| The Deferred Management Fee (DMF) or Loan | | | | percentage in the first three years, with a negligible |
| License scheme is the primary form of retirement | | | | amount in the remaining time to year ten. |
| living contract in Australia and widely used by both | | | | You should not accept this. Standard industry practice |
| for-profit and not-for-profit operators. Unfortunately | | | | is to accrue an equal amount every year. |
| the contracts are also a major source of | | | | Share of Capital Gains |
| dissatisfaction for retirement village residents, as they | | | | Another component of the Exit Fee which angers |
| are heavily weighted in favor of village owners. The | | | | village residents is the sharing of capital gains on |
| sheer complexity of the contracts has also resulted in | | | | resale of the unit with the village owner. Under a |
| a lack of understanding among retirees as to how | | | | typical DMF contract, any capital gains achieved on |
| these arrangements work. | | | | the resale of the unit are shared equally between the |
| It could be argued that this lack of understanding | | | | village owner and the departing resident. |
| among retirees that has allowed village owners to | | | | Some village owners however, have extended this |
| abandon any notion of fairness in their contracts in | | | | arrangement to the point where they are entitled to |
| pursuit of their own commercial interests. The original | | | | ALL of the capital gains. Do not accept any less than |
| intention of the DMF contract was to offer residents | | | | 50% of the capital gain on your unit. If your DMF is |
| a unit that was cheaper than the freehold value of a | | | | calculated on the re-sale price of your unit (as |
| similar residential property. The annually accrued fee | | | | opposed to your original purchase price), then you |
| served to compensate the owner with the equivalent | | | | should not share any capital gain with the village |
| amount of "market price" lost when the unit was sold | | | | owner. |
| to the resident. In this way, a 25% DMF would allow | | | | Refurbishment |
| the village owner to sell the unit for 25% less than | | | | Upon exit, a retirement unit is refurbished for the |
| the equivalent market value. | | | | next resident. This can be as simple as a fresh coat |
| Over time however, village owners have abandoned | | | | of paint for newer units, or a full refurbishment |
| the discounted sale price and simply charged | | | | including kitchen and bathroom joinery for older units |
| residents the equivalent freehold value of the unit in | | | | (+15 years). The best outcome for the village owner |
| addition to the accrued fee. Consequently the DMF | | | | is to have the resident pay for this; in contrast, the |
| contract is very profitable for a village owner, | | | | best outcome for the resident is to have the village |
| however some village owners are becoming | | | | owner pay for it. |
| increasingly aggressive in the level of fees charged. | | | | Commercially, the following is considered to be the |
| To tip the balance back in your favor, listed below | | | | fairest outcome: |
| are five of the key terms and conditions you will find | | | | IF the contract states the resident receives all of the |
| in your deferred fee contract plus negotiating tips for | | | | capital gain on re-sale of the unit THEN the resident |
| each: | | | | funds all of the refurbishment costs. |
| Deferred Management Fee or Exit Fee amount | | | | IF the contract states the resident shares capital |
| A DMF is a fee that is accrued by the resident for | | | | gains with village owner on re-sale of the unit, or that |
| each year they are in occupation at the village. When | | | | the DMF is calculated on the re-sale price THEN the |
| the resident decides to leave the complex, their unit | | | | resident and the village owner fund the refurbishment |
| is sold and the accrued fee is paid to the operator | | | | costs in equal proportion to the split of capital gains. |
| from the proceeds of the sale. | | | | IF the contract states the village owner receives all |
| The standard industry DMF contract is what is called | | | | of the capital gain on re-sale of the unit THEN the |
| a "25 over 10", that is, a fee of 25% is charged over | | | | village owner funds all of the refurbishment costs. |
| a period of 10 years. Do not accept a fee over 25% | | | | Sales Commission |
| unless you have clear indication that you a buying at | | | | Any licensed real estate agent can handle the sale of |
| 25% less than the equivalent freehold value. You | | | | your unit when you vacate, although the on-site sales |
| should also try to negotiate the fee down from 25% | | | | agent will usually achieve the best outcome. |
| - anything around 20% or less is a good result. | | | | However, it is a good idea to make sure your |
| Pushing the accrual time period out beyond ten years | | | | contract does not oblige you to use the on-site |
| is also useful. | | | | agent exclusively, as this can be a good negotiating |
| Deferred Fee accrual amount | | | | point in the event that you need to extract other |
| The standard DMF contract of "25 over 10" assumes | | | | concessions from the village owner when you exit. A |
| that the management fee is accrued at a rate of | | | | typical fee or commission for selling your unit would |
| 2.5% every year for ten years. Ten years is usually | | | | be around 2-3%, the lower the better. Do not pay |
| the maximum period used, because research shows | | | | for any marketing of your unit - this is the |
| this to be the average time a resident remains in the | | | | responsibility of the selling agent. |
| village. | | | | It is important for retirees to know they do not |
| Some villages have a shorter average length of stay, | | | | have to accept the terms and conditions as offered |
| for whatever reason. In these villages a savvy owner | | | | in the retirement village purchase contract. Everything |
| will "front-load" the deferred fee into the early years | | | | is negotiable. Of course, in popular villages you will |
| of the residence. For example, if a village has an | | | | have less scope for negotiation than in a complex |
| average length of stay of three years, on a standard | | | | where there is a considerable amount of stock for |
| "25 over 10" contract the owner may charge a higher | | | | sale. However, it is always worth a try! |