Kaye Terry BAMR Window De Stoop Director

When acquiring an established management rights business the accountant is directed by way of paragraphs in the contract of sale as to what profit and remuneration are to be verified and the period to which that profitability relates. When purchasing off-the-plan those safeguards will not be included and the accountant is required to confirm a figure represented to the purchaser by the developer.

How does the accountant do that?

From the outset you must realise that the conclusion figure is going to be hypothetical and the report is going to include a disclaimer by the person/firm conducting the feasibility study. The investigating accountant will require details concerning:

• the location of the complex;

• the number of units in the complex;

• the size and configuration of the units;

• the developer’s marketing intentions;

• whether the units are furnished or not;

• the proposed remuneration in terms of the management agreement; and

• whether there is any proposed rent-free period for tenants or rent guarantee periods for unit owners.

The latter may depend on whether it is a residential or holiday style complex.

Armed with this information the accountant should inspect the site location and similar complexes in the adjoining areas to ascertain competition and sources from which to obtain data concerning the expected number of units to be in the rental pool, occupancy percentages and tariffs.

Detail concerning occupancy percentages and associated income sources such as cleaning, linen hire, PABX fees etc are probably available from the accountant’s own records as well as government and other professional groups.

Now armed with this additional information the accountant can commence the actual calculation of expected income (adding further variables into the equation such as high, low and shoulder seasons and the associated tariffs) and from his own records and experiences calculate the expected operation expenditures associated with the income items.

If the developer has negotiated sales on the basis of a guaranteed return to investors, these associated rentals should be ignored and all calculations done on current market rentals, otherwise the end result could be a highly inflated profit to the manager.

If the accountant is experienced in this business sector and has records and sources from which to obtain the necessary information, his final figure will be accurate, however the report will still be hypothetical and be qualified.

Remember that your gross income (and therefore your net income) is going to always be dependent on the amount of income received per unit, the number of units in the letting pool and the occupancy percentages ach-ieved.

An example of how the gross income (and therefore the net income) is dependent on the mix of occupancy, tariff, etcetera is detailed in the table (see Table below left).

The table contents are all unknown variables at the time of buying off-the-plan and even though some can be estimated reliably, it is evident that the revenue can vary significantly depending on the final result achieved.

Another matter that should be considered when buying off-the-plan is the additional working capital requirements to fund the initial marketing plan, capital items (PABX, computer and office equipment, etc), and even general living expenses while the letting pool is being established.