Newsletter Volume 1 Edition 5
Sent June 2011
When the desired serviced facilities charge a Deferred Service Fee
Last month we looked at ‘Where to live in your senior years’ when living in the family home becomes a daily challenge rather than a joy. This month we look at the potential deferred service fees, or deferred management fees, that can deter entry to a ‘lifestyle community.’
The attractions of ‘lifestyle living’ are that you have both your private space, an apartment or villa, and access to communal spaces and facilities. In addition, the facility management generates a sense of security and well being as staff are seen around maintaining the grounds and buildings.
The buy in price for a lifestyle living place can look like the price we would expect to pay for an individual strata title apartment or home unit in a similar setting. So why the deferred service fee?
What costs does the regular service fee cover?
We can accept the monthly regular service fee as a bit high but maybe OK for the level of ‘services’ that are provided. Mentally our assessment of the ‘services’ includes only the visible ones, such as, the village bus, the gardening and lawn mowing and lighting of the communal areas.
If prompted, we could accept that the regular service fee must cover the costs of having someone monitor and respond to the emergency call system, the expenses of cleaning the communal facilities and the gas for heating the swimming pool, plus the direct costs of maintenance and insurance of the building structure. We still think of the receptionist and mail handling as part of the facility ‘management’ not as a ‘service’ to residents.
How much is the regular service fee?
The service fees are set by the sponsor initially and then increased with ‘inflation’ as per CPI increases. A larger increase could apply if the service levels and/ communal facilities are upgraded.
Weekly service fees start at around 30% of the single person Age Pension for a free standing villa unit in an outer suburban village. Retirees dependent on the Age Pension could manage this level of service fee.
A prestige inner suburban residence could require a regular service fee of about 50% of the single person Age Pension for a spacious one bedroom independent living apartment. Larger apartments and/or additional residents, usually attract higher regular service fees. A significant level of superannuation or investment income would be desirable for a financially comfortable retirement in such a facility.
But why the deferred service fee?
The short answer is that the regular service fee only covered the ‘cash outgoings’ part of the communal property expenses, hence you still have to pay your ‘rent’ for your use of the communal facilities.
The long answer starts with the sponsor who borrowed the funds and bought the land, secured the planning permits then built the both the communal facilities and the individual apartments and/or villas and continues to manage the facility.
Periodically, the sponsor refurbishes the communal areas to maintain the appearance of the whole establishment. Residents see new carpets and lounge chairs, upgraded gym equipment and new paint.
A sponsor could consider levying a full service fee which covered all of the regular outgoings plus a component of rent for the use of the communal facilities. For the prestige inner suburban residence, the full service fee also includes a charge for the eventual replacement of the lifts and air-conditioners.
Lifestyle communities typically charge a deferred service fee of 3% of the resale value of your apartment or villa, for each year that you owned it. Note that you could be charged further ‘exit fees’ to cover the costs of refurbishing your villa or apartment, and signing up a replacement resident.
Thus for the outer suburban retirement village, the deferred service fee may be similar to 60% of the single rate of Age Pension. As an alternative to collecting both the deferred service fee and the regular service fee, the sponsor could just levy a full service fee of about 90% of the single rate of Age Pension.
Alas retirees choosing independent living villas in outer suburban lifestyle communities are generally dependent on the Age Pension and could not easily afford the full service fee. These retirees of modest means are content to pay the cash outgoings component for the communal facilities which they enjoy. They would accept that the rental component of the lifestyle community costs would come out of the final sale price; another way of spending the kids inheritance on recreational and support services.
For the prestige inner suburban residence, the deferred service fee for a one bedroom apartment, could be similar to 100% of the single rate of Age Pension. Thus the full service fee could be about equivalent to 150% of the single rate of Age Pension for just one person living in style.
Therefore, you need to consider your potential income position and the actual costs of living in your preferred apartment or villa before you sign the contract. The family also need to be aware that the net value of your ‘home’ is reducing and that the net proceeds of its “sale” would not be available on the day that you move out. The net sale proceeds and the deferred management fee become payable only when a new resident occupies your former home or the manager agrees to an earlier release.
Clients of Financial Care Services receive impartial confidential financial advice from an actuary. Financial Care Services is an independent professional financial advisory service which holds Australian Financial Services Licence number 299570.
Clients are charged flat fees for advice and assistance; no upfront commissions are accepted in respect of clients’ investments. Home visits and out of hours appointments are available to assist client families.
For more information call Christine on 9808 0338 or visit www.financialcareservices.com.au
Financial Care Services specialises in advising seniors through life’s transitions.
Remember, referring your clients for impartial professional financial advice enhances your profile and reduces the potential for later complaints.
Fellow of Institute of Actuaries of Australia
Director and Authorised Representative
Financial Care Services
Telephone 03 9808 0338