A Retirement Village Deferred Management Fee (“DMF”) is the single largest expense associated with a retirement village contract. Because it is such a large expense it needs to be properly understood.
What is a Deferred Management Fee?
The DMF is the fee charged by the retirement village operator to generate income. That income is used for the construction of the units and other facilities within the village such as indoor swimming pools, recreation centres and bowling greens. It is in the operator’s interest to reinvest in the retirement village to ensure it continues to be a saleable commodity.
The DMF is charged at the end of the tenure and is retained from the resident’s original ingoing contribution. It should be noted that the ingoing contribution is similar to an interest free loan paid to the operator that gives the resident a right to occupy the unit. It is repaid when the contract is terminated.
How is the DMF calculated?
The DMF and its method of calculation must be disclosed in the Disclosure Statement as required by Section 21 of the Retirement Villages Act 2016 (“the Act“). It will always be calculated from the date occupancy commenced to the date the resident permanently vacates the unit.
There is no standard method of calculation, it varies between operators. Some operators will use a simple calculation which relies on a sliding scale depending on the length of tenure. For example, some operators use a similar scale to the following:
- Occupancy less than 1 year – 2% of ingoing contribution;
- Occupancy between 1- 2 years – 4% of ingoing contribution;
- Occupancy between 2 – 3 years – 6% of ingoing contribution;
- Occupancy between 3 – 4 years – 8% of ingoing contribution;
- Occupancy for more than 4 years – 10% of ingoing contribution.
Where the DMF calculation is based on the ingoing contribution there is a degree of certainty in determining the amount of the DMF. Other operators will use a calculation based on the ingoing contribution of the new resident (where the unit is “sold” to a new owner). In these circumstances there is less certainty as it is impossible to predict what the ingoing contribution will be in 5 years, 10 years, or longer. The advantage with this method of calculation is that the resident will generally be entitled to all or part of the capital gain realised on the resale.
Most operators will cap the period of occupancy for the DMF at around 5 years. This, of course, means that there is a financial benefit for the resident the longer he/she is in occupation of the unit.
How does the DMF relate to other charges?
The DMF is a separate fee charged at the end of the period of occupancy. There will also be other charges which make up the final amount payable by the resident (or the resident’s estate in the event of the resident’s death). These fees may include:
- A Re-Marketing fee which is a charge to offset the costs of “selling” the unit and other units in the village. The fee will be a percentage of the ingoing contribution;
- Maintenance Fees, sometimes referred to as the General Service Charges, are the ongoing fees charged weekly, fortnightly or monthly for regular maintenance on the units and the village. The operator is entitled under the Act to continue to charge this fee for a period of 6 months after termination of the contract;
- A Refurbishment Fee which is the fee charged to bring the unit to a saleable condition. Depending on the operator there may be some flexibility as to what work needs to be completed given the existing condition of the unit. Some units may not require much refurbishment at all while others may require extensive refurbishment;
- Repair costs – Where a resident has made changes to the unit, for example installing additional handrails in the bathroom, the costs of removing the handrails and reinstating the walls, and any other repair costs will be charged at the end of the tenancy;
- The Capital Replacement Fee is the fee payable for capital expenditure, repair, renovation and maintenance of the village and will be a percentage of the ingoing contribution as set out in the contract; and
- Outstanding rates – will include council and water rates and, in accordance with the requirements of the Act, can be charged for a period up to 6 months after termination of the contract.
These fees, or some of them, will be charged at the conclusion of the tenancy. Along with the DMF they are collectively known as the “exit fee”. The “exit entitlement” is the amount of money payable to the resident after the exit fee has been deducted.
When is the DMF paid?
As mentioned earlier the DMF is paid after termination of the contract. The operator holds the ingoing contribution (which is paid at the commencement of the contract) and deducts from it the exit fee when certain criteria are met. If the unit is “sold” to a new resident within a short period of time the contract will provide a timeframe for payment of the balance to the outgoing resident. Typically, the contract will provide that the exit entitlement is paid within 10 business days.
Should there be a delay in finding a “buyer” for the vacant unit the outgoing resident will obviously have to wait for payment of the exit entitlement. The Re-Marketing Policy attached to the Resident Contract will set out the procedure for marketing the unit and advising the resident of progress with the sale.
If the unit cannot be sold at all the Act provides that the exit entitlement must be paid to the resident when 18 months have elapsed since the resident permanently vacated the unit.
Conclusion
Most operators see the benefit in using simple calculations for the DMF. A new resident should be able to have some idea of the approximate amount of fees payable when the contract is terminated. If the DMF uses a complex method of calculation a lawyer or accountant should be engaged to provide working calculations and come up with an estimate for the exit entitlement based on several tenancy scenarios. It is always best for the new resident and the new resident’s family to be fully informed about the retirement village fees before entering the contract.
For further information please contact Jason Meyer on 8362 6400 or email Jason Meyer. Join our mailing list to receive updates and advice on current issues.
