*Note:- Contracts with a capital 'gain' provision usually include a capital 'loss' provision.*

WARNING - Some contracts calculate the Capital Contribution (aka the deferred fee) not on the initial entry price but on the eventual selling price.

This 'selling price' type contract will have an even larger impact on capital over time, eg: A deferred fee set at say 25% of an entry price of $500,000.00 produces a payment required of $125,000.00. For those village residents with a long period of occupancy and an exit price style contract, 25% of an exit price of say $800,000.00 produces a 'deferred fee' payment of $200,000.00, an extra $75,000.00.

This equates to a hidden deferred fee rate of 40.0% on the original $300,000.00 in-going paid.

There can be a vast difference in the capital value position of a retiree on leaving a retirement

village depending on - 1. whether the contract of occupancy grants any share of capital gains

to the resident and 2. even if granted whether any capital gains were achieved.

The
following tables show the differing outcomes of five different ways
in the treatment of capital gains. View the differing outcomes where
the resident share of any capital gain is 100% 75%, 50%, 25%, or 0%.
Of particular note is the methodology used to calculate the
refundable amount of the outgoing resident and the dramatic impact it
can have on the refundable amount on departure.

In
Scenario 1, 2 and 5 the financial outcomes are based on the Deferred
Management Fee being calculated on the 'outgoing value' of the unit.
What separates them is the methodology of the calculation, there is
no legislative protection for retirees against the methodology used
in Scenario 2 and 5.

In
Scenario 3 and 4 outcomes are based on the Deferred Management Fee
being calculated on the 'ingoing value' of the unit. 41% of the
retirement village industry is outlined in Scenario 4, the main
feature being the operator granting zero access to any capital gain
in the value of the unit being occupied. Scenario 3 produces the best
outcomes for departing residents as the calculation methodology
grants true access to the capital gain % as stated in the Fact Sheet.

**The different calculations are summarised in the table below.**

**Note both the differing financial outcomes for retirees and the difficulty retirees would have in foreseeing these impacts prior to be required to execute a contract of occupancy.**

SUMMARY

**Scenario 1**=

*.*

**The in-going Amount $ ($800,000) plus a % share of any Capital Gain $ minus a Deferred Management Fee of 40% calculated on a total of both the in-going amount and the $ share of any capital gain %****Scenario 2**=

**.**

*The in-going amount $ ($800,000) plus a % share of any Capital Gain $ minus a Deferred Management Fee of 40% calculated on the Outgoing Value of the Unit ($1,6m)*

**There is no legislative protection for retirees against the Scenario 5 methodology.**

**Scenario 3**=

*.*

**The in-going $ ($800,000) minus a Deferred Management Fee of 40% calculated on the in-going amount. On top of the result of this calculation the departing resident then receives 100% percent of their % percentage share of any capital gain****Scenario 4**=

*.*

**The in-going $ ($800,000) minus a Deferred Management Fee of 40% calculated on the in-going Value of the Unit****Scenario 5**=

*The in-going $ ($800,000) minus a Deferred Management Fee of 40% calculated on the Out-going Value of the Unit ($1.6m)*.

**There is no legislative protection for retirees against the Scenario 5 methodology.**

**Scenario 1.**

Calculation
of the Refundable Amount $ =

*.***The in-going Amount $ ($800,000) plus a % share of any Capital Gain $ minus a Deferred Management Fee of 40% calculated on a total of both the in-going amount and the $ share of any capital gain %****Scenario 1**

Capital
Gain (CG) share to resident = 100%

Methodology
($800,000 + $800,000 CG = $1,600,000 x 40% DMF = $640,000 =
$1,600,000 - $640,000 = $960,000 refundable amount.

Capital
Gain (CG) share to resident = 75%

Methodology
($800,000 + $800,000 CG x 75% = $600,000 = $1,400,000 x 40% DMF =
$450,000 = $1,600,000 - $560,000 = $840,000 refundable amount.

Capital
Gain (CG) share to resident = 50%

Methodology
($800,000 + $400,000 = $1,200,000 x 40% DMF = $480,000 = $1,200,000 -
$480,000 = $720,000 refundable amount.

Capital
Gain (CG) share to resident = 25%

Methodology
($800,000 + $200,000 = $1,000,000 x 40% DMF = $400,000 = $1,000,000 -
$400,000 = $600,000 refundable amount.

Capital
Gain (CG) share to resident = 0%

Methodology
($800,000 + $0 = $800,000 x 40% DMF = $320,000 = $800,000 - $320,000
= $480,000 refundable amount.

**Scenario 2.**

Calculation
of the Refundable Amount $ =

**.***The in-going amount $ ($800,000) plus a % share of any Capital Gain $ minus a Deferred Management Fee of 40% calculated on the Outgoing