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A contract with a capital gain provision may afford some protection from inflationary effects over time.
Warning:- Contracts with a capital ‘gain’ provision can include a capital ‘loss’ provision.
Columns 1 to 4 to the left have various outcomes from a ‘capital gain’ provision in a contract, column 2 giving the best result in favour of a resident. Capital gain can afford a level of protection against rising nursing home entry costs or a change in circumstance such as a return to the property market but the contract must be checked very carefully to see who will actually get the benefit of any increase in the value of a Retirement Village unit.
Although a Fact Sheet may say 100% of the capital gain goes to the outgoing resident, the impact of the deferred fee calculated on the sale price is such that the outgoing resident will get only that percentage left after the percentage of the deferred fee is taken.
For example :-
25% deferred fee calculated on sale price / ultimately only 75% of the capital gain $ goes to the resident.
35% deferred fee calculated on sale price / ultimately only 65% of the capital gain $ goes to the resident. (see example 3 in the table above)
Some contracts calculate the Capital Contribution (aka the deferred fee) not on the initial entry price but on the eventual selling price. Column 3 in the example above demonstrates the added effect on a resident should a contract to purchase within a retirement village contain BOTH conditions of the deferred fee calculated on the exit price and the capital gain going to the operator. There is currently no legislative protection for consumers from the operator gaining 100% of the capital gain but the deferred management fee is calculated on the exit price.
This ‘selling price’ type contract can have a large impact on capital, eg: A deferred fee set at say 35% of an entry price of $560,000.00 produces a deferred management fee payment of $196,000.00. For those village residents with an exit price style contract, 35% of an exit price of say $812,000.00 rather than the entry price of $560,000.00 produces a ‘deferred fee’ payment of $284,200.00, an extra $86,200.00.
This equates to a hidden deferred fee rate of 50.75% on the original $560,000.00 in-going paid, only a capital gain provision in favour of the resident can compensate for this.
A Fact Sheet may indicate 100% of the capital gain goes to the outgoing resident however the impact of the deferred fee calculation based the sale price is such that the outgoing resident will get only that percentage left after the percentage of the deferred fee is taken. See Column 3 in the table above.
WARNING – The operator may charge a deferred fee on the exit price rather than the entry price. With a deferred fee rate of say 35% the most a retirement village resident can get of the capital gain is 65% because the operator will take 35% as part of the so called deferred management fee calculated on the total sale price inclusive of the capital gain amount.
The following table based on a 4% annual increase in unit values over time, shows the reduction in the refundable amount should a deferred fee be calculated on the exit price rather than the entry price.
Also see Page 6 re the so named retirement village poverty trap.
A deferred fee may also be described as,
- Capital Contribution
- Fee Payable on Exit
- Departure or Outgoing Fee
- Deferred Management Fee
- Deferred Fee
- Scheduled Annual Rental
- Deferred Profit Fee
A refundable amount due on exit may also be described as,
- Refundable Capital Contribution
- Fixed Refundable Contribution
- Interest Free Loan to the Operator
- Refundable Lease Premium
- Bond Remainder
The entry fee may also be described as,
- Purchase Price – whether ownership or not
- In-going Amount
- Entry Price
- Lease Premium
- Capital Bond