RETIREMENT VILLAGES - ECONOMICAL LIFESTYLE CHOICE - BUT BE AWARE OF DEFERRED COSTS

Al Berzins

 

'Ederslee' Retirement Village - Bateau Bay NSW

A varity of media reports have recently focussed on complaints from retirement village residents about contracts that, on the surface, seem unfair, particularly when it comes time to vacate and sell the retirement property. Australians are fond of bricks and mortar and they're used to making money from real estate but getting a resident out of a retirement village with a fair return can be a disappointing exercise.

Many retirees get back less than expected, once a village operator has collected various fees and charges and a cut of the increased value of a unit - and that can be after years of capital gains in the surrounding suburb.

What's left when they move out - on average, 10 years later - depends on the parameters of any departure fee charged, the operator receiving a share of any capital gain and what the contract stipulates, among other things, about having to refurbish the unit before resale.

The bottom line is you need to consider the overall cost of the lease or purchase when assessing a village.

''You certainly don't buy into a retirement village to make money,'' says Richard Andrews of the Find My Retirement Home service. ''It's a lifestyle choice and retirees need to keep that in mind.''

TRANSPARENCY ISSUES

Residents' advocates say villages can be great for downsizing, security and companionship and there have been welcome changes to state legislation covering villages in NSW that have improved residents' rights.

However, ownership structures can be difficult to compare; the dominance of long-term lease agreements that they say favour for-profit operators; thick contracts that are hard to understand; and the transparency of ongoing fees.

''It is an excellent model of living - I would be the first to say that,'' says the president of the Retirement Village Residents' Association, Malcolm McKenzie. Now 80, he has lived in a NSW village for 15 years.

CONTRACTS AND COMPLEXITY

The chief executive of the Retirement Village Association (RVA), Andrew Giles, says the entry of big corporate groups in recent years ''provides a good economic diversity that reflects an industry reaching maturity'' and permits savings from economies of scale.

Whatever side of the picket fence they're on - resident or operator - all agree buyers must examine village contracts and disclosure statements carefully, with the help of a specialist lawyer, to ensure they know exactly how much they'll be paying and what they'll be paying for.

A potential resident should undertake a good investigation of the facility and its arrangements so you understand what you're signing and you know what your financial outcome is going to look like when you leave. Some people don't really understand what they're signing when they buy and it doesn't bite them on the bum until they leave.

However, the departure fee is the only avenue for an operator to make a return on their investment in a village. Monthly service fees are set on a cost-recovery basis only and don't cover the initial cost of building shared facilities such as swimming pools and emergency-call systems.

'There are five main ways to occupy a unit: freehold; leasehold (you buy the unit but lease the land); deferred management fee (or DMF, whereby you buy the right to occupy, then pay annual fees and an exit charge); company title; and strata title. Rental is another option.

In Australia about 90 per cent of village units are now occupied on long-term leases using a DMF structure.

COST TO MOVE IN

The DMF structure was originally designed by non-profit operators so they could keep the upfront cost low to help people into units. That meant you'd pay, say, 70 per cent of the market value initially and the operator would recoup the difference once the unit was resold. Therefore, retirement village units are cheaper than a similar, privately owned unit in the same suburb, particularly if you take into consideration the community facilities that will be available. 

Incoming residents get to keep a bit more in their pockets but it also means that operators charge a DMF to recover some of that difference at the end.

ONGOING COSTS

Once you've paid the entry price, you need to be able to meet what are variously called ongoing, maintenance or recurrent fees A rule of thumb is that you'll contribute $10 a day towards village running costs but the more facilities a village provides, the higher the ongoing fees.

HOW MUCH TO LEAVE?

Eventually the time will come for the unit to be sold and your payout to be calculated. This is when departure fees kick in. Generally, DMFs accumulate at 2 per cent of the purchase price each year for perhaps 10 years.

Then there's the question of capital gains. Under most contracts, part of the appreciation in a unit's value goes to the operator, which means even more money is deducted from the final selling price before the proceeds go to the resident or his or her estate.

On top of that, residents may be required to contribute to the cost to refurbish the unit to a certain standard for sale.

Under one contract, that might mean new carpet and some fresh paint; under another it could mean the much more expensive option of installing a new kitchen and bathroom.

SALE OF THE UNIT

Residents sometimes complain of the time it takes to sell a unit and the price achieved. The contract may specify that the village operator will be in charge of the selling process.

These days you will usually be allowed to choose your own agent. It's in everybody's interests - the operator, outgoing resident and their family - that the property is sold as soon as possible.There may be a guaranteed payout period - a maximum time a unit can sit unsold before the resident receives some sort of payment.

In NSW, if you're entitled to at least half of the capital gain upon resale, then you may be required to contribute 50% of the recurrent fees after 42 days.

