Typically, lenders will apply one of two gearing calculations to management rights funding :

Unit value x gearing ratio – usually 80%
Management Rights Value x gearing ratio – usually 65%
Or
Unit and Management Rights Combined Value x 65% to 75% gearing.

Experience suggests (when borrowing for management rights) that working on an “all up” gearing ratio of around 70% is a good place to start. As an example the calculation then looks like this :

• Unit Value $400,000
• Management Rights Value $700,000
• Costs (say 5%) $55,000
• Total Required $1,155,000
• Less $385,000 deposit + costs
• Loan Amount $770,000 being 70% of the combined purchase price

Of course, gearing is only one part of the equation. Lenders are just as interested in the quality of the asset, the borrower’s previous work experience and the capacity of the asset to service debt. In particular most experienced management rights lenders will consider the following issues when assessing a loan :

• Balance term of the agreements (including options)
• Sustainable net profit
• Future prospects or upside
• Debt Servicing Capacity
• Opportunities to increase net profit
• Composition of the letting pool
• Operating business model
• Legislative Risk
• Economic Trends and Drivers
• Qualifications of the intending purchaser