A deferred management fee is an exit fee that residents pay to retirement village operators when they leave the village. This payment is often a percentage of the ingoing fee, or the sale price, and is agreed to in the contract upfront. The fee is paid to the operator when a resident vacates the village and is usually deducted from the sale price of the unit.
The departure fee model is used by most retirement villages. It is not used in any other sector and therefore often gives rise to confusion.
The deferred management fee structures employed by village operators are calculated using a variety of approaches. The fees payable are dependant on the specific contract terms and are normally determined by the type of tenure and by how long a resident lives at a village.
The purpose of the deferred management fee is to cover costs incurred by the village operator to develop and maintain the village for the residents, which are not covered by recurrent charges. Such fees allow operators to offer properties at subsidised prices, making moving into a retirement village more affordable. Where there is no deferred management fee in place, those costs are covered by residents upfront, and/or via higher recurring fees, eroding disposable income in retirement.
The deferred management fee model aligns the financial interests of the retirement village operator and the resident. The operator has a stake in maintaining and enhancing the value of the village, as the deferred fee is typically calculated as a percentage of the sale price when the unit is resold. This arrangement encourages the operator to ensure the village remains attractive, well-maintained, and in-demand.
Understanding retirement village deferred management fees is crucial for prospective residents to make informed decisions and accurately evaluate the financial implications of their retirement living choice.
As noted above, a deferred management fee is an exit fee that residents pay to retirement village operators when they leave the village. Retirement village operators use deferred management fees to retain part of the resale value of a retirement village unit and such fees may also cover part or all of the capital gains made from the resale of a retirement village unit. Residents are required to pay this fee to the village operator when they sell their unit and terminate their occupancy within the retirement village. Operators typically deduct the fee from the proceeds of the sale before the resident receives their share.
A deferred management fee is a common fee structure for retirement villages. Its purpose is to lower the upfront payments for residents to move into the village. They cover costs that are incurred by the village operators to build and expand the village as well as its services and facilities that would otherwise have to be covered by the residents.
The calculation of the deferred management fee will vary depending on the terms of the contract. In some cases, the fee is based on the original purchase price, while in others, it is calculated based on the resale price. Some contracts may use a combination of both. Where there is a combination of both, this normally includes a capped fee based on the original purchase or sale price, plus an additional percentage of the total capital gains.
This means that the resident may not fully benefit from any increase in the property’s value over time. The percentage of capital gains retained is outlined in the relevant contract and can vary among different retirement villages.
The fee structures associated with deferred management fees can be intricate and involve multiple components. This complexity can make it challenging for residents to fully grasp how the fees are calculated and understand the financial impact they will have.
At Mount Gilead Estate, we provide full transparency on fees including the deferred management fee.
Mount Gilead Estate offers a very competitive deferred management fee and full transparency. The maximum deferred management fee you will ever pay at Mount Gilead Estate is 30% and can be lower depending on the length of time a resident has lived in the village.
Unlike other villages, Mount Gilead Estate does not take additional capital gains from the resale price when residents vacate the village. This ensures retirees can capitalise on their investment as well as improve their available finances to spend in retirement.
The Mount Gilead Estate DMF is calculated as follows and is capped at 30% of resale price.
• First Year -10%
• Second Year – an additional 10%, bringing the total to 20%
• Third Year – an additional 10%, bringing the total to 30%
• For part-year periods, the fee is calculated on a pro-rata basis reflecting the number of days in that year that our residents have occupied their homes
This fee structure has made it possible for retirees to experience the retirement lifestyle they dreamed of.
Generally, DMF’s are calculated based on a sliding scale depending on the length of tenure within a given village. The longer having lived in a village, the higher the amount to be paid when leaving. This is normally capped at anywhere from 30% up to 50% or more for some villages. According to the Property Council Retirement Census Snapshot Report, 93% of villages cap their DMF at a maximum of 36% or under.
The sliding scale, capped DMF structure is so villages avoid disproportionately impacting residents who have lived in the village for shorter periods. Otherwise, they may be subject to higher fees without receiving reasonable benefits as compared to longer-term residents.
However, on top of the standard deferred management fee, many retirement village operators also retain a further portion of the capital gains from the property resale. This is in addition to their capped fee and can be anywhere up to half or even all of the capital gains made. This further reduces the financial returns that retirees and their families can expect upon leaving the village.
