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Departure 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.
The Retirement Village Handbook includes a detailed
explanation of what departure fees are and what they are for. It
describes the different structures and explains the
implications of the different structures, with examples. It also points out some
potential traps for the unwary and perhaps most importantly it explains the complex relationship
between departure fees, service charges and the entry price.
On this page you will find:
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background information about departure fees
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a guide to help you analyse a particular departure fee
structure
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a link to our free online Departure Fee Calculator.
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Departure fees are usually calculated either:
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by reference to the entry price, with a separate arrangement
regarding the apportionment of any capital gain that may accrue |
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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:
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| 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. |
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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. |
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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%. |
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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. |
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The key factors that usually determine the size of a departure fee
are:
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the entry price
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the rate at which the percentage
fee increases
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the minimum percentage fee
level
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the maximum percentage fee
level at which it stops increasing
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the eventual period of occupancy
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the
size of any capital gain that
accrues during the period of occupancy
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the basis for the apportionment of any
such capital gain
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the size of any
administration fee that may be payable.
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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.
Try Our Free Online Departure Fee Calculator
We have set up a free online Departure Fee Calculator that
can estimate how much a particular departure fee could be in a range of
scenarios.
[Click here to try our free online Departure Fee
Calculator] |
