ensure that their particular, often conflicting, wishes are satisfied. Experienced specialist Management and Letting Rights lenders like Suncorp have pre-empted this problem in New South Wales. In consultation with the industry, it is possible to draw up a template Deed which, for the most part, satisfies the requirements of all parties. In this way most (if not all) of the possible Owner’s Corporation objections to the Deed’s standard content are addressed from the outset. Saves time, money and stress which has got to be a good thing.

The second critical matter is the term of the agreements. Following changes to the New South Wales legislation in 2003 (the changes in Queensland in 2003 are coincidental in terms of timing) the term of the management agreement was limited to 10 years. The term of the exclusive agreement to provide letting services was not included in this restriction. While the changes were not retrospective the net result is that post 2003 agreements will often have differing terms. From a lender’s viewpoint this creates some challenges. Given that Management and Letting Rights value is, to some degree, predicated on term of agreements, what’s the asset really worth?  Also, over what term should the finance be provided given the differing termination dates of the assets being funded? Notwithstanding the possibility of a term “top up” via new agreements, these are serious considerations.

In summary, some great opportunities in a growing market. Just make sure you get the right advice!

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