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The phrases ‘claw back’ and ‘claw forward’ are management rights industry specific terms that are almost always used in relation to off the plan management rights transactions and occasionally in relation to existing management rights business transactions.
Contributed by Hynes Legal
What a claw back or claw forward does is create an adjustment to the purchase price of a business based on the number of units that may be in the letting pool at a certain time. A claw back is a downward adjustment (reduction) to the price and a claw forward is an upward adjustment to the price (increase).
The claw back / claw forward amount is essentially the capital value of each letting appointment. There is a formula to calculating these amounts.
The fist thing to remember is that the remuneration which you earn as the caretaking salary does not usually form part of any adjustment because this is paid to you no matter what. This remuneration is paid irrespective of the number of letting appointments that you may actually have.
It is a completely different position with respect to letting income. The income you earn from letting is derived only from the number of lawful letting appointments you have. There is an art to define when a lot forms part of the pool which is beyond the scope of this fact sheet but when you are looking to calculate a claw back or claw forward amount, you can use this simple formula:
Clawback amount = (Net profit - net caretaking remuneration) / Number of units in letting pool x multiplier
1. Get the overall net profit (whether real or anticipated) for the business.
2. Take the net caretaking remuneration away from that. The net caretaking remuneration is the amount paid by the body corporate under the caretaking agreement less the staff costs (beyond a two person management team) to provide the caretaking services. In smaller complexes where a two person management team can provide all the caretaking services, this will simply be the caretaking remuneration. In larger complexes, staff costs (which have already been deducted from the net profit) will in effect have to be neutralised, as they will have already come off the net profit.
3. Divide the balance remaining (which is in effect the net letting income) by the number of units in the rental pool – which gives you the net income for each letting unit.
4. Multiply that by the agreed multiplier. That then leaves you with a figure that represents the capital value of each letting appointment that forms part of the business. The purchase price in the contract can then be structured around that number to represent the capital value of the letting side of the business.
An additional twist is to differentiate the values based on the style of lot. For example, a one bedroom corporate let unit would have a different level of income (and therefore capital value) from a three bedroom permanently occupied unit. If you want to break it down into that level of detail, you would need to apportion the letting income amongst the different styles of lots which would then (using the above formula) get you to a capital value per letting appointment.
Ultimately, it is a question for the parties to agree to what the capital value of each letting appointment is. If they are all two bedroom permanent lets, it is easy. If there is a spread of one, two and three bedrooms, mixed between corporate, permanent and NRAS lots, it can be pretty complex.
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