Despite having written articles about this issue in the past, I am regularly asked by clients, sales brokers and others if it is lawful for a management rights operator to profit from advertising levies collected from owners. There has been a common belief that a manager cannot, or at least if the manager does, that profit is not taken into account when assessing the net profit of the business.
The rationale for that view is that monies paid to the manager for advertising is to reimburse the manager for advertising expenses incurred by the manager. So if there might be anything left over from what the manager has collected in levies after meeting the actual advertising expenses, that excess belongs to the owners, not the manager who must account in some way to the owners for that.
The rule made some sense in the past where advertising took the form of paid advertisements in newspapers, magazines, brochures and other publications. However in today’s world advertising rarely takes that form. Today a manager’s website is probably the most critical tool in advertising, marketing and promoting a complex. A modern, sophisticated and attractive website can generate significant increases in occupancies and returns to owners.
Developing, maintaining and utilising a website and partaking in other social media promotions and activities are just some of the labour intensive work that a manager does to advertise, market and promote a complex. Whilst any actual expenditure on a website designer and a software provider would be properly regarded as expenses, there is a huge component of labour (by the manager or the manager’s staff) that cannot be properly classified as an expense. The consequence, if advertising is treated as an expense, is that the manager cannot be reimbursed from or keep the advertising levies for those labour costs.
I have consistently maintained that advertising and promotion can be treated not as an expense to be reimbursed but as part of a service of advertising, promotion and marketing to be provided by the manager. Where the letting appointment is properly structured in this way, the manager is providing an overall service which involves expenditure by the manager and the provision of labour, time and effort, in exchange for which the owners pay advertising levies.
Where advertising is treated in this way – and advertising levies collected for this purpose – the manager can lawfully retain all of the levies collected without having to account separately to owners or others for any actual expenditure. All advertising levies collected belong to the manager and any excess above what might be actually expended should be taken into account for profit calculation purposes.
It is important that the fee or charge be properly described, that the POA Form 6 is properly completed and that there is proper disclosure of these things in the letting appointment (as for example in the ARAMA addendum drafted by Mahoneys).
More and more accountants and valuers now take the view that a manager can make a profit from advertising levies, particularly where advertising, promotion and marketing are part of a “bundled” fee or charge as contemplated in the various articles I have published (where most of the manager’s fees, charges and commission are bundled into one all-encompassing percentage amount).
However they will look to make sure that any labour costs associated with such activities are accounted for in the profit & loss, that any profit is reasonable, and that there has actually been regular marketing and promotion of the complex to ensure ongoing occupancy levels.