Buying and selling rent rolls is a fundamental aspect of any real estate business. Whether you are looking to expand your business, reduce your property management division or exit completely, it is important to understand what rent roll transactions are and how they work.
Over the next seven-part blog series we [your businessDEPOT rent roll experts] will unpack the key aspects of buying and selling a rent roll.
an introduction to rent roll transactions:
what is a rent roll?
A rent roll is the property management and rental division of a real estate agency that manages and deals directly with both tenants and landlords of investment properties.
The real estate agency will manage landlord’s investment properties by keeping landlords up to date, collecting rent from tenants and managing any issues that arise. This also includes arranging new leases, negotiating rental amounts and periods and finding new tenants if necessary.
In exchange for such services, the real estate agency is paid a set percentage commission from the rent the tenants pay.
The sale or purchase of a rent roll is therefore one agency selling to another multiple management rights relating to specific properties, commonly in the same or similar location areas.
how is a rent roll purchase price calculated?
The calculation of a rent roll purchase price is an agreed multiple of the total annual property management commission of the properties being transferred to the buyer.
This multiple varies depending on the circumstances, such as the location of the rent roll properties, annual average management income [AAMI], market supply and overall system processes of the seller.
If you are thinking about selling all or some of your property managements, then it is crucial to ensure you obtain an appraisal of your rent roll to ensure this multiple is understood. For more information on rent roll pricing, stay tuned for our third blog where Director Brad Dean outlines the key value considerations.
legal considerations prior to agreement
A buyer and seller of a rent roll transaction must enter into a tailored agreement that outlines the terms of the sale.
Prior to entering an agreement, it is important to consider whether any further agreements or advice is required, which includes [but is not limited]:
- A terms sheet – this document outlines the terms of the deal agreed between the parties prior to entering into an agreement.
- Non-disclosure agreement [NDA] – when a buyer conducts their due diligence investigations once the agreement has been entered, the buyer will inevitably be privy to confidential and sensitive information about the seller’s business. To ensure the protection of the seller’s confidential information, an NDA may be prepared and tailored [or also included in the Agreement] to ensure such information is protected [whether or not the sale is effected].
- Business premises – does the buyer wish to take over the premises of the seller upon purchasing the management rights? If so, relevant documentation such as a lease or lease transfer will need to be prepared and consent from the landlord will be required.
- Employment agreements – if any employees are being taken over from the buyer.
- Sales authorities – if the buyer may purchase properties that are on the market for sale and if so, what the purchase price is for the sales.
- Management authorities – it is imperative that sellers ensure all management documents in relation to rent roll properties are up to date and compliant with legislation, noting this differentiates between jurisdictions.
- Other considerations – further documentation will need to be completed if business names, trademarks, vehicles or other intangible assets wish to be transferred with the sale of the rent roll properties.
common terms of a rent roll agreement
Once you have unpacked the above considerations, it is vital that a solicitor who specialises in rent roll transactions is engaged to draft the rent roll agreement and consider all aspects of what the agreement will entail. This is fundamentally important noting the complexities of a rent roll transaction.
Common terms to consider in the agreement [but are not limited to]:
- Conditions of sale, whether due diligence, finance, franchisor approval or other conditions apply
- Key due dates
- Multiple to calculate the purchase price
- Whether the buyer can take over any employees and if so, what is the adjustment mechanism in favour of the buyer to do so
- Restraints such as non-compete or non-solicitation on the seller
- Retention period and amount [to be expanded in a future article]
- What is classified as a lost property during retention
- Whether any assets are included in the sale [for example leases, business equipment, plant and equipment]
tax and duty considerations
There are also many tax implications to consider when buying or selling a rent roll.
The disposal of a rent roll will typically be subject to capital gains tax [CGT]. Noting this, potential CGT or small business concessions may be available to reduce the capital gain and the tax payable on the sale.
Goods and services tax [GST] may also be applicable to the transaction depending on the nature of the sale. If a sale of a rent roll is considered a ‘going concern’ then the sale is GST-free. To satisfy this criteria, the sale of the rent roll must be considered the sale of a continuing business with everything necessary for the ongoing operation of the business being sold to the Buyer.
We also note that a buyer will also be subject to paying transfer duty with respect to a rent roll purchase that is calculated on the purchase price of the rent roll. If a second settlement also applies this will need to be assessed and further duty may be payable.
It is strongly recommended that separate accounting advice is sought in advance of any disposal or purchase so that you are aware of the tax and duty implications. In this regard, stay tuned for our future blog by Director Craig Harrison that unpacks duty and tax considerations in rent roll transactions.
There we have it, a brief overview of rent rolls and things you might need to consider. Stay tuned for the next part of the blog which goes into more detail about how to value your rent roll business.
we’re here to help
If you are considering selling or buying a rent roll, feel free to reach out to us at email@example.com or give us a buzz at 1300BDEPOT to discuss the potential agreement and all aspects of the sale or purchase.
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General advice disclaimer
The information provided in this booklet is a brief overview of the subject matter and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however, information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision and should consult an appropriate professional before making any decision.