Many people are confused about the difference between a retirement community and an aged care facility, and I would certainly agree that the lines appear to be blurring between the two.

So what is a retirement village?

A retirement village is basically whatever is defined as a retirement village in your state or territory’s retirement village legislation. Typically, the legislative definition describes it as a property where retired or older people reside, and they purchase a right to occupy (usually via a lease or licence to occupy) and may purchase additional services for a fee. A village needs to be registered under the state retirement villages act in order for it to charge all of those weird and wonderful fees like deferred management or exit fees.

However, you may have heard of other retirement living facilities such as an Over 50′s or Over 55′s village, or a lifestyle resort. These complexes typically sell you the freehold title to the built structure (the house) and then lease you the portion of land it sits on. These developments come under the state or territory’s manufactured homes legislation, usually the same legislation that covers caravan parks and the like.

Other retirement-style facilities include freehold complexes, where you own the freehold title to the unit. These facilities may or may not be registered retirement villages and may or may not charge all of the same fees (such as deferred management or exit fees) that you will find in a village operated under the retirement villages legislation.

There are around five different types of purchase and occupancy arrangements for retirement villages and each one has its own framework of fees, charges and complexity. Generally speaking, the occupant pays an upfront fee similar to the freehold value of the property, then a small regular fee during their occupancy, and a larger deferred fee upon exit.

Retirement villages are typically targeted to retirees who can live independently, although many villages now offer some care services as well.

Aged Care on the other hand, comes under the one Commonwealth Aged Care Act 1997, which dictates how the charges and occupancy is arranged. There is still a fair bit of discretion on the operators behalf as to the quantum of charges, and you should be sure to get good advice from a financial planner skilled in the aged care area before you sign anything. As with retirement communities, certain aspects can be negotiated and you should never rely on the company sales agent to give you the right advice.

Under the aged care model a resident may be charged for the care and services provided, as follows:

• Basic daily fee – as a contribution toward accommodation and costs of daily living.
• Income tested fee – as a contribution towards the costs of care.
• Accommodation payment – as a contribution towards capital accommodation costs.
• Extra services charge – applies to residents occupying extra service places (both permanent and respite) for the provision of a significantly higher standard of accommodation services and food.
• Additional service fee – where the resident requests or agrees to additional services (such as newspapers and hairdressing).

Aged Care facilities are targeted to seniors who need an element of nursing support in their day-to-day lives. This can range from a little assistance through to full palliative care. You can find out more on the Australian Government’s aged care website.

I think the confusion arises where you have retirement villages which offer an aged care facility within the same complex as the independent living units. These villages are called “integrated villages” and seek to offer a complete spectrum of care to alleviate the need for its resident’s to ever move again. Well-planned complexes will have the aged care area well separated from the independent living area so that able-bodied residents don’t mix with those who are requiring care.

Integrated facilities typically offer aged care as an incentive to potential purchasers interested in the independent living units, because this is where operators make their money. It is worth noting however that there is usually no guarantee to an existing resident of the village that there will be a place for them in the aged care facility, and they may still have to go onto a waiting list for a place. You may also have to sell your existing unit to fund your aged care place, and the fees associated with a sale of your residence can seriously deplete your capital base.

The aged care facilities within a retirement village may operate under the Aged Care Act 1997 and charge the purchase and occupation fees accordingly, or they may simply charge a weekly/monthly rental, or they may operate under the same deferred management fee schemes as the independent living units within the retirement village.

The whole area of aged care and retirement communities can be a real minefield. I strongly suggest that you find a good financial advisor who can guide you through the process and make sure you get the best deal you can.

If you would like to know more about Aged Care, Noel Whittaker and Rachel Lane recently published a book called “Aged Care – Who Cares?”. To promote the book they are running a series of aged care seminars in Brisbane, Sunshine Coast and the Gold Coast. The seminars are free and I would strongly encourage you to attend if you are interested in learning more about aged care.

The details for the general public seminar are attached here: WM Invitation – Aged Care Public Sessions 2011. Make sure you call to book your seat – previous seminars have booked out.

