If you run a real estate business, you may or may not already have a rent roll. You might be looking to grow your business by purchasing a rent roll from another business.

Or, you might be considering exiting your business, so looking to sell your rent roll.

Either way, having an advisor such as AFS that is experienced in facilitating rent roll deals to guide you through the process is valuable.

What is a rent roll?

A rent roll is the property management or rental division of a real estate business that deals directly with landlords and tenants, collecting rent, handling maintenance and repair issues, responding to tenant complaints, and even pursuing evictions.

In return for these services, the real estate business is paid a management commission on the periodical rent in addition to other fees and charges for things such as finding a tenant (letting fees) and other small administrative charges. 

Rent rolls are saleable and can be very valuable businesses.

At what price?

The value or price of a rent roll is typically assessed as a multiple of annual property management commissions. The multiple will typically be between 2.5 to 3.5 times, but can vary, and depends on many factors, including geographic location of the rent roll, the nature of the properties under management, general market supply and demand.

Things to consider when looking to buy or sell a rent roll

There are many factors to consider when looking to buy or sell a rent roll, and an accountant or consultant experienced in rent roll deals is of great value at this stage of analysis and decision making (due diligence).

Factors to consider include:

• Number of properties under management
• Nature of properties under management and landlords, including geographic spread of properties, types of properties under management (e.g. residential vs. commercial)
• Analysis of expected profitability of the rent roll
• Analysis of tenant arrears, lease terms, periodic tenancy numbers, vacancy rates
• Staffing requirements, e.g. will my existing staff levels be able to cope, will I take on the existing staff of the rent roll I’m buying, do I need to hire new staff
• Landlord pricing, will I keep the current pricing or change, if changing, what do I expect to be the impact of losing landlords
• Business premises, am I moving the rent roll to my existing business location or am I taking over the existing business premises
• Funding the purchase of a rent roll, how much will the bank lend, how much of my own money do I need to contribute
• Software and reporting, what software does the current rent roll use, is it the same as what I currently use, will I change or transfer to my existing software
• Tax and legal implications
• Retention period and amount. A retention is an amount that is withheld from the sale price as an allowance for any properties that don’t continue with the new owner of the rent roll. If immediately after purchase landlords leave, the buyer would be paying for business that is not continuing. A retention provides some protection to the buyer for this potential loss.
• Non-compete or restraint of trade clauses, if applicable. If you are buying a rent roll business, relationships with the previous owner can be strong, and a buyer may want some comfort that the seller won’t just reopen for business as soon as the sale is completed, potentially affecting the business you’ve just purchased. A non-compete or restraint of trade clause can provide some comfort to the buyer.

Sale and purchase terms

Once you’ve decided to buy or sell, and at what price, the deal now needs to get done. Accountants and lawyers will typically need to be involved at this stage.

Typical terms that need to be considered include:

• Price, multiple and any price adjustments on completion/settlement for matters such as increases or decreases in property management income, employee leave entitlements assumed by the new owner
• Retention amount (typically 10-20% of the sale price, but negotiable)
• Retention period (typically 90 days after completion/settlement of the sale, but negotiable)
• Staff and premises, i.e. options to take on staff
• Non-compete or restraint of trade clause and agreements
• Conditions of sale, e.g. sale subject to due diligence, sale subject to finance.

Tax implications

For income tax purposes, a rent roll is typically treated as a capital gains tax (CGT) asset. Accordingly, the sale of a rent roll will typically give rise to a capital gain or capital loss. In the case of capital gains, various CGT or small business CGT concessions may be available to reduce the capital gain and therefore reduce tax payable on sale.

For goods and services tax (GST) purposes, the sale of a rent roll may or may not attract GST, depending on the nature of the sale.

The sale of a rent roll can be GST free if it is considered the sale of a continuing business, or ‘going concern.’ However, for the sale to be considered the sale of a GST free going concern, many factors need to be satisfied, such as the business must be in operation right up to the time of sale. Additionally, all things necessary for the continued operation of the business must also be transferred as part of the business sale, which would typically include the existing employees, business premises, systems and software etc.

If the buyer is only taking on the rent roll itself and none of the above continuing business items, the sale will likely be subject to GST.

You should consult an accountant or tax adviser experienced in rent roll deals for advice specific to your circumstances.

Legal implications

You should also engage a lawyer experienced in rent roll deals to provide you with advice. This is important whether you are buying or selling.

Lawyers will draft and review agreements and provide advice including:

• Heads of agreement, the document outlining the terms of the deal prior to due diligence being conducted
• Contract of sale, the document outlining the final agreed terms of the sale once due diligence has been completed and any other conditions of sale have been satisfied (e.g. finance)
• Non-disclosure agreements relating to due diligence
• Non-compete or restraint of trade clauses or agreements
• Lease or lease transfer documents
• Licencing, business name, trademark or intangible asset matters
• Vendor loan or mortgage document (if applicable)
• Employment agreements
• Any legal or regulatory requirements

What can start off as a simple ‘I’m going to buy/sell a rent roll’ actually requires much thought and decision making, and it can be a more complex process that originally thought. This is why engaging advisors experienced in rent roll deals is important.

AFS are specialists in rent roll deals and the real estate and development industry more broadly. If you have any questions or would like advice on buying/selling a rent roll in your business, please contact Damien Palmer on 03 5443 0344 or email afs@afsbendigo.com.au