How are Retirement Village Departure Fees Calculated?

Retirement village departure fees, which are also sometimes called "exit fees", "deferred management fees" or "DMFs", are usually calculated as a percentage of either:

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

The percentage usually accrues over time at a rate that may be fixed or variable. For example, it could accrue at a fixed rate of 2.5% per annum or it could accrue at 5% per annum for the first 2 years and 2.5% per annum thereafter.

The percentage may be subject to a minimum or maximum. For example, it could be a minimum of 10% or a maximum of 30% or more. A maximum percentage is often described by reference to a number of years. For example, a departure fee that accrues at 3% per annum for a maximum of 10 years is effectively capped at 30%.

Regardless of the legal structure, a capital gain accrues if the home is eventually sold, leased or licensed to a new resident for an amount greater than the entry price paid by the previous resident. Any part of this capital gain that is paid to or retained by the operator is effectively part of the departure fee.

If the departure fee is calculated by reference to the re-sale price, it already applies in relation to any capital gain, so no further apportionment is required. If the departure fee is calculated by reference to the entry price, there will usually be a separate apportionment of any capital gain. In some retirement villages, the operator retains the entire capital gain, while in others it is shared. For example, it may be shared 25/75, 50/50 or 75/25.

Although there is no standard departure fee, the industry norm is probably around:

• 2.5% per annum, capped at 25% after 10 years and applied to the entry price, with any capital gain shared 50/50; or
• 3% per annum, capped at 30% after 10 years and applied to the re-sale price.

If a departure fee is applied at a lower rate in one village than in another, it doesn't necessarily mean that homes in the former village offer better value than homes in the latter village because the difference could be offset by a higher entry price in the former village, all other things being equal. Also, the rationale for having a departure fee varies depending on the legal structure of the village and the relevant legislation. In some villages the operator may have no alternative but to recover certain expenses by way of a departure fee, while in other villages no departure fee may be required at all because those expenses can be recovered otherwise.

In summary, the key factors that determine the size of a departure fee are:

• the entry price
• the rate at which the percentage fee accrues
• any minimum percentage fee level
• any maximum percentage fee level at which it stops accruing
• 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 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.

However, demographic changes such as the retirement of the "baby boomers" and increasing life expectancy will create continuing demand for housing that meets the requirements of seniors. Supply may also be limited in the main metropolitan centres due to the limited availability of centrally located sites for the development of new retirement villages.

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 (link below).

More Information?

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

1. Introduction and Overview
   
   

2. Why Are Retirement Villages So Complicated, Confusing and Controversial?
   
   

3. Financial Considerations
   
   

4. How Are Retirement Village Departure Fees Calculated?
   
   

5. What Are Retirement Village Departure Fees For?
   
   

6. Free Departure Fee Calculator
   
   

7. Top 10 Tips
   
   

8. Rental Accommodation
   
   

9. Pets
   
   

10. Legislation
    
    

11. The Retirement Village Handbook