The details of the seminar aimed at aged care operators and industry is attached here: WM Invitation – Aged Care Industry Conferences 2011.

Queensland has around 190 registered retirement villages, with many of these located around Brisbane and the southeast corner of Queensland, including the Gold and Sunshine Coasts. The region is popular with retirees due to its pleasant climate, beaches and easy access to quality hospitals and health care. Many of the villages located near the Brisbane CBD are older villages, built around 30 years ago. The newer villages are located in suburban fringe locations where retirement village developers have been able to access large plots of land.

When considering where to live in Brisbane, the first decision you need to make is “which side” of Brisbane to live in. This could be the north side, as far up as Bribie Island or Caboolture, east in the Redlands region, south, as far as Logan, or west, out as far as Ipswich.

Understandably, the closer to the Brisbane CBD you want to live, the more expensive it is. For example, a two bedroom apartment close to the CBD may be $400-$500k, whereas a similar standard of apartment may be accessed for around $250k in the more regional locations.

Living in a retirement community can be a great lifestyle choice for retirees. Unfortunately, the process of buying a home in a retirement village is complex and confusing, with many hidden traps and charges awaiting the unwary buyer. It is important that you get good, independent advice and don’t just rely on what the village sales agents are telling you. Find My Retirement Home is a Brisbane-based independent advisor and buyer’s agent specialising in retirement homes. You can give us a call on 1300 425 442.

Retirement villages in Queensland are administered by the Department of Fair Trading.

There are five ways that retirees are able to own or occupy a retirement home in Brisbane. You can learn about the five different ways HERE.

One of the most difficult issues for the buyers of retirement homes to understand is that of Exit Fees, also known as departure fees or deferred management fees. You can learn more about Exit Fees on my video tutorial HERE.

If you would like to conduct an online search for the retirement villages available in and around Brisbane, please go HERE.

In Victoria, a retirement village is defined under the legislation as a community where most of the residents are aged 55 or over, have retired from full-time work and upon entering the village, paid a lump sum (called an ingoing contribution) that was not rent. There are around 400 retirement communities in Victoria.

Living in a retirement community can be a great lifestyle choice for retirees. Unfortunately, the process of buying a home in a retirement village is complex and confusing, with many hidden traps and charges awaiting the unwary buyer. It is important that you get good, independent advice and don’t just rely on what the village sales agents are telling you.

Retirement villages in Victoria are administered by Consumer Affairs Victoria.

There are five ways that retirees are able to own or occupy a retirement home in VIC. You can learn about the five different ways HERE.

One of the most difficult issues for the buyers of retirement homes to understand is that of Exit Fees, also known as departure fees or deferred management fees. You can learn more about Exit Fees on my video tutorial HERE.

If you would like to conduct an online search for the retirement villages available in Victoria, please go HERE.

In NSW, a retirement village is defined as any residential complex predominantly occupied by retired persons aged over 55 years. These residents have entered into some form of contractual arrangement with the owner or operator of the village, usually in the form of a loan/lease or loan/licence agreement.

According to the NSW Dept. of Fair Trading, there are approximately 591 retirement villages across NSW, accommodating more than 36,000 residents.

Living in a retirement community is a great lifestyle choice for retirees. Unfortunately, the process of buying a home in a retirement village is complex and confusing, with many hidden traps and charges awaiting the unwary buyer. It is important that you get good, independent advice and don’t just rely on what the village sales agents are telling you.

There are five ways that retirees are able to own or occupy a retirement home in NSW. You can learn about the five different ways HERE.

One of the most difficult issues for the buyers of retirement homes to understand is that of Departure Fees, also known as exit fees or deferred management fees. You can learn more about Departure Fees on my video tutorial HERE.

If you would like to conduct an online search for the retirement villages available in NSW, please go HERE.

A sign you don't want on your door in a retirement village!

We have all heard stories about retirement village residents being kicked out of their homes, but is it really such a big issue?

A retirement village resident’s tenure in their unit is determined by the nature of the purchase or occupancy contract they signed when moving into the village. The nature of the purchase or occupancy contract is determined by the legislation under which the retirement village operates.

