What you need to know about retirement village contracts

I have looked in detail at one village and had a preliminary look at two other villages(all under construction on Sydney's North Shore) and one established village in the same area

When I looked at the Village Contract I found the following disturbing clauses

- the operator can renovate, redevelop or change the use all or part of the village

- if a resident requires care for 6 hrs per day for more than 8 wks the lease may be terminated

- the operator may sell the village

These clauses were included in the contract of an operator who appeared to have an established record and the proposed village was planned to a very high building standard and with good support services. Whilst I could accept the deferred management charge and other costs I was not prepared to accept the above clauses

The other two villages under construction were by operators with no track record and with some over ambitious claims and services where I felt higher service costs or service reductions would be the outcome

The established operator refused to forward me a copy of the village contract to allow me to review it prior to a sales appointment

Hi Peter,

You raise some great points, all of which would be reasonably expected to be outlined by a solicitor around the contractual obligations.

As for seeing any detail before a "sales appointment", well as discussed, this is just not the way things are done!

A retirement village is not an aged care home, and, according to the NSW Department of Fair Trading, 60% of village residents will move directly to full time residential aged care.

I have seen Retirement Village promotional video where residents talk of a move to a retirement village as a "final move". For 60% of residents this will not be the case, and things get complicated when a spouse needs to move to a nursing home and the surviving spouse has limited access to savings.

This is just so important - a retirement village is not an aged care home. It would be prudent for regulators to insist retirement village residents agree this is not a "final move", and that they are comfortable with their provision for aged care costs.

Agree. If they refuse to forward a copy of the contract prior to a sales appointment then that is a red flag. Go talk to another one.

a retirement resort if well chosen also includes a facility that you can transfer to when total support is required and not dumped on children or family. The new ones are one complete facility incorporating all services and activities without leaving the one building. The finance held within the first facility is used to finance the second stage along with government support. Cheers Ken

Hi Ken,

This may sometimes be the case, however it is more the exception than the rule.

That is why on the map of retirement villages in NSW on our website we have also listed aged care providers, to enable prospective retirement village residents a view of nearby residential aged care providers.

In Northern Sydney there are few examples of an integrated Retirement Village and Residential Aged Care facility, and the major Retirement Village Operators : Keyton, Aveo do not have nursing homes in the mix.

When there is a nursing home on site, there is often not a guarantee of a bed.

On your final point about the proceeds of a retirement village being integrated into the nursing home costs - it would be wonderful if that were the case, my experience is that it is not.

By way of example, a client of mine had parents at RSL LifeCare Narrabeen (which offers a retirement village co-located with an aged care facility) - mum had moved to an aged care bed at Peter Cosgrove House, and dad survived for a while in his Retirement Village Unit. They did not have any money to pay the lump sum RAD for mum while Dad was still in his retirement village unit. When Dad passed, they though they would quickly apply the exit entitlement from the retirement village unit to mums aged care lump sum. This wasn't to be the case. The family had to wait 6 months from the "key return date" for the proceeds from the unit. Once they had received these proceeds (less a Deferred Management Fee of 20%, and 10% entry payment, as well as 42 days of recurrent charges after key return date) - they had been funding the lump sum for the aged care provider at a cost of 8.14%.

This delay in getting the money cost the mum close to $20k.

While the retirement village and aged care home are in close proximity (which is great for dad visiting mum), there was no "financial co-operation" here at all.

On another note, there is now a provision (in NSW) where a resident can request the operator to pay the Daily Accommodation Payment amount for the aged care bed while waiting for their exit entitlement. This is a dud deal - while leaving residents wait for the money they need to pay a lump sum at an aged are home, all they get is to access this money early to pay interest on the lump sum at a rate of 8.42% (which is the new rate from Jan 1 2025).

Thanks for an interesting take on a topic of increasing community interest. However, I do think that whilst I support the basic message of being aware of what you sign for, I think the examples are over simplified or at least not typical. Firstly, for most of us, the capital required would be coming via the sale of our existing home; an asset paid for some time ago, that is out of date with current building standards and not earning any income. So I think you have overstated the foregone income story. Your table includes a range of unexplained charges which may or may not be typical. So I think again you are over stating things. Further and back to your first line, the renter is buying a lifestyle not possible at 'home' ; a cruise ship or resort with features not available at home: swimming pool, gym, restaurants, cafe, sport facilities, social events, hobby classes., let alone a change to meet and make new friends. You need to cost the benefits of these features in your story to be realistic. Finally, I know some places offer entry costs based on foregoing any so called sale profits and return capital within a few months.

