Management rights valuations
Management right valuations typically include a property unit, a managements rights agreement and letting rights agreement. A separate contract may also be included for ground maintenance.
Terms of the management rights agreement that can impact value include the time remaining on the contract and renewal conditions, the duties of the manager, the body corporate remuneration, and termination clauses.
Other key management rights valuation components include the number of properties in the rental pool, letting fees, commissions and management and maintenance expenses incurred by the operator and a market salary for the owner operator.
After deducting the market value of the property unit from the price of a management right, the value of the business can be inferred. For example, in a sample of fifteen management rights advertised for sale on the Gold Coast, the listed price ranged between $0.66 million and $2.76 million, with a unit property price of between $0.25 million and $1.20 million: inferring a business value of between $0.30 million and $2.0 million.
Based on pricing in the market Management Rights appear to attract higher earnings multiple, reflecting perhaps the attraction of an apparent guaranteed contractual remuneration. The remuneration stream, however, isn’t always guaranteed as the body corporate may be able to terminate; further, the owner operator needs to incorporate their time cost in managing the complex.
Based on the sample of fifteen Gold Coast management rights advertised for sale, the inferred multiple of disclosed net income to value ranged between 3.4 and 5.6, with an average of 4.8. The disclosed net income appears to be before owner’s remuneration. Comparable listed companies may include real estate investment trusts and other estate listed companies.
Examples of management rights engagements include the breach of a management rights contract. The applicant held the rights to carry out the management role for the body corporate. The body corporate allegedly terminated the contract without cause. Lotus Amity prepared an expert report which quantified the loss of profit suffered by the applicant as a result of the breach; report prepared for the Queensland Civil Administrative Tribunal. Issues considered included the risk profile of the cash flows, the damage period, the profitability of the contract and the costs associated with the contract.