Publications

Real Estate and the Saleability of Your Business
Author: Col Myers
Date: December,2009


The value of manager’s residential units in some areas (particularly those close to the beach or in the Sydney area) is becoming a liability to the saleability of the management rights.

So what’s the problem?

Simply put, when investors look at purchasing management rights, they look at the total cost of the acquisition i.e. the cost of the business plus the cost of the residence/office. Where the real estate values are high, the net returns are significantly reduced. Consequently, the proposed purchase is not as attractive as it otherwise would have been.

Management rights brokers are reporting that an increasing number of people are looking at this reduced net rate of return and then deciding to look elsewhere.

So how do we minimise the problem?

Unfortunately, your options may be limited.

If the reception/office is part of the title to your residential unit (or is an exclusive use allocation to your residential unit) then you have no flexibility. The unit cannot be severed from the management rights.

In the Sydney area however, many (if not most) of the office/receptions are separate freehold lots. Consequently, designated manager’s residential units are irrelevant to the operation of the management rights. It is these types of complexes that have some real options available.

So what are these options?

Your options are twofold:-

1. If your Owners Corporation will allow it, sever the management unit completely from the management rights so that the management rights are attached only to the office lot, or


2. Sever the existing residential unit from the management rights and provide that the manager (or its approved employee) must simply occupy a unit in the complex. By doing this, the manager has the flexibility of buying a cheaper (say) one bedroom unit or renting a unit in the complex.

So what’s the better option?

I believe that managers (or their approved employees) should live in the complex they manage. It is difficult to argue that Owners Corporations should pay managers a caretaking fee which may be substantially in excess of what independent trade persons may charge for the same work if the manager is not living on-site and effectively on call 24/7 in the case of an emergency. This is the ultimate (and unarguable) difference between on-site managers and Owner Corporation employed trade persons.

As long as the manager lives in the complex it should be irrelevant to the Owners Corporation what unit he lives in or whether he rents the unit or owns it.

So what needs to be changed?

There are a couple of issues to consider.

Firstly, one of the pre requites to obtain an On-Site Residential Property Manager’s licence in New South Wales is that the licensee’s principal place of residence must be situated in the complex and the licensee owns that principal place of residence. Consequently, if the manager does not own and occupy a residential unit, he won’t be entitled to obtain this form of restricted letting licence and will be required to hold a full real estate agent’s licence

I have previously expressed the view that On-Site Residential Property Managers should, in time, upgrade their licenses to full Real Estate Agent licenses as it creates all sorts of flexibility from the manager’s point of view. It also gives the manager a potential new income stream in respect to selling units. This process is not overly complex or time consuming.

Secondly, an amendment may or may not be required to the by-laws so as to delete reference to the particular nominated manager’s residential lot from the by law.

Thirdly, the Caretaking Agreement will also need to be varied by the Owners Corporation to delete reference to the nominated manager’s residential lot.

Conclusion

The escalating value of real estate is an important issue facing management rights, not just in New South Wales but in Queensland and elsewhere. Managers should seriously consider their options as far as severing expensive residential management units from the management rights documentation and thereby provide flexibility for the manager to own or rent any unit in their complex.

Agreements with this flexibility will become a far more saleable item than those without.