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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 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:
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 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.
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).
Please see the following pages of this Retirement Villages Guide for further information:
Please also see the following pages for further specific information regarding the particular application of the retirement villages laws in the respective Australian States and Territories: