Real Estate and the Saleability of Your Rights |
The whole country has experienced a blow out in the value of real estate over the last couple of years. Whilst the increase in property values has been great for all of us with property, the side effects from a management rights point of view is not so great.
The value of manager’s residential units in some areas (particularly those close to the beach or in the Sydney area) has increased to such an extent that it 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 ie. the cost of the business plus the cost of the residence/office. Where the real estate values have escalated substantially, the net return applied to the total investment is significantly reduced. Consequently, the proposed purchase is not as attractive as it is 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 for businesses which show a better rate of return. For example, leasehold motels are becoming more attractive because there is no Owners Corporation to deal with, no real estate to purchase, your residence is still on-site and you have long term security of tenure!
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 operation.
In the Sydney area however, many (if not most) of the offices 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 management unit from the management rights and simply provide that the manager must still own a unit in the complex and the management unit (as far as the agreement is concerned) is simply whatever unit owned from time to time by the manager. By doing this, the manager has the flexibility of buying a cheaper (say) one bedroom unit & thereby reducing the total value of the rights. The manager may prefer to rent a two or three bedroom unit in the complex to actually live in and then rent out the one bedroom unit.
So what’s the better option?
I firmly believe that managers should own a unit in the complex and also live in the complex that 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 trades persons may charge for the same work if the manager is not living on-site and effectively on call 24 hours a day, 7 days a week in the case of an emergency. This is the ultimate (and unarguable) difference between on-site managers and Owner Corporation employed trades persons.
As long as the manager owns a unit in the complex it should be irrelevant to the Owners Corporation what unit that is. It also should be irrelevant to the Owners Corporation whether the manager lives in that particular unit or rents another unit in the complex. The bottom line is that the manager has ownership of a unit and also has his/her principal place of residence in the complex.
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 licencee owns that principal place of residence. Consequently, ownership of one unit in the complex but residence in another (under a rental arrangement) does not technically qualify you for this type of licence and taking this course may require the licencee 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 lots in the complex. 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 and to substitute a reference to “any lot occupied by the manager from time to time”.
Thirdly, the Caretaking Agreement will also need to be varied by the Owners Corporation to delete reference to the nominated manager’s residential lot and again substitute a reference to “any lot occupied by the manager from time to time”.
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 any unit in their complex and reside in any unit in the complex.
I firmly believe that agreements with this flexibility will become a far more saleable item than those without.
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