As many will know, deferred management fees are a deduction from the capital investment made in a retirement village unit and are paid at exit.
They can work in many different ways (such as a % of the original investment, a % of the new occupant’s investment, etc) and typically are calculated as a % per year of occupation up to a maximum. An example is Belrose Country Club of 7.5% of the resale amount per year of occupation up to a maximum of 37.5%.
DMF are a favourite subject of criticism, with some describing them as unethical, and as gouging unsuspecting residents as they leave – this is a significant distortion of the truth.
In reality most Australians have not saved enough for their retirement and for this reason, cannot afford to pay a market rate for the quality of housing they enjoy from their retirement income. Consequently retirement villages keep monthly payments affordable, however, to make the finances work they need to receive considerably more in some other way – and receiving a sum on exit allows residents to enjoy today and pay tomorrow.
The alternative is to pay much higher ongoing amounts – sometimes known as the rental model – and this is common in the USA.
We have undertaken some research comparing costs of Belrose Country Club, Sydney with Lake Barrington, Chicago – a retirement village in the suburbs of Chicago ( almost randomly selected) – to test how the two models compare.
In the example selected total residency costs (including deferred management fees) for a 10 year occupancy in Sydney were less than half the costs of Chicago, about the same for an 8 year occupancy, and more expensive for a shorter occupancy.
This does not represent a comprehensive study, nevertheless we feel that it clearly demonstrates that the Deferred Management Fee is not the villain it is sometimes portrayed as.
[Information\retirement housing\blogs\April-May 2015\Deferred Management Fees article]
28 April 2015