Randall,

You raise some great points:

1. There is no typical in retirement community homes. The NSW Department of Fair Trading outlines 5 types: Leasehold, Loan or license arrangement, Strata or community, company title and there are more. Any of these types of housing should be approached with diligence. This is not the same as home ownership.

2. Within these "types" there is contract variation. In my example - which is definitely a real life example, there is a 100% share of "capital gain", while at the same time exit fees are based on the NEW ENTRY PRICE at a rate increasing at 5% per year to a maximum of 25%, there is a 2% charge to contribute to a capital fund upon leaving (based on the entry payment of the new resident), a sales commission of 1.5% (also on the new entry price) as well as a non-refundable component. The effect of this is that any price appreciation is very much shared with the operator (the capital loss story also needs scrutiny). All of this serves to obscure the ability to get a clear price to join the community.

3. Your existing home - that you may have had for 50+ years may not generate income - but it generates wealth. It would be fair to say the value of houses has been going up at a long term average c5% for 50 years. Once you convert that asset to another asset class this could continue. It should be noted that the lump sum payment for an aged care home is loosely correlated to property values in the area, and is going up from 1 July this year as the Government allows aged care providers to ask more from residents who have the money to pay. If you sit out of your local property market for 8 years in a retirement village, don't expect aged care costs to stay still - this should be planned for.

4. Retirement Living in these communities is wonderful. It is not me that needs to cost the benefit of swimming pools, gym restaurants - it is the potential resident. Somewhere in all this is knowing actually what it is costing to make an informed decision.

5. Half of residents in NSW are confused about their contracts. This is based on a Retirement Village Resident Association survey completed just last year. This is pretty scary for residents considering aged care options after leaving the village. This can and should be fixed with more work to understand contracts, and an annual statement from the operator detailing where the resident is up to with deferred managements fees, and a worked example of expected exits costs, and a projection for future years. The operator would have all of this clearly understood a part of their business model. Sharing it with the resident would bring this in line with other financial products, alleviate confusion and fear towards the aged care step, and allow residents to more fully enjoy the community and benefit of the village.

Thanks Brendan for your response and the amplification on points raised. I also agree that the aged care situations are potentially more of a challenge.

"So I think you have overstated the foregone income story". Exactly. Yes, there is an opportunity cost but as you say the money has come from a non-income producing asset (usually) so how much opportunity cost is the real question. If you don't go to the new village, you still need somewhere to live, so some or all of the $2M in this example will be spent elsewhere and therefore won't be producing the "opportunity cost" income. The only way the 100% opportunity cost makes sense is if you sell an asset for $2M, invest the proceeds at 4.35% and live for free somewhere else (move in with the kids!). Further if you liquidate an existing house for more than the cost of the village (say $3M) you get a profit to invest which can produce an income you otherwise would not have had if you stayed where you were; this is one of the main motivations for downsizing over many decades, to realize excess capital value for income production. So staying put also has an opportunity cost.
If we remove the opportunity cost from the above table, arguing the presumed "lost" cash flow is likely to be unrealistic, the weekly cost drops massively, at year 7 it is down to just over $1000 a week from $2680. Or 2.6% of the original $2M outlay. Good or bad, up to you to decide.

Hi Steve,

In the final part of this article I asked for people to pipe up if they disagreed with my numbers or methodology - and you have! It's great that you have looked closely at the numbers and expressed a view. Thanks!

I guess I would respond to your points in this way:

If I was to hand someone $2m, I would want something for it. Because I would consider alternative uses of that money, and this needs to be taken into account in a decision.

For an investment analysis, cost of money is always a consideration, and in handing over money, the risk is a consideration in the pricing. In terms of a retirement village - you do not have title, and a contract dictates outcomes. There may be a factor of a change in value that the unit transacts for - but this is not to be confused with all the rights and entitlements of having title to property, something that the income resident may think is the case.

Consider the purchase of the Wesley Taylor Nursing Home in Narrabeen by Retirement by Moran in April last year (I am unaware of the purchase cost). There are plans to build 120-130 retirement units at a cost of $220m. Retirement by Moran has just completed Sage in Cronulla - a development with units involving a resident contract loan of $2m-$5m. I can only assume the planned development in Narrabeen will follow a similar luxury pricing model. For the bank lending money to build the $220m property, the situation looks good, because upon completion, the incoming retirement village residents take on the loan (which I assume will help extinguish the debt to the bank), they will pay for upkeep of the property, they will pay a big chunk of their upfront loan upon leaving, they will remain lenders until there is another buyer for their loan, and they will probably wear the downside risk of the new resident not paying as much. Meanwhile, Retirement by Moran will hold title, and participate in value increases over time.

