They are marketed as being the optimum lifestyle choice for recent retirees, often in ideal locations with all the facilities for a stress-Complimentary lifestyle. But with complex fee structures and inconsistent regulation, retirement village living should be approached with caution.
Before becoming emotionally attached to the idea of living next to a golf course or an ocean, or the prospect of no more home maintenance, consider how long you are going to be able to enjoy all the lifestyle options and whether you can afford it.
Affordability is impacted by the way operators build into a contract the cost of living in a village, by way of recurrent charges, and the cost when it comes time to sell.
The retirement village sector is complicated further by each State and Territory having its own legislation.
For these reasons reading and understanding any retirement village contract – which may be as long as 100 pages or more – is a must. And so is professional advice.
Understanding the contract
There are three main contract and finance models used by the country’s estimated 2000 retirement villages: outright ownership which gives the unit owner a title over the unit; the loan licence model, where the bulk of the ingoing contribution is set up as a loan to a village operator in return for a licence to occupy the unit, and a traditional lease.(i)
In each case there is an ingoing contribution, often similar to the cost of buying the unit (if this was possible). A departure or exit fee will be based on the length of time someone lives in the unit.
Operators also charge weekly, fortnightly or monthly fees, called recurrent charges, which cover the day-to-day operating costs of the village and which may or may not include rates, water, electricity, maintenance of common areas and staffing costs.
Depending on the legal structure, residents may or may not share in any capital gain in the value of the unit when they leave the property. A resident can also be asked to contribute towards the refurbishment of their unit before it’s sold.
Calculating departure fees
Departure or exit fees are unique to the retirement village sector and require particular scrutiny by a professional who understands the sector.(i)
The calculation is commonly a percentage paid per year of residency, and is usually capped somewhere between 30 and 38 per cent. The cap is generally reached after 10 years. The departure fee may be calculated on the ingoing cost that the resident paid, or the amount the unit is sold for when the resident leaves. The calculation method can vary between providers and within a village.
The Retirement Living Council says the departure fee helps to compensate the village owner for the cost of building the village and allows the resident to part-pay for this at the end of their residency rather than the start.
It can also be designed to give prospective residents a choice of whether they pay a full market price for the unit when they move in or defer some of the payment until they leave.
Make sure you* Understand the contract and have it reviewed by a professional * Know something about the operator and their experience * Know how village budgets are presented * Know how the operator reacts to residents who query how money is being spent * Are happy with how the residents’ committee works? |
Looking for lifestyle benefits
Financial considerations aside, there is real value to be had from retirement village living. Many residents enjoy the benefits of being part of a community, living independently but with some additional support, activities and social interaction. The financial benefits are dependent on the finance model and the market.
While the primary reason for entering a retirement village is often lifestyle choice, it’s important to understand where the value lies in making that choice. If you would like to discuss your retirement planning, give us a call.
i. http://www.retirementliving.org.au/wp-content/uploads/2017/03/Contract-Finance-Model.pdf