The proportion of deferred payment structures with and without separate capital gains share for the resident is 37% and 63% respectively.
Given that the departure fee payable is generally linked to tenure, it may not be possible for the exact amount of deferred management fees that will be deducted upon resale to be known at the time of entering the contract. This can make it challenging for residents to plan their financial future effectively and may result in unexpected costs.
Mount Gilead Estate does not retain additional capital gains above the maximum deferred management fee of 30% of the resale value of the retirement unit.The purpose of the ‘deferred management fee’ is to offer a lower ingoing contribution to move into the village. An incoming contribution being the price paid for exclusive use of the property, similar to the purchase price of a new home.
Retirement villages often offer a range of amenities, services, and facilities that contribute to a vibrant community and enhanced lifestyle for residents. As a retirement community develops, operators are faced with the challenge of developing, maintaining and managing a growing village and all its facilities, amenities, and services while keeping it financially sustainable. Traditional models like upfront payments or rental agreements are not sufficient to cover either required upfront capital expenditures or certain ongoing costs.
Departure fees are a source of income for operators which can be used for the above purposes which are not covered by recurrent charges.
By incorporating a fee structure based on a percentage of the value of their home, operators can collect funds at the end of residents tenure, helping to sustain the ongoing development, management and maintenance of the retirement village while subsidizing the entry costs for new residents.
By keeping the entry fee lower, this makes village living more financially accessible to more retirees, therefore, improving their quality of living in retirement. It also frees cash for residents when they move in to give them more flexibility in general to live the kind of life they desire (through a lower than otherwise ingoing contribution).
Given the improved financial position at the start of their retirement, rather than the end, it becomes evident that it is the retirees that are the winners where deferred management fees are concerned. However, there is still a lot of negativity about this type of fee structure. This is primarily caused from confusion and a failure to provide adequate weight to the exit fees vs the ingoing contribution when considering which village to move into by many retirees.
The departure fee is designed to give purchasers flexibility in how they pay for the investment made by the owner of the village. It can allow prospective residents to pay a lesser upfront payment by agreeing to an amount being retained by the operator when they leave.
Over time, the structure and terms of deferred management fees have evolved. Different retirement village operators have adopted varying fee models, resulting in a range of calculation methods, payment timing, and fee durations. This diversity has led to a mix of approaches across different retirement villages. This lack of standardisation has resulted in confusion for many retirees and dissatisfaction from their families and the community due to unexpected costs and lack of clarity in contracts by some less scrupulous operators.
Magnifying these issues for retirees and their families, the contracts between the resident and village can be lengthy and filled with legal jargon. As such, important details about deferred management fees may be buried within the contract, making it challenging for residents to locate and comprehend the relevant information.
Some retirement village contracts lack transparency in relation to deferred management fees. The information provided by the retirement village operator is insufficient or unclear, making it difficult to make informed decisions about financial commitments.
In some cases, residents may not fully anticipate or understand all the potential costs associated with deferred management fees. This lack of awareness can result in unexpected financial burdens and frustrations. To navigate these complexities, it’s crucial for individuals considering retirement village living to carefully review the contract, seek legal advice, and ask questions to ensure they have a comprehensive understanding of the deferred management fees and associated terms. Open communication with the retirement village operator and seeking clarification on any confusing aspects can also help address potential confusion and provide residents with greater clarity.
As mentioned, deferred management fees are intended to subsidise the ingoing contribution for residents, while maintaining facilities. This means retirees can have a better retirement with more disposable finances to use how they please.
For residents at Mount Gilead Estate, that includes the exclusive use of resort-style facilities including a 9-hole golf course, two swimming pools including an indoor heated pool, a gym, onsite hair dresser, community garden, lawn bowls green, village library, world class three-story residents club house, games room, snooker tables, village bar and café, and more.
What’s more, given Mount Gilead Estate caps the amount payable on exit to a low 30% of the resale value and does not retain a further portion or capital gains, residents can capitalise on their investments. Exit fees or deferred management fees do, however, vary greatly from village to village. There is no one standardised rule for calculating these fees.
As such, anyone considering moving into a retirement village should ensure they have all the information up front to make an informed decision. To discuss all fees related to living at Mount Gilead Estate, contact us today and call our sales team on 1300 686 122
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