I can only assume that every step of this process has been finely analysed by bankers and developers and operators, and the driver of the opportunity is the large sums of money northern Sydney retirees will have from selling their homes of the prior 50 years or so.

Make no mistake, this is a good deal for the developers - and the outcome of several luxury development demonstrates huge demand. I am just saying that it is worth a close look to make sure it is a good deal for you.

Given your extensive experience in this field, I assume you are also familiar with the Manufactured Homes (Residential Parks) Act 2003 - Qld. My understanding is that most states (including NSW) have largely similar legislation to regulate this section of the retirement village industry. Most significantly, residents under this model own their homes and no lending to the operator is involved. Pre-contractual disclosure obligations are comprehensive and purchase contracts relatively simple - at least compared to the type referred to in your article. Residents pay a site rent because they don't own the land on which their home is sited, but that's it. There are no deferred charges and residents keep 100% of the capital gain.

Your article paints a fairly gloomy picture of the Retirement Village industry and might deter retirees from going down that path. It would provide some balance if you penned an article in the future on the pros and cons of the Manufactured Homes side of the industry. In my opinion, many of the pitfalls to which refer do not exist under that regime.

By way of making a full disclosure I am a recently retired CEO of a family owned manufactured home park in Qld.

"family owned manufactured home park":

Chinese tiny homes:
https://www.google.com/search?q=expandable+shipping+container+home
Just add land and connections.

Remember the AVEO scandal or have we forgotten.

John,

On 18 December last year (days before Christmas!), the NSW Government announced they had appointed Aveo to develop the old Manly Hospital site.

It looks like the reputation rehabilitation is complete.

My expectation, given Aveo are primarily a retirement living developer and owner, is that sky high Manly real estate values will support big Retirement Village up-fronts that will very nicely underwrite this development.

And the pipeline of luxury retirement village units gets bigger!

It is striking that the Government is overlooking such a crucial component of what is, essentially, a financial product. Any other financial instrument in Australian society faces a very high degree of scrutiny, as it should. Perhaps it reflects the strength of the lobbying groups involved that the current Minister does not see it as risk, overlooking those without the knowledge that are some of our most vulnerable citizens.
Thank you for sharing your insights.

Really ? why would we care about licensing ? As a retired FP , I would like to know in English how the contract works and explained in plain English if I was going into a retirement home .No it seems .Government was quick to establish Statements of advice , commission disclosures and a guarantee the client understands a Financial planning advise document in a minimum 40 page document , but who cares about a million $ contract with an Age care resident . They are old and demented and are often pushed into signing when they are most vulnerable ! Who gives a stuff /let the Developers continue ! All care and no responsibility ! Stuff the residents , let the good times roll .Please ignore this Aged care minister in the labour government , would not want you to give Albo another thing to think about !

It is true enjoyment cannot be easily monetised, but given money drives the other stakeholders, it would be irresponsible not to factor it in.
The typical consumer here is a vulnerable senior with declining faculties, family and friends in different life cycles and professionals adept at saving for their own cosy retirement. The odds are stacked. Demographic tsunami of living almost forever worsens the problem.
Thinking outside the box, what could be done?
The propensity of adult inheritors to abandon their parents in twilight time to their own flawed devices until the will is read post funeral: isn’t it time to require their involvement in parental upkeep (not merely financial) as in some societies? Remember they couldn’t have abandoned the inheritors without the state trooping in.
Good Samaritan assistance: for a fee this could be offered to those unable to navigate the obstacles.
The omission of the opportunity cost of initial outlay is shocking.
Sadly, Royal Commissions highlight problems post facto: too late. They offer the equivalent of embalming advice to those seeking to escape murder.

Your views are very interesting but place money possibly above enjoyment. Those that have worked hard and saved all their lives have earned the right to enjoy their finances as best suits them not what is left to family or others . The quality of retirement facilities has improved considerably over the past five years along with higher prices. The earlier article about frugal and tightwad attitudes reflects the many different objectives of many retirees. For those I think your article is excellent and of great help and inspiration Thank you once again for sharing your thoughts. Cheers Ken Ellis

Kenneth. The first sentence. "Retirement Village life is great".

It is entirely reasonable to invite scrutiny around the inherent complexity in pricing, the unreasonably difficult process of disclosure - and the pending calamity of higher aged care prices that are dealt with by the children when retirement village living stops (as great as it is).

The question of "how much does it cost"" is NOT "Retirement Village life is great!".

Developers, investors and operators have scrutinised the numbers and cannot build fast enough - it is not unreasonable to suggest residents look at the numbers too.