 

MORE ON EXIT FEES

The Exit Fee is also known as a Deferred Management Fee or DMF. Most of the homes sold in retirement communities around the country use a deferred management fee arrangement.

DMF schemes have been structured to work within the state retirement village legislation, while seeking to appease our cultural need to “own property”. In essence, it is an annual fee charged to the resident for each year of occupancy in the village, capped at a set number of years, and calculated as a percentage of either the original sale price.

The original intention of a DMF scheme, some 30 years ago, was to allow retirees to buy a unit for 20-30% less than the market value of an equivalent freehold unit. The village owner would then make that discount back over the resident’s occupancy through the accrued fee.

Exit fee contracts are structured around a long-term “right to occupy” in the form of a lease or licence, which the resident of an individual unit executes with the village owner. This is a long-term contract between the owner and the resident, and commits the resident to paying a management fee that is deferred until such time as they vacate their unit. The fee is accrued over the duration of the resident’s tenure in the property and is physically received by the operator only upon departure of the resident. The fee is usually retained from the proceeds from the re-sale.

Under the DMF scheme residents also pay a weekly, fortnightly or monthly fee to the owner, to cover the costs of operating the village, such as insurance, rates, utilities and staffing. The owner of the village also contributes to these costs on behalf of the common areas and in new complexes, any units yet to be sold. Legislation prevents operators from making a profit on service costs so weekly fees are set at the level of total costs, including the owner contribution.

Additional services may be offered to residents such as meals, laundry and cleaning. The charge for these services to residents may include a profit component, although this is generally held within a reasonable, commercial range to encourage utilisation of the services by residents. These services may be provided by the owner or outsourced to third parties. Some services may even attract a government subsidy.

It is important to note that under a deferred fee scheme the resident does not actually own the freehold title to their unit – this remains with the owner of the village. Instead, the resident purchases a “Right to Occupy”, in the form of a lease or licence. This Occupation Right is similar to freehold title in that it costs the resident around the same level of cash to acquire it, and they enjoy rights of occupation similar to that of a tenant in a community-titled residential complex, such as a block of flats.

Under a DMF scheme a resident is actually free to vacate the unit at any time, but would be liable for the accumulated portion of the fee, if the departure occurs prior to the capped fee year.

The Deferred Management Fee scheme is the subject of much angst and bad feeling from retirement community residents. I think this is not so much from the unfairness of the contract, but rather from the lack of understanding of how the contract works, which results in unpleasant surprises for the resident when they consider moving.

However there is no denying that Deferred Fee schemes weigh heavily in favour of the village owner. Village owners and developers have invested many thousands of dollars with accountants and lawyers to design contracts that work within the appropriate state and federal laws, yet maximise the profit and tax outcomes for owner.

But is this necessarily a bad thing?

It is wrong to assume that village owners who use deferred fee contracts are profit-minded vultures that don’t care about their residents. Many not-for-profit operators such as church groups or benevolent organisations also use deferred fee contracts.

You know, at the end of the day, successful villages are those with well-funded, interested owners. If an owner is making money from the enterprise, they will be more inclined to spend money on the upkeep of the community facilities to keep the complex looking fresh and attractive. No-one benefits when a retirement village owner goes broke.

In conclusion, a retirement village can be a great lifestyle option for retirees, but there are some hidden traps that you need to be aware of.

To Read More refer to “Don’t buy your Retirement Home without ME!”, published through Wiley

For myself, I currently have a personal interest in this industry. I am the Executor of my mother's estate. Right now, I am selling her retirement unit. Details are as follows. Where else could you buy a Beachside Retirement Lifestyle or a cheap weekender for just $75,000! You be the judge.

Unit 57 ‘Elderslee’ 15 Bias Avenue Bateau Bay Just $75,000 Buys Beachside Retirement or Economical Weekender

Original Studio in this genuinely friendly village. The Unit has elevated position with NE aspect, natural light, balcony, built-in robes, open-plan design, stair chair for ease of access. Other features are: leafy views, mature trees, bird-life and sea breezes. ‘Elderslee’ is close to Bateau Bay and Shelley Beach with shops, Bowling Club and Golf Club and transport nearby

Enjoy independent living, social contact, activities, a feeling of community, no home maintenance or gardening, safety and security, great quality of life at half the price of an equivalent property outside the village. ‘Elderslee’ is elegantly designed, beautifully landscaped and is tastefully integrated into the surrounding community to encourage a healthy, active lifestyle

Communal Facilities:

  • Billiards, darts, indoor bowls
  • Library
  • Barbecue Area
  • Gym
  • Medical services on-site
  • Community Centre
  • Active Social Committee

Contact Agent: DeMarcos Realty: Godfrey DeMarco 0433 405 984 or Alan Berzins 0468 426 127