As the property market tightens, the focus of real estate businesses tends to turn towards rent rolls for securing revenue.
When it comes time to move on and sell a rent roll, being ‘sale ready’ can help a real estate agent to take advantage of a seller’s market when it occurs.
The Assets of the Business
It is generally accepted that when a property management agency agreement is signed by a client, the agent gets an immediately valuable and tradeable asset – or do they?
Not many agents carefully consider or review the terms of their agency agreements. Most agents think of their agreements only in terms of regulating the relationship they have with their clients. They do not turn their mind to the relationship they will have in the future with a buyer of their business.
Agency agreements affect an agent’s relationship with a buyer of their business, and even a banker if they wish to refinance.
Selling a Rent Roll
Look at the agency agreements and ask the following questions:
- Are the agreements personal to the agent?
- Do the agreements include opt-out provisions or can they be assigned to a buyer of the business?
- On a sale of the business, does the agent need to seek the consent of each client to be transferred to the buyer?
The sale of a property management portfolio can be emotionally draining and time consuming. Agents would not want to add the additional frustration of the agency agreements not being easily assignable.
Finance for smaller portfolios can be a challenge. Banks may lend against the value of the rent roll without taking separate security, but only if the agency agreements are enforceable.
Not only do the agency agreements need to be easily assignable, but they must comply with the legislation. Making sure the agreements are legally compliant will ensure a better result when it comes to a sale or refinance.
Increasing the Value of a Rent Roll
The value of the rent roll will usually be based on a formula which is a multiplier of the yearly management fee. A retention period may be nominated during which any leakage of properties from the portfolio will be adjusted against the sale price. Apart from having the agreements in order, high multipliers and a strong sale price can be gained through the following ways:
- What are the agent’s plans after sale? A restraint of trade will ensure a higher sale multiple.
- If the business is a franchised business is the franchise agreement current? Timing becomes extremely important as there are certain points in time in a franchise arrangement which can trigger a higher sale price.
- Managing more fixed term leases than periodic tenancies will increase the sale price.
- Operational and financial hygiene, including arrears management, is crucial. Does the agent have sound debt collection procedures in place?
- Will the property managers stay on and increase the retention rate after the sale? Are their employment agreements up to date and in line with any changes in the law?
- The agent shouldn’t simply sell to the person who offers the most money. Selling to someone who is not capable of looking after the business’ clients to the end of the retention period will lose the agent more than they gained by taking a higher offer initially. Agents should avoid selling to someone with a bad reputation.
There are many issues which are unique to the sale of a rent roll and agents and their advisers should seek specialist advice from a business lawyer who specialises in real estate and rent roll businesses.
For more information contact the Property Commercial Finance Team: