"When I requested different investment scenarios, PCS Finance always provided timely and correct analysis. Their advice was very helpful"
S Chang and A Huang (Management and Letting Rights Owner)
PCS Finance will help you understand your spending limit before you actively seek a property. Once your financial parameters are known the real search for the right Management Rights business can begin.
The majority of Management Rights’ lenders are approving loans up to 70% of the combined market value however in some cases up to 75% of the combined market value. A purchaser is able to borrow up to 100% as long as there is sufficient equity in other property and the business (along with other income) is earning enough to meet the commitment. A combination of bank and equity finance funding of up to 95% can be achieved without the need for additional security.
If you are considering purchasing your first Management Rights business and need a guide to understand if it is a viable option for you, below are a few guiding points:-
• The minimum amount of cash or equity in property you will need to enter the Management Rights market is approximately $150,000 or $100,000 for partnerships.
• Work out how much cash or property equity you can invest and then multiply this by 2.85 to understand the property value you can afford. For example, if you have $450,000 in cash/property equity you could purchase a complex worth $1.28 million (approx.)
• Factor in 5% to 6% of the purchase price for upfront costs covering stamp duty, solicitor costs, bank costs, licences and accountancy fees
To fund the purchase of a Management Rights business you may choose to borrow against other property. As an example, if you own a property worth $600,000, you may choose to borrow up to 80% (without mortgage insurance) of this property providing you with $480,000 in equity. This would allow you to consider purchasing a Management Rights’ business valued at approximately $1.37 million (approx.).
As a Management Rights buyer it is common to look at numerous complexes prior to making an offer. When you find a prospective property it is recommended you contact PCS Finance to ensure the business financials will work alongside your own personal financial situation and goals. PCS Finance will evaluate the scenario of the potential property to fully understand the fees, charges and ongoing interest.
When evaluating the financials of a prospective property PCS Finance will:-
• evaluate the required equity/cash to be invested upfront
• take into account the separate values of the business and the managers’ unit
• evaluate the income that will be available to pay back the debt and/or interest costs
• provide advice on the proposed purchase price
• obtain indicative offers from prospective bank lenders
When evaluating a prospective Management Rights’ financial proposal, PCS Finance will look at several components:-
1. The managers’ unit and office area
2. The Management Rights’ business
3. MLR agreement terms & type
4. The Multiplier
5. Break up of units between Investors & owners
The value of the managers’ unit will be based on the location, size, type of complex, age of complex, additional storage area and the office area. As a general rule, a premium of 10-15% can be applied to the value of the unit due to it’s ability to operate a Management Rights’ business from the property.
The value of the business will be based on the net operating profit multiplied by 3.5 – 6.5 times.
The net operating profit will be calculated by deducting the core operating expenses from the gross revenue for a specific period.
The ‘multiplier’ is based on supply and demand and it has been increasing overall in the past 10 years. On current average, a property with a net operating profit of up to $150,000 is approximately 5 times.
Purchasing Off the Plan
Purchasing a business ‘off the plan’ is more complex as there is no history of occupancy or income and therefore it is recommended you carry out your own research comparing other properties in the area. When purchasing, it is important to check the following:-
• are there claw forward/claw back conditions
• when is the adjustment date
• how much is the adjustment amount per lot
• how is the adjustment amount calculated
• will the developer accept payment as a guarantee or will they expect monies to be deposited upfront
• how was the projected income calculated
• what research has been completed to justify the projected net income
• is the multiplier within market range for the area; and
• is there a rental guarantee?
Buying off the plan will mean the loan conditions will be different to the conditions of an existing business purchase. So when buying off the plan, PCS Finance will ensure your lending value ratio, interest rate and loan condition is negotiated appropriately with potential lenders.
Additionally, when buying off the plan, working capital requirements will increase such as funding of the initial marketing plan and capital items (PABX, computer and office equipment) and general living expenses while the letting pool is being established.
Management Rights is a business with specialised finance needs. There are approximately eight banks in Australia that provide specialist lending for Management Rights. PCS Finance will evaluate lending options and ensure your loan structure is correctly set up for your individual situation.
Banks that specialise in Management Rights offer loans with a variety of features including:-
• a revolving business line of credit
• principal and interest loans
• interest only loans
• fixed or variable rates
• redraw and 100% offset
• 100% financing with additional security
When setting up your loan structure, PCS Finance will:-
• evaluate the loan term and explore the option of fixing the rate for a term
• evaluate flexibility features of the loan, including redraw and/or offset facilities
• maximise tax effectiveness
• set up a repayment structure that will work with the predicted cash flow
• apply the correct interest rates and establishment costs taking into account discounts available for management rights transactions
• take into account limited guarantees and borrowing entities
• facilitate the set up of everyday deposit and Trust accounts, EFTPOS, BPay, Electronic Banking
There is more than one way of structuring a loan and PCS Finance will work alongside your Accountant and Solicitor to ensure the correct structure is set up during the process.
In the evaluation of the right loan structure, PCS Finance will review the total package to make a recommendation for your individual needs.