RENT ROLL MYTHS BUSTED

Mark Sin­clair

Elite Agent - - CONTENTS -

Lately I’ve seen sig­nif­i­cantly in­creased ac­tiv­ity in and around rent roll sales and pur­chases, cou­pled with a grow­ing num­ber of ques­tions from both buy­ers and sellers sur­round­ing the pro­cesses in­volved. Here are the four main myths I reg­u­larly hear from busi­ness own­ers, and the truths be­hind them.

MYTH 1: FI­NANCE AP­PROVAL IN 30 DAYS

There is a pre­sump­tion that fi­nance ap­proval for buy­ers will au­to­mat­i­cally be granted in 30 days. This can oc­cur, but not as fre­quently in the cur­rent eco­nomic cli­mate as a con­se­quence of the Bank­ing Royal Com­mis­sion, com­bined with an over­all slow­down in debt fund­ing. Buy­ers must be com­pletely ‘bank ready’ in or­der to re­ceive fi­nance ap­proval in 20 to 30 busi­ness days.

Credit is be­com­ing harder to source, so fo­cus on pro­vid­ing your bank with all nec­es­sary in­for­ma­tion in­clud­ing, but not lim­ited to, your past three years’ fi­nan­cial state­ments, year to date P&L, cur­rent bal­ance sheet, sched­ule of per­sonal as­sets and li­a­bil­i­ties, and a copy of your cur­rent ATO por­tal. Cash­flow pre­dic­tions will also fa­cil­i­tate a faster ap­pli­ca­tion.

MYTH 2: SELLER RE­CEIVES FULL PAY­MENT AT SET­TLE­MENT LESS RE­TEN­TION

This is a hang­over from days gone by. The way in which the port­fo­lio trans­fers to the buyer com­pletely dic­tates what the seller will re­ceive at set­tle­ment. This is most ap­pli­ca­ble when fi­nance is in­volved. For ex­am­ple, if a buyer is fund­ing 300 man­age­ments

TYP­I­CALLY, MOST LOANS FOR RENT ROLLS ARE 60 PER CENT OF THE VALUE OF THE PUR­CHASED PORT­FO­LIO.

and at the set­tle­ment date 200 man­age­ments trans­fer, then the seller will be paid for the 200 man­age­ments less the agreed re­ten­tion. In this ex­am­ple, it is 66 per cent of the port­fo­lio.

In other words, banks will only ex­tend suf­fi­cient fi­nance to cover what’s ac­tu­ally trans­ferred. As the banks will take charge over the buyer’s com­pany, they won’t lend funds when man­age­ments aren’t in the buyer’s name.

MYTH 3: NEW MAN­AGE­MENT AGREE­MENTS

Clients reg­u­larly say that new man­age­ment agree­ments don’t need to be signed and the buyer can rely on hav­ing the cur­rent agree­ment as­signed. Again, this is a legacy of days gone by. In this day and age, the buyer wants and es­sen­tially needs the man­age­ment agree­ments in their en­tity’s or com­pany name.

Not only does this give great com­fort and se­cu­rity of ten­ure to the buyer, but it gives the bank knowl­edge that it has taken charge over the as­sets of the buyer and not some third party’s man­age­ment agree­ments.

MYTH 4: LVY BREACHES

Clients ask me, ‘How did I breach my LVY when I’m not be­hind in my loan re­pay­ments?’ This has been rel­e­vant in both Queens­land and Western Aus­tralia, but NSW and Vic­to­ria should be aware of what’s around the cor­ner.

Typ­i­cally, most loans for rent rolls are 60 per cent of the value of the pur­chased port­fo­lio.

BUY­ERS [OF RENT ROLLS] MUST BE COM­PLETELY ‘BANK READY' IN OR­DER TO RE­CEIVE FI­NANCE AP­PROVAL IN 20 TO 30 BUSI­NESS DAYS.

If rental val­ues drop five per cent, 10 per cent or 15 per cent this im­pacts the rev­enue and ul­ti­mately the value of the rent roll it­self. If rents drop, for ex­am­ple, by 10 per cent, your value drops by 10 per cent and you’re au­to­mat­i­cally in breach of your loan re­quire­ments. Your bank may ask you to find the ad­di­tional fi­nance to put your fa­cil­ity back in or­der.

Mark Sin­clair is the founder and Mang­ing Di­rec­tor of Reales­ti­ma­tions. Es­tab­lished five years ago fol­low­ing an ex­ten­sive agency and cor­po­rate real es­tate ca­reer, Reales­ti­ma­tions is a spe­cial­ist ad­vi­sory, val­u­a­tion and con­sul­tancy ser­vice specif­i­cally tai­lored to the real es­tate in­dus­try. For more in­for­ma­tion visit reales­ti­ma­tions.com.au.

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