Off the plan management rights

noun

‘Off the Plan’ refers to the situation where a management rights business is marketed prior to the completion of a complex’s construction.

As such, the business is sold based on income projections, rather than historical trading information. ‘Off the plan’ management rights transactions occur between a buyer and the developer.

For Starters

1

In order for a purchaser to secure an ‘off the plan’ management rights, it is generally a pre-requisite that the they have experience in the industry. This is due to the fact that the manager carries the developer’s reputation in relation to the presentation of the building, the tenanting of the units and ultimately the return for the investors.

2

Off the plan management rights have traditionally come to market when 50% of the units have been sold. However, as demand has grown in recent years, there is an increasing trend to market the management rights in conjunction with the first re-lease of units.

What to look out for...

Those looking to purchase ‘off the plan’ management rights are encouraged to ‘do their homework’ as these businesses are sold largely based on projections. The expected net profit will be based on projected letting pool numbers and rental appraisals. It is also important to get a feel for the caretaking duties.

It is common, particularly with larger ‘off the plan’ management rights, to engage an industry specialist accountant to produce a projected income report. This gives the purchaser confidence in their purchase, and helps ease the finance approval process.

Once a purchaser is comfortable with the expetced future performance of the management rights, it is time to formalise an offer. Once an offer is agreed with the developer, contracts are entered immediately. Deposits are paid, but funds are not transferred until settlement (i.e. when the complex is open and the manager is receiving an income).

Protecting you and the developer

Claw forward/claw back

This refers to the clause in the contract that allows the final purchase price to vary depending on how many letting appointments are secured by the new manager (there is a typically and agreed price per unit, and the purchaser will only pay for what they get).

Claw forward ceiling/basement

The percentage of units that come into the letting pool at which point the claw forward/back stops (ie a contract stipulate that a purchaser will pay for no more than 95% of units coming into the letting pool).

Walk Away / Termination Clause

A percentage of investors that makes the opportunity no longer viable for the purchaser (ie a contract might stipulate that if there are fewer that 40% of unit in the letting pool, the purchaser can terminate). Please note some developers will offer no walkaway clause as they feel the manager secures the business at a lower multiplier, so must be committed to proceeding regardless of the outcome.

Advantages

They are almost always cheaper than an established equivalent

You are often able to negotiate additions to the manager’s unit and the manager’s agreements to better suit your needs

You will often play an integral part in placing new tenants, which means you can control who the residents are to a certain extent.

Disadvantages

There will always be a degree of uncertainty as to how an off the plan management rights business will pan out.

Beware of agents overselling the expected returns on units – you might be the only one left to pick up the pieces of unrealistic expectations.

As developers are keen to place an experienced manager at the helm of their new project, new-comers can often find it hard to get a foot in the door.

Being prepared and looking the part

Typically when you are buying an accommodation business, you’re the one asking all the questions. With ‘off the plan’ management rights, the role is often reversed. You are responsible for renting a large volume of stock in the quickest period of time while securing the best rents possible. With great upside comes great responsibility. It’s for this reason that your first meeting with the developer is similar to a job interview.

  1. 1 Dress professionally - we understand that management right gives you the freedom to wear casual clothes though it’s not appropriate for your first face-to-face with developers or investors
  2. 2 Prepare a cover letter an resume – given the competitive environment, you will often be compared with other interested parties so this is an opportunity to shine.
  3. 3 Offer document and references – it’s important to be clear in your requests and highlight any positive points of difference to your competitors’ offers. Written and verbal references are essential..

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