For example:

The occupancy contract, whether it is a lease or licence, determines the nature of a resident’s tenure and outlines the circumstances in which a resident can legally be ejected from the retirement village. For strata freehold communities these issues are covered under the strata community by-laws.

Typically, the only circumstances that allow for the legal removal of a resident from a retirement village revolve around a breach of the terms of the lease, licence, village rules or community by-laws. The resident is usually provided with a period of time in which to rectify the breach before any further action is taken.

Some contracts contain clauses that allow for the village operator to “move on” a resident in the event that they are deemed to require higher care than what is offered within their current residence or village. These clauses can allow rouge operators to apply this determination maliciously, so you should be careful to have your solicitor cross them out or weaken their application.

Other contracts may allow for a change in the retirement village ownership (including receivership) to trigger a right to buy back units and eject the residents, particularly if the complex is old or ripe for re-development. It is doubtful that the village operator would change this clause, so if you want better security of tenure, try somewhere else.

Most of the horror stories you do hear about in the media relate to rental retirement communities. In a rental retirement community the resident executes a lease with the individual unit owner, who could be an investor or a company that specialises in rental retirement villages.

The lease itself is governed by a states’ residential tenancies legislation and the only difference with a standard residential lease may be the provision of other services such as meals, laundry or personal care. Consequently, your tenure is determined by the lease term, typically six to twelve months. Once the lease term has expired, the owner of the unit is quite within their legal rights to either increase the rent, or eject the tenant and execute a lease with someone else.

Again, if you are looking for better security of tenure, I suggest that you either execute a very long term lease, or look for another kind of occupancy arrangement.

In conclusion however, it is worth noting that it is actually very rare for residents to be ejected from their units in a retirement village. Even if a village goes broke, the resident’s tenure is still secured by the terms of their lease or licence. It is similar to a large CBD office building – you wouldn’t see the tenants evicted simply because the owner of the building has gone broke, because their tenure is secured by the terms of their lease.

So don’t be too concerned about being kicked out of your retirement village – it is simply not that big of an issue.

I was recently interviewed on the Sky Business channel, talking about retirement homes.

Here are some of the excerpts from the show…

Buying a retirement home is a complex and confusing business, with many hidden traps and fees to snare the unwary buyer. To make matters more difficult, there is a real lack of good quality independent information that prospective buyers can access to assist with their research.

Take for example, this report here, from the website www.villages.com.au.

The report claims to compare the cost of staying in your existing home against the costs of living in a retirement village. Based upon a couple of key assumptions, the report claims that you either break-even, or are slightly better off, by moving into a retirement village instead of remaining in your home.

I take issue with this report for two reasons:

Firstly, you are ALWAYS, and I repeat ALWAYS, going to be better off financially by staying in your existing home rather than moving into a retirement village, even if you have to get a mowing or cleaning service in to assist you with maintaining the property. This is because the buying and selling of property incurs large expenses that can take years of capital growth to off-set.

Secondly, a retirement village is about lifestyle, not cost. No-one moves into a retirement village to make or save money. You move into a retirement village because you want the benefits of retirement community living – security, social life and a low-maintenance property.

I also have an issue with their key assumptions:

The investable difference.

The report assumes that the retiree is able to sell their home and pocket (in this case) over $350k which is invested elsewhere. It would be great if this were the case for anywhere but the northern beaches of Sydney! Many people I speak with use most of the funds from the sale of their home to purchase a retirement unit. Remove this amount from the equation and the outcome is very different for the retiree.

Capital Growth.

The report assumes that a retirement village will experience the full capital growth of 7-10% pa whereas a standard residential home should only expect 70% of that growth assumption. Yet Derek MacMillan, a director of the Retirement Villages Assoc. and head of Australian Unity Retirement Living says HERE that retirement village units are priced at around 85% of the median house price in the same area. You can’t have it both ways. Based on this report’s assumptions, the retirement village unit is going to exceed median house price growth in the surrounding suburb, meaning that over time, local residents will not be able to afford to move in. Unlikely. For the record, I would estimate that normal resident property will increase beyond that of retirement village units due the the absence of fees associated with retirement village living.

