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 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. 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.