Departure Fees

Departure fees are one of the most important, difficult and least understood aspects of retirement villages.  They are the fees you pay when you leave the retirement village.  There are many different structures and they can produce very different financial outcomes. 

Departure fees are usually calculated either:

	by reference to the entry price, with a separate arrangement regarding the apportionment of any capital gain that may accrue
	by reference to the re-sale price when the unit is sold, leased or licensed to a new resident, which necessarily takes into account any capital gain that may accrue.

It is important to understand that any capital gain that is paid to or retained by the operator is effectively part of the departure fee.

Most departure fees fall into one of the following three categories:

The fee is a percentage of the entry price, which accrues over time at a specified rate, for example at the rate of 2.5% per annum.

There are then variations within each of the above categories.

The key factors that determine the size of a departure fee are:

	the entry price
	the rate at which the percentage fee increases
	the minimum percentage fee level
	the maximum percentage fee level at which it stops increasing
	the eventual period of occupancy
	the size of any capital gain that accrues during the period of occupancy
	the basis for the apportionment of any such capital gain
	the size of any administration fee that may be payable.

The best way to analyse how a particular departure fee structure works is to calculate what the financial outcome would be in a range of possible scenarios. 

To do this properly you need to estimate the rate at which you think the market price of the property will increase in future years.  This obviously involves some guesswork, but as a general proposition it is probably reasonable to assume that there will be a strong positive correlation between movements in the market price of retirement village properties and the broader residential property market. 

There is also a strong argument that demographic changes such as the impending retirement of the "baby boomers" and generally increasing life expectancies will create continuing demand for housing that meets the requirements of seniors.

We suggest that you create a table and work out what the following amounts would be after say 1, 2, 3, 5, 7, 10, 15, 20 and 25 years, using your best estimate of the likely growth rate:

1. the market price of the unit

2. the accrued capital gain (1 minus the entry price)

3. the accrued departure fee

4. the proceeds, refund or exit entitlement you could expect to receive if you permanently vacated the premises (1 minus 3)

5. the overall nominal gain or loss that would result from the transaction (4 minus the entry price).

 The above calculations will help you understand:

	how the market price of the unit may increase over time as capital gains accrue
	how the departure fee may increase over time
	how much you may be entitled to receive when you permanently vacate the premises
	whether you are likely to make an overall gain or loss on the transaction.

We also suggest that you repeat the exercise using a higher and a lower assumed growth rate to see how sensitive the results are to changes in the growth rate.  Repeating the exercise for alternative units will make it much easier to make useful comparisons.

Even then it is difficult to really understand what some of the numbers mean because of the time value of money.  Put simply, a dollar tomorrow is worth less than a dollar today.  Ideally, after working out what the departure fee would be in a range of possible scenarios, you should calculate the "present value" of each amount by discounting it using an appropriate discount rate so it reflects the real cost of the fee measured in today's dollars.  Calculating the present values will:

	help you understand the real cost of the departure fee
	illustrate how the real cost of the departure fee can vary depending on the period of occupancy and the growth rate
	help facilitate "apples and apples" comparisons of alternative entry price and departure fee combinations that may be offered in relation to a particular unit
	help facilitate "apples and apples" comparisons of alternative units and villages, even if they have different entry prices and departure fee structures.

Need Help?

Math is not everyone's cup of tea, so if you want help or would like to save a lot of time doing the above calculations, you can click here to have these calculations done for you on-line for a cost of approximately $30. Please note; this is a third-party service and we take no responsibility for the information that you may receive.

The service calculatea the following amounts for you for each of years 1 through 25 using a growth rate that you nominate:

1. the market price of the unit at the end of the year

2. the accrued capital gain at the end of the year (1 minus the entry price)

3. the accrued departure fee at the end of the year

4. the present value of the above departure fee, using a discount rate that you nominate or we can suggest

5. the present value of the above departure fee expressed as a quarterly amount spread over the relevant period of occupancy

6. the proceeds, refund or exit entitlement you could expect to receive if you permanently vacated the premises (1 minus 3)

7. the overall nominal gain or loss that would result from the transaction (6 minus the entry price)

8. the annual rate of return generated by the investment.

The results (200 calculations) are presented in a table and a series of graphs so they are easy to interpret, understand and compare.

[Click here to see an example of the table and graphs]