If you do want to move out of your existing house and the financial outcome is important to you, then you need to consider the best ownership arrangements for that new property.

The ownership structures delivering the best financial outcomes, in order, are as follows:

1. Downsize to another freehold residential property. Under this arrangement you don’t incur any fees additional to that found in a normal property and you get all of the capital gain when you sell.

2. Find a freehold retirement community. Freehold retirement communities that don’t apply exit fees will deliver your best financial outcome at exit. Unfortunately very few of them exist and they don’t offer many lifestyle facilities, such as swimming pools.

3. Buy a Leasehold retirement property. A true leasehold property is where you own the house and you lease the plot of land the dwelling occupies.

Most retirement villages in Australia sell their units under a deferred management fee structure, more popularly known as a Loan/Lease or Loan/Licence scheme. Under this arrangement, the resident pays the full freehold equivalent price for a “right to occupy” the unit in the form of a lease or licence. For every year they are in residence, they incur a deferred management fee, or exit fee (or departure fee in NSW), which is paid only when the resident leaves and the unit is re-sold. The outgoing resident may also have to pay half or all of their capital gains (if any) to the village operator as well. For more information on how deferred management fees work check out our blog post and video HERE.

As someone “on the ground” negotiating these contracts every day for my clients, I can tell you that if a resident can leave a village within ten years and re-coup their original capital investment, then they are doing very well. Most residents can expect to leave with around 60-80% of the original purchase price.

The Villages organisation that produced this report are associate members of the Retirement Villages Association (RVA). The RVA is an industry body with a membership encompassing retirement village operators, owners and developers. It is NOT a government body and it does NOT represent that interests of retirement village residents.

Despite my criticisms of retirement village purchase contracts, I am a huge fan of retirement villages and the lifestyle they offer to retirees. Whilst I recommend that you make the decision to move into a retirement village on lifestyle issues, you should also be careful to analyse the financial implications of the purchase contract as well.

What do you think of the report? Are they on the money?

Lesley Parker wrote this great piece for the Sydney Morning Herald and The Melbourne Age’s “Money” insert today.

Hi there!

In this tutorial I want to help you understand the Exit Fees that are usually associated with buying a retirement home.

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”. This is in contrast to the retirement living sectors in the US and Europe where the population is much more comfortable with renting.

You might also hear a DMF contract referred to as a “Loan/Lease” or “Loan/Licence” scheme. 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 or subsequent re-sale value of the home.

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. Unfortunately today, retirement village owners charge residents the full equivalent freehold value of the unit as well as the deferred 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.

Strengths

Exit Fee scheme do have quite a few good things going for them. For Starters, they are usually larger, better complexes with more facilities.They enjoy better funding and are typically owned and operated by larger, professional organisations.

Some complexes offer to buy your property if it hasn’t sold within an agreed timeframe and the on-site operator will typically manage a refurbishment of your unit for you when you leave and re-sell the unit.

DMF schemes are the most common purchase arrangement around and as such offer a wide variety of accommodation and pricing options.

Weaknesses

The downsides of deferred fee contracts is that they feature a heavy fee structure. Freehold title remains with the Owner, and is not bought by the Resident.

Due to the volatile nature of the cash flows, there is substantial owner/operator sustainability risk.

Re-sales typically the responsibility of the owner/manager, whose interests may not be aligned with yours. Refurbishment obligation is usually on the Resident at the end of occupation.

There is an ongoing liability to the resident from village owner, who may go broke, and upon exit, there is an ongoing liability for resident to continue funding village fees until such time as the unit is re-sold.

Calculating the Exit Fee

As mentioned previously, the DMF is an annual fee charged for each year of occupancy, capped at a set number of years, and calculated as a percentage of either the original purchase price or subsequent re-sale value of the licence. The fee is accrued annually at each anniversary of the resident’s commencement at the village, and paid out to the village owner from the proceeds of the re-sale of the unit. The fee varies between villages, within villages and also between states.

An example of typical DMF model is shown here in this Table.

