With the changing economic conditions over the past few years it has become increasingly difficult for owners of certain types of management rights businesses to sell their unit and business together. Problems arise where the caretaking and letting agreements require the manager to own and/or reside in a unit in the complex and:
- the business is netting a relatively low nett profit (say under $70,000 – $80,000 a year); and/or
- the value of the unit is disproportionately high in comparison to the value of the management rights business.
This has been a problem in small to medium size complexes where the value of the manager’s unit has increased dramatically but the income of the business has barely changed. This has, in many cases, made a combined purchase of the unit and business unviable.
So what can a manager do in such a circumstance? Realistically there are 2 options. The first is to drastically reduce the sale price of the unit so that a combined purchase of the unit and business is viable. The second is to separate the business from the unit and sell them both separately.
The first option is, in most cases and for obvious reasons, unpalatable for a seller. The second, in some cases, is unpalatable for a body corporate, particularly if it is a body corporate that expects and is used to having its manager living on site.
So what can a manager do? More often than not the best course of action is to discuss the possibility of option 2 with the committee. As with most things in management rights the manager’s relationship with the committee and owners is key. The reason these relationships are so important in this instance is that in order to separate the unit and the management rights business it will in most cases be necessary to amend the caretaking and letting agreements and the by-laws. As most managers will know, this can only be done with the owner’s support at a general meeting.
If a manager is successful in separating the unit and business, a sale becomes much easier as a buyer:
- is not required to outlay a significant amount of money to acquire the manager’s unit (in comparison to the business); and
- can add the business to an already existing business or businesses, particularly if the building is within close proximity to the others owned by the buyer.
In the past we have had some success in achieving the above for clients and we are generally able to arm our clients with a strategy for achieving the outcome sought. We expect that given the continuation of the current economic conditions there will be many more managers of small to medium size management rights businesses looking closely at this option.