Caretakers seeking extension on management rights

I understand it has been common in the past for caretakers who own the management rights on a strata complex to seek periodic extensions on those rights.

They can seek extensions as long as the new rights do not extend more than 25 years into the future (QLD).

So typically every 5 years they might seek a 5 year extension.

I have also read that more recently owners have not been granting extensions automatically as they used to

QLD: Q&A Just Vote No to Extending Management Rights

It seems odd that owners are expected to extend management rights on request. If management rights are worth something (i.e. they are a trade-able business that can be bought and sold) why are they extended for free on request?

What are the advantages/disadvantages of voting to allow an extension on management rights from the perspective of owners?

If management rights contracts are not renewed and then expire can the rights be sold by the Body Corporate to a new prospective rights owner just as existing MR owners currently sell their business to new owners quite often?

 

@Michael Mitchell is this up your alley?

 

No. The 'Rights can only be "sold" once in Qld under the BCCM Act and that is in most cases from the developer to the first MLR purchaser. The Body Corporate has no say in this (it usually doesn't exist yet and the developer maintains control at this stage too). When a Body Corporate or particular Owners are sour about aspects of the MLR contracts - don't get sour at the manager, get sour at yourselves for not doing your due diligence properly when deciding to purchase into the scheme, as the agreements were around before your time, and you have no power to change them unless by mutual agreement and should have read and understood them before signing to buy. Under-performance of the agreements is a different kettle of fish, but in terms of the agreements themselves and what is contained within, after the fact, Body Corp has next to no power to get these changed unless the MLR owner agrees too. Caveat to this is in the first 2-3 years of the agreements, there are provisions in the Act to force reviews as this is reasonable given new schemes may need the duties etc adjusted as things work themselves out, but after that, set in stone.

Now, Owners Corps and anti-onsite manager people seem to think the manager is paid too much or don't like them or whatever and want to try and erode them away blah blah. Q: What's best for the building (and all levy payers)? Do an honest review of the work and other non-tangibles such as essentially most onsite managers who care are on call 24/7/365. You price that up from external 3rd party contractors - facility managers such as Programmed etc, and in most cases, for medium-large schemes that require daily duties, the cost will be 3-5x more than what you would be paying the onsite manager. It's always the uneducated short-sighted owners whose views shoot themselves in the foot and they don't even realise. In a small amount of cases they actually gain traction and they do get rid of the MLR's, and then only about a year or two in, when the Committee is working for nothing ('volunteers') and getting jack of it, and the true costs (increase in levies) from the external contractors do they realise the mistake they've made. It is then possible to get a new set of 'Rights in place, however the Body Corporate is not permitted to profit from this, in other words, they cannot sell a set of rights again (because a body corporate cannot act as a business), all they can do is put tenders out and try and get best value for money from contractors willing to take one the work. In the limited number of cases I've seen/heard, when this occurs, the Body Corporate only offers 1-3 years terms, and guess what, very hard to get good people when the operators have nothing invested (eg. none of their own money) and don't give a **** (just like what happens with strata managers, the exact reason you hear owners whinge their strata manager is crap or too slow etc, it's because they have a short term contract (1-3 years) and those managers have portfolio's where one strata manager might manage 100 schemes, is an employee and paid what like $70k).

Me personally, I have nearly $2m invested in my management rights business and real estate - to me, this whole complex is my 'home' and I take pride in it. My phone is always on, I pay levies, I take responsibility and ownership of everything. I have nearly doubled my business in 3 years and grown an external rent roll. I can tell you now, if this was "just a job" and I only made $60k a year or something, I wouldn't give a crap - my phone would be off outside of hours, etc. When you have someone who is committed and has skin in the game and wants to win and see everyone else win too - because remember a rising tide lifts all boats (eg. property sale & rent values, lifestyle & safety etc for occupiers) - that's the best scenario you can hope for. If your manager isn't performing well enough, there are avenues to get this improved or for them to move on and get better managers to buy in. I could talk about this all day...

 

Thanks for your thoughts Michael,

I am still not really clear on what is the benefit to the owners of accommodating an MR owners request to extend management rights by, for example, 5 years, from 18 years hence (2038) to 23 years hence (2043)?

The chances are the MR owner will sell the business and move on before 23 years. They will sell to the highest bidder regardless of who they are.

It seems it is better for the owners to choose who manages the complex with ongoing review possible every 3 to 5 years rather than the MR owners simply being allowed to make the decision themselves with offer price being their only selection criterion.

A 5 year extension seems like a free gift from the owners to the MR owner since it directly affects the resale value of the business. What is the incentive to give them this gift?

