Retirement Villages and Homes - Financial Considerations
Retirement village residents may be required to pay:
- an initial entry price when they move in
- rent and/or recurring service charges during their stay and perhaps beyond
- a fee called a departure fee, deferred management fee or exit fee when they leave.
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.
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.
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:
||Entry Price or Re-sale Price
||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.
||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.
||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.
|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%.
||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.
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]