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Retirement Villages - Financial Considerations & Departure Fees

Retirement village residents may be required to pay:

  • an initial entry price
  • recurring charges such as service charges and/or rent during their stay and perhaps beyond
  • a fee called a departure fee, deferred management fee or exit fee when they leave.

Entry Price

The nature of the initial entry price depends on the particular legal structure. For example, it may be the purchase price of a freehold property, security or other asset, or it could be described as a loan, premium or prepayment of rent.

No initial entry price is payable in the case of a conventional lease and the initial entry price into a manufactured home village is generally the cost of acquiring the home itself, but not the land on which it sits, which you lease or license from the owner.

Recurring Charges

Recurring charges are the charges you pay on a regular basis, usually weekly, fortnightly or monthly, while you live in a village. Basically, they cover the cost of providing a range of general services for the benefit of all residents in the village. The total recoverable amount is usually allocated to the various units in the village based on their respective sizes, although in some cases some expenses may be allocated based on the number of people occupying each unit if this is thought to be fairer in the circumstances.

The nature and components of the recurring charges can vary from village to village and jurisdiction to jurisdiction depending on the particular legal structure and the applicable legislation. For example:

  • in conventional lease villages and manufactured home villages, the recurring charges will also include a component of rent
  • in strata title and community title villages, you may also have to pay levies, which can include a sinking fund component for capital repairs and replacement.

Departure Fees

Departure fees, which are sometimes called deferred management fees or exit fees, are one of the most important, difficult and least understood aspects of retirement villages. They are the fees you pay when you leave the retirement village. There are many different structures and they can produce very different financial outcomes.

First, it is more than reasonable to wonder, or even ask, what a departure fee is actually for. In our opinion it will usually have the following components:

  • an operator subsidy/reimbursement component, which fairly compensates the operator for expenditure that it cannot or does not otherwise recover through the above recurrent charges, including an interest component that reflects the deferred nature of the payment
  • an operator profit component, comprising any balance.

The trick, of course, is to work out the breakdown between the above components.

Another possibility is that the operator offers entry price flexibility. In other words, it may accept a lower entry price up front in return for a larger departure fee at the back, which may suit some people.

It is also sometimes argued that the departure fee represents a return to the operator on its investment in the village grounds and facilities, but in reality this cost is more than likely already reflected in the entry price.

Departure fees are usually calculated either:

  • by reference to the entry price, with a separate arrangement regarding the apportionment of any capital gain that may accrue
  • by reference to the re-sale price when the unit is sold, leased or licensed to a new resident, which necessarily takes into account any capital gain that may accrue.

It is important to understand that any capital gain that is paid to or retained by the operator is effectively part of the departure fee.

Most departure fees fall into one of the following three categories:

Category

 

Entry Price or Re-sale Price

 

Capital Gain

         

A

The fee is a percentage of the entry price, which accrues over time at a specified rate, for example at the rate of 2.5% per annum.

The operator is entitled to 100% of any capital gain that may accrue.

         

B

 

As above.

 

The operator and the resident share any capital gain that may accrue in agreed proportions.  For example, each may be entitled to 50% of the capital gain.

         

C

 

As above, except the fee is a percentage of the re-sale price when the unit is sold, leased or licensed to a new resident.

 

The fact the fee is based on the re-sale price means the operator is entitled to the accrued percentage of both the entry price and any capital gain that may accrue.

There are then variations within each of the above categories:

Rate of accrual

The rate at which the percentage fee accrues can vary greatly, from about 2.5% per annum to 10% per annum in some cases.  In some villages the rate may be higher in the first year or the first couple of years.  For example, it could be 8% in the first year and 4% in subsequent years.

     

Minimum and maximum fees

 

The percentage fee may be subject to a minimum and/or a maximum. For example it could be a minimum of 5% or 10% of the relevant amount and/or it could be a maximum of 25% or 35% or even 50% of the relevant amount.  Maximum fees are often described by reference to a number of years.  For example, a village that charges a fee of 2.5% per annum for a maximum of 10 years effectively charges a maximum fee of 25% of the relevant amount.  If the fee were charged for a maximum of 20 years, the maximum fee would be 50%.

     

Administration fees

 

Some villages charge a one-off administration fee when a unit is permanently vacated.  It is usually based on the re-sale price and it is usually imposed as an alternative to a minimum fee or a fee that is higher in the first year or the first couple of years.

The key factors that usually determine the size of a departure fee are:

  • the entry price
  • the rate at which the percentage fee increases
  • the minimum percentage fee level
  • the maximum percentage fee level at which it stops increasing
  • the eventual period of occupancy
  • the size of any capital gain that accrues during the period of occupancy
  • the basis for the apportionment of any such capital gain
  • the size of any administration fee that may be payable.

The best way to analyse how a particular departure fee structure works is to calculate what the financial outcome would be in a range of scenarios. To do this properly you may need to estimate the rate at which you think the market price of the property will increase in future years. This obviously involves some guesswork, but as a general proposition it is probably reasonable to assume that there will be a strong positive correlation between movements in the market price of retirement village properties and the broader residential property market. There is also a strong argument that demographic changes such as the impending retirement of the "baby boomers" and generally increasing life expectancies will create continuing demand for housing that meets the requirements of seniors. Another factor to keep in mind is the relative scarcity of development sites in metropolitan areas, which will limit supply in these areas in the face of rising demand.

More Information?

Please see the following pages of this Retirement Villages Guide for further information:

  1. An Overview

  2. Top Ten Tips

  3. Services and Levels of Care

  4. Financial Considerations & Departure Fees

  5. Departure Fee Calculator

  6. Rental Accommodation

  7. Pets

  8. Legal Structures

  9. Legislation

  10. Publications
 

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