 

When I bought, there were 16 years left (out of max 25 years in this type of module), first financial year I put a motion in for a 5 year top up, 2nd financial year, same again, to get it (the business) to its maximum value (on that aspect; there are many aspects to these businesses). I have outlaid a lot of money to buy into and create a business that I can sell one day and profit from (just like any other business where equity has been created from good operation etc), in return the Body Corporate gets the best from me and it's no skin off their nose as they cannot and do not profit, the only variable to them is the quality of work. In that regard, why would they be against it? It's only people who don't understand they cannot profit or leverage who vote no or think the manager is getting something for nothing. Because the reality is, who owns a unit for longer than a few years let alone outlasts the length of the agreements? No one. So at the pointy end, it doesn't even affect them long term - it's just to cause grief or tall poppy. What people with your view seem to forget is the MLR owner has usually borrowed huge amounts of money (millions) and taken on that risk, to serve you - it's not a 'job', they have invested in and bought a business. And if the Body Corporate or Owners don't want to support that, best the manager sells and moves on to another place because clearly they're not valued and then that scheme can suffer for it with bad operators or employee contractors who just treat is 'as a job'. In my case, if my top ups were not approved, I would simply have sold and bought somewhere else where I am valued. (these views are my opinion only I obviously don't speak for others in the industry).

 

That's precisely the problem. Those millions have to be recovered by charging over and above the proper cost (with reasonable profit) of delivering the service. My Docklands apartment was built by a Queensland developer with management rights onsold with a 25-year contract that locked the owners in to excessive charges (e.g. a set 80K+CPI for postage). In the end we borrowed $2m to buy out the contract and went to a local manager. Even while we were repaying the loan we were paying less, and we're now paying a lot less - roughly $5K now in my case v. $6K ten years ago - and that's after having built up a seven-digit sinking fund.

Our current managers are on a year-to-year contract: that's their incentive to perform.

 

NSW and VIC (and all other states bar QLD) for that matter are very different to what QLD has AFAIK, and to be frank, I wouldn't buy a MLR in any state but QLD because of the protections under the BCCM Act and in the long stay space only (given the risk). With that said, I feel the industry here in QLD is actually dying because the model is failing, in short, the longer running agreements in aging buildings with increased maintenance costs are becoming uneconomical to maintain, especially when some agreements have 5% annual increases built in (not simply linked to CPI on a ratchet-up only approach), but also the WH&S requirements (burdens) [sic: additional management of contractors and record keeping etc etc] since CTS's were classed as PCBU's, are one of a few things contributing to why the model is failing. In short, on the one hand you've got Body Corp's saying the Caretaking contracts cost to much, on the other hand you've got Managers saying they're actually not getting paid enough with the increased work load due to the last ~15 years worth of legislation and no amendment or recognition of this increased work load in the agreements. The multipliers on the businesses are too high, the market has been stuffed by the brokers reaching the top of their curve (simply capitalism running it's course), and the buyers who are paying this money are generally foreign with little practical experience resulting in poor performance and understanding of their agreements - duties and obligations etc, not helped by the 'spin' the brokers put on these businesses;- to be blunt, often selling them as 'lifestyle' businesses where buyers are not fully aware that "you actually have to work", it's not a holiday type of thing. OTP's are a different kettle of fish, I couldn't imagine the risk involved in purchasing that model (does it get any more speculative re: the keys? lol; even with clawbacks etc, what a horrible position of uncertainty to be in :/) or in the short stay space especially with a lot of the auxiliary income streams now becoming obsolete with the increase and cheapness and available of many technologies such as internet and streaming services and the volatility during things like COVID albeit not too often, tourism is stuffed, a lot of these operators have almost been bankrupted by this. Also, little to no uptake from younger generations buying in, and 'corporates' such as UniLodge, Mantra, etc buying and simply staffing, resulting in a different feel compared with the original 'mum & dad' type operator feel and level of care etc. - the landscape is changing and the model will change to adapt to correct itself. I don't know what or when that will look like, just a feeling I've got.

nb. existing agreements still hold their weight if legislation was to change such as QLD followed NSW type example for new agreements, and also to, developers, selling the 'Rights is like the icing on the cake for their profit line, I don't see that changing any time soon, so maybe things won't change at all...

disclaimer: again, just my opinion, and I've only been involved in this industry for 5 minutes in the scheme of things (these have been around for nearly 40 years I think)...

 

>>Tony3008>>Those millions have to be recovered

That seems to be the root of the problem with this MR model where the manager has to pay a large business purchase stake to get in. The interest on that loan has to come from somewhere.

>>Tony3008>> In the end we borrowed $2m to buy out the contract and went to a local manager.

Why not just let the contract expire by not offering extensions? Then the only buyout costs are the real estate value of the caretaker's unit.

>>Tony3008>>Our current managers are on a year-to-year contract: that's their incentive to perform.

This arrangement seems much simpler both financially and politically for the unit owners.

 

Because at that point we still had another 20 years to go on the original agreement entered into by the developer. We spent a lot on legal fees exploring ways of having this agreement set aside, but (not totally surprisingly) the other side's attitude was 'see you in court' and given that all litigation has risks we as an OC couldn't be in the position where we'd gone to court, lost and were now looking to unit holders to cough up thousands of dollars each for nothing. Instead they were presented with a negotiated agreement at a SGM and were persuaded of the merits of this.