A retirement village primer

PORTFOLIO POINT: Entry fees, exit fees, different types of tenure – here’s a guide to buying into a retirement village.

The maze of different retirement villages, classes of legal tenure and different levels of accommodation on offer is enough to leave even the most experienced property investor dazed and confused.

To best understand how it works – and why the exit fees are so high – it helps to understand how they are built from the ground up

The role of developers

Understanding how developers make their profit on retirement villages will give you a good appreciation of their approach to such issues as the ingoing contribution, exit fees and capital gains.

First, a developer will make a profit from construction, just as a builder will when they build and sell a house. That is, there will be capital gains and a profit margin on the purchase, construction of the unit and the sale. If they retain an interest in the village as its manager then there’ll be a small profit derived from the charges they make by way of general service charges or the cost of running the complex.

Quite often, however, their biggest profit component is deferred until the resident eventually exits the village. At that time their interest in the residence is sold and an exit fee is deducted from the proceeds. This fee will often be about 10% of the sale price of the residence if it’s sold within a year of its purchase or as much as 30% of the sale proceeds if it is sold after three to four years.

More often than not this is the biggest component of the developer’s profit, even bigger than the capital gain and profit on the initial sale of the residence.

This exit fee is often overlooked by retirees and their families, but never hidden by the developer. It will clearly be set out in a document called the “Resident Contract” and/or the “Public Information Disclosure Document” retirement villages give to prospective residents.

As for the investor’s capital gains, many family members operate under the misguided belief that great care should be taken in the selection of this residence to ensure that it’s “a sweet little earner” for Mum and Dad (and protecting their inheritance, if they’re being honest). But they’re wrong. The purchase of a unit in a retirement should be a lifestyle investment and not be driven by any misconceptions about capital gains.

Appreciate, too, that some developers will reduce the cost of a unit in exchange for a larger share of the capital gain upon exit. This also allows the retiree more money to spend on other aspects of their lifestyle and is often a good way of getting into a complex they might not otherwise be able to afford.

Levels of accommodation

A careful and realistic assessment of the likely needs of “Mum and Dad” is required here. The more complete villages will have three levels of accommodation and a continuum of care. First, there are independent living units, where residents can come and go as they please just as if they’d acquired a unit in a complex on the Gold Coast.

Next are the level of accommodation we’ll call serviced apartments. Here, the same independent living units are supported by the operator of the village so residents can have cleaning attended to and three meals a day, if required. This is probably the sweet spot as there’s a real prospect that nearly all of us will need this kind of support at some stage.

It’s the third level of accommodation, a nursing home, and the need for it that’s often overrated. Only about 7% of Australians end up in nursing homes, meaning the vast majority of Australians will never need this 24/7 attention. Family members should keep this aspect in perspective when investigating options for their elderly relatives.

Do residents have any power?

Don’t get hung up about the issue of management committees and whether residents have any power.

Retirees generally don’t want to “run the show” or be heavily involved in the management of a complex, although there are exceptions to every rule. Sure, they have rights, and operators of villages will invite them to attend meetings and have some input but will rarely cede the kind of power that allows them control.

Accept that this is in Mum and Dad’s best interests and that looking after and managing elderly people is difficult. People do it either because they have a vocational, business or personal interest; that is: they’re either a social worker, retirement village operator or a relative.

Legal tenure

Retirement property is offered under a variety of legal tenures:

Strata title. This is the purchase of a unit in a body corporate structure. This is usually not as simple as it sounds, as village developers and managers will usually provide in the documentation that even though the resident is the owner of the unit they lease it back to the operator, who in turn subleases it back to the resident. This allows the operator to retain control, even though it is owned by the resident. In addition, you’ll also see a mortgage and a caveat (freeze) laid over the title in favour of the operator to protect their right to receive the exit fee. So, don’t obsess about the importance of obtaining freehold ownership as it will all be “locked up” in the operator’s favour in any case.

Leasehold. A registered lease over the title in favour of the resident granting them, say in the case of a couple, exclusive occupation of the unit until their death or the eventual departure from the village of a member of the couple.

A licence. This is a contract between the operator and the resident, once again granting the right to occupy the residence to the retirees for as long as they live and choose to reside at the residence.

Licence/loan. In return for a loan from the resident to the operator, the operator grants a licence to the retiree to reside in the unit.

Rental agreement. This is the most basic level of entry into a retirement village and is usually only offered by charitable or religious groups.

Detective work

Don’t rely solely on the legal documentation and the disclosure paperwork provided by the developer and operator of the village. Knock on a few doors of residents in the complex and spend some time chatting to them about what life is really like in this village.

Run a mile if you meet any resistance from the operator. Notice small things about the place: are the car spaces fenced in and full of old junk that should be at the local rubbish tip?

The residents’ noticeboard is also worth a peek. If it’s full of notices about when the hairdresser visits, the time of the next tai chi lessons and when the village bus travels to and returns from the local shopping centre, then all is probably well.

If, however, the only thing pinned to the board are copies of the last management committee minutes or copies of the by-laws or rules for the complex with a warning that strict compliance is required by all residents, then this village is probably nothing more than a minimum security prison, with palms.

This article was first published in Australian Property Investor magazine and has been reproduced with permission.