In this example, we will use a contract known as a 25 over 10, that is, a 25% Deferred Management Fee accrued over ten years.

We assume that the fee is spread equally over the ten-year period, so 2.5% is accrued each year and after ten years, a total fee of 25% has been accumulated. This is just an example however, and total fees can range anywhere from 20% to 40% or more.

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. In this example, if a resident departed in year five they would be liable for the fee accrued to date of 12.5%. If they were to leave in year twelve, their obligation would remain at the capped amount of 25%.

Some village operators, particularly those with a short average length of stay, front-load the fee into the first few years of a resident’s occupancy instead of averaging the fee equally over the accrual period. Under a 25 over 10 structure, a village operator might make the first year 8%, the second 5%, and every year thereafter 1.5%. This ensures that a resident in occupation for only three or so years ends up paying the majority of the deferred management fee.

So let’s look at an actual calculation of this fee, using the same assumptions of a 25 over 10 contract:

The resident purchases a unit for $450,000. After ten years of occupation they exit and sell the unit for $750,000. Under this contract they are obliged to split the capital gains on exit equally with the owner, and we will discuss this in more detail shortly.

At exit, the deferred fee component payable, calculated at 25% of the Entry Price, is $112,500. The capital gain of $300,000 is shared equally between the resident and operator and comes to $150,000 each.

So the Total Return to the resident is: $487,500, and the Total Return to the Village Operator is $262,500.

Note that the resident has only just broken even after ten years of capital growth, although this doesn’t include outgoings such as sales commissions or village fees.

Retirement village sales agents will usually dismiss this away by saying that this purchase is a lifestyle decision and not an investment. In a way, they are right – you are no longer at the asset accumulation stage of your life and now is the right to be spending the fruits of your labors from the past fifty or sixty years. However, we see no reason not to apply the same level of financial analysis and due diligence to this purchase as if a person was 30 years younger.

DMF Summary

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.

The days of your home being an ever-increasing source of capital growth may be over

If you are putting off moving into a retirement community because you are waiting for your house to go up in value, then you may be operating under a flawed assumption.

I came across a great article recently by Leith van Onselen on his blog “The Unconventional Economist”. The article essentially proposes that the baby boomer generation pushed up property prices from the 1990′s as they fell in love with investment properties. Leith argues that as these same boomers sell down their properties (to reduce debt, downsize, or top-up super and fund their retirement) it will cause a corresponding decrease in property values…

Investor appetite for housing began to grow in the 1990s as the Baby Boomer generation began to reach peak earnings age (45 to 55 years). They began buying up investment properties en masse as a way of both minimising their tax (via negative gearing) and ‘saving’ for retirement…But with the Baby Boomers soon to enter retirement, it follows that their appetite for investment properties will shrink, thereby removing one of the key demand-drivers of house price growth. Further, because higher investment yields can be earned by placing their funds in a bank term deposit than can be earned via rent, it is likely that many Baby Boomers will sell their property investments to fund their retirements. This process of property divestment is likely to accelerate once the Baby Boomers realise that there is little prospect of continued high capital appreciation.

Now as a property expert (and owner of residential investment properties), I can tell you that residential properties are not worth holding for their cashflow or yield – the main game is capital growth. In the event that capital growth becomes non-existent, you would be better off placing your money in a bank account than in a residential investment property.

What this portends is that supply (properties for sale) is going to outstrip demand (people wanting to buy properties), which as we all know, results in downward pressure on prices.

So if you are sitting in your 3-4 bedroom home in the suburbs waiting for the value of your property to come back to pre-2007 levels so you can sell up and buy that unit in a retirement community, then you may find you are sitting on an “asset” that continues reduce in value and at the same time, demand more and more cash from your pocket for repairs and maintenance.

Remember, if you sell into a flat market, you also buy into that same flat market. This can work out better financially for you anyway – on the “sell” side, your agents fees are less, as is your capital gains tax if it is an investment property you are selling. On the “buy” side, you pay less stamp duty on a cheaper buy price.

Don’t put it off any longer and make the move today (there’s a new year’s resolution for you!).