Following our recent Developer Series event, ‘Emerging trends in development and the role of owners corporation agreements’, panellist Alex Cook shares his thoughts on tips for developers setting up a Management and Letting Rights structure.
Management and Letting Rights (MLR) is a concept sparking increased interest amongst Victorian developers. The pre-eminent structure for managing strata titled communities in Queensland for the best part of five decades (and now a multi-billion dollar industry), MLR is still somewhat in its infancy in Victoria.
However, with the successful establishment of MLR in a handful of landmark Melbourne developments in recent times, not only adding significant value to the projects but also creating a high quality of service to owners and investors alike, developers are increasingly seeing the benefits of the model.
Indeed, Resort Brokers Australia, a boutique Queensland brokerage specialising in accommodation business transactions, sees Melbourne as the major growth market for MLR in the coming years. With this in mind, below are some key points that developers can take into account during the early stages of a development, in order to ensure MLR is possible and to maximise its potential value.
The MLR model and the industry that surrounds it is not particularly difficult to understand, but there are points for consideration. The structure behind every MLR is business is different and every prospective operator has different pros and cons. Developers should not pigeon-hole themselves into dealing direct with one operator. Set the MLR to suit your development, then use a broker to find the operator best fitted to the project and willing to pay the best price. You can often have your cake and eat it too.
CONTRACT OF SALE
Ensure the contract of sale that is issued to apartment purchasers reserves suitable rights for the developer to establish a MLR structure at the inaugural OC meeting. In the case of FM agreements, it may be worthwhile pre-disclosing a tenure that you intend to attach to the agreement (if not, it may limit what you can establish later on, and therefore the MLR value). Maddocks has extensive experience in ensuring the contract of sale reserves the necessary rights for the developer.
CONTROLLING SELLING AGENTS
If a developer does elect to establish and sell a MLR business, the ultimate value will be derived by how many letting appointments the successful operator is able to secure. In Queensland, it’s almost a given that the operator will secure most investor owners into their letting pool. In Victoria, historical precedent dictates that many selling agents expect to handle letting following settlement. So they are effectively getting something for free, that would otherwise have value for the developer. Think of ways to stop selling agents going after letting appointments. If considered early, non-competition clauses can be included in agency agreements signed with selling agents.
Many buildings with MLR in place offer short-term letting services, renting out apartments to holiday makers and corporate guests on behalf of the apartment owners. Generally speaking, this is a far more profitable way to manage an apartment (both for owner and operator). Operators are willing to pay far higher ‘per key’ prices for short-term letting appointments (as high as $35,000 in Melbourne recently). However, in order to facilitate this, there must be basic operational space (reception, back offices, luggage room, linen room, storage etc.) for the operator to use. If a building is likely to be suitable for short-term occupation, a developer should give some thought to required operational space when plans are being drawn up.
If a developer is using rental guarantees as incentives to sell apartments, and is also setting up an MLR operation, why not make joining the onsite letting pool a condition of receiving the rental guarantee? The ‘per key’ money paid by the operator for the letting appointment can go a long way to militating against any potential exposure to the rental guarantee.
If you would like to discuss any of the points raised in this article, or indeed anything relating to management rights, please do not hesitate to contact me on 0467 600 610 or email@example.com
|Alex Cook | Resort Brokers
T +61 467 600 610