Deferred Exit Fees and Costs in Retirement Villages
Still not enough Transparency
Moving into a Retirement Village typically requires entering a long term lease or license which involves you paying the operator a lump sum deposit or accommodation bond - various names are used - for the right to occupy a retirement unit, and providing the operator with the right to make regular maintenance and other charges, as well as to deduct certain deferred fees when you leave the unit.
Whether the lease or licence agreement represents fair value depends entirely on the terms of the individual contract, and these can be extremely complex documents running to many pages. Unbelievably, the common approach taken by many developers, operators and real estate agents is only to initially provide details regarding the upfront "price" of the unit. Indeed, even the major online real estate sites, such as realestate.com.au, simply list properties with the entry price and mention "retirement living".
This is misleading because the upfront cost is not the only cost attaching to the purchase - the deferred fees are typically significant and fund the (sometimes questionable) lower entry price. Additionally, operators will often be reluctant to provide details of the deferred fees payable, and the licence/lease agreement, prior to a viewing or "in principle" commitment to the purchase of a unit.
In our view, this should be illegal and you should not deal with an operator that takes such an approach. We don't wish further legislation by the Government, that invariably makes things even more complicated, but we need more stringent rules around transparency - and that includes contractual documentation being readily accessible at the time of any initial inquiry and a summary of the major terms appearing in any marketing material.
After the upfront price, deferred fees should be your second focus
Frankly, we are continually puzzled by just how little thought many retirees give to the conditions on entry to a retirement village - and particularly the deferred fees payable on exit. Many retirement villages offer fair and reasonable conditions but others can pose a potential "wealth hazard" and all documents need to be carefully reviewed before any commitment is made.
To provide some general indication about deferred fees, the 2020 PwC/Property Council Retirement Census, indicates that, "the maximum deferred payment percentage for 98% of operators is 36% or below. The median maximum deferred payment percentage is 30% over 6 years". This is indicative only; some operators exist outside the scope of the survey.
It is difficult to make generic comments in this area because of the sheer variety of agreements across Australia - some providing for deferred fees to be based on the Ingoing price for the unit, some on the Outgoing sale price, and some providing for the sharing of any capital gain made between the individual and the operator. Nevertheless, we have provided one example below that might be considered useful.
Just One Example
Just consider the following existing offer on some "desirable" Over 55's apartments in a seaside location:
1. Individuals purchase a long term license to occupy a 2 or 3 bedroom apartment unit valued at between (currently) $720K and $1.85M
2. A number of fees are payable whenever you leave the facility, comprising:
A. Deferred Fee based on Tenure
Note that this is a percentage of the Resale Value, not a percentage of the Ingoing Price.
| You have lived in the residence for between 90 days and 1 year | 7% of the Resale Value |
| You have lived in the residence for less than 2 years, but more than 1 year | 13% of the Resale Value |
| You have lived in the residence for less than 3 years, but more than 2 years | 18% of the Resale Value |
| You have lived in the residence for less than 4 years, but more than 3 years | 22% of the Resale Value |
| You lived in the residence for more than 4 years | 25% of the Resale Value |
B. Capital Replacement Fund (CPR)
You pay 1% of the Resale Value per annum up to a maximum of 10 years on leaving the property.
C. Re-Marketing Fee
You are required to pay all reasonable re-marketing costs including advertising and sales commissions.
In addition you are required to pay a weekly maintenance fee; but whether that represents good value depends on precisely what is included and how much you value the support services. It is also arguable that the 1% per annum CPR fee simply reflects what you would need to invest in any property to maintain it properly and maximise value - however, unlike in a strata apartment development, you have no control over the use of this money or guarantee that it is properly applied.
Some Example Figures
So, assume you have purchased a license to occupy a property for 900K and we take 2 different scenarios - i) a pessimistic scenario in which the resale value does not increase over time and ii) and an optimistic scenario in which the value increases by 5% per annum compound - and you leave after 5 and 10 years respectively. How much money do you make (or lose) on your $900K investment?
| Purchase Price = $900,000 | End Year 5 ($) |
End Year 10 ($) |
| Scenario 1: No Increase in Value Annually | 900,000 |
900,000 |
| Deferred Fee | 225,000 |
225,000 |
| Capital Replacement Fund | 45,000 |
90,000 |
| Operator Share on Sale | 45,000 |
45,000 |
| Your Share on Sale | 630,000 |
585,000 |
| Your Gain or (Loss) | (270,000)* |
(315,000)* |
| * Less Re-marketing Fees | ||
| Scenario 2: 5% Increase in Value Annually | 1,148,653 |
1,466,005 |
| Deferred Fee | 287,163 |
366,501 |
| Capital Replacement Fund | 57,433 |
146,601 |
| Operator Share on Sale | 344,596 |
513,102 |
| Your Share on Sale | 804,057 |
952,903 |
| Your Gain or (Loss) | (95,943)* |
52,903* |
| * Less Re-marketing Fees |
In Summary
There should be absolutely no expectation that moving into a Retirement Village represents an investment on which you will make a positive return - but we don't believe entering into license arrangements such as those illustrated above, with substantial deferred fees, are advisable unless you have reason to believe that the entry price represents a substantial discount to the freehold price of other comparable properties in the market - having regard for the additional amenities the village may offer. The focus should be on assuring that you are receiving value for participation, and understanding what happens at the end of your stay in terms of costs and when you will have access to your funds .
Discounted entry prices have regularly been proposed as a reason for deferred fees and we have seen clear evidence of this applying with many, often non-profit operators, but this will not always be the case.
As for the sales pitch that you are "avoiding stamp duty" because this is is a lease or license; that is correct but from the example above you will see that even the deferred fee at the end of Year 1 (7%) clearly exceeds any stamp duty cost.
The moral of the story is that you should obtain independent advice before entering into any long term license of a retirement property. The cost of getting the advice will simply be dwarfed by the price of getting it wrong.
| Please note prior to making any Inquiry: Financial regulations regarding the provision of specific advice mean that it is impossible for us to provide assistance unless it is provided as part of professional advice for which fees will apply. |
If you would like to arrange professional advice in relation to the above matters, please complete the Inquiry form below providing details and you will be contacted accordingly. You will receive a fee quotation in advance of any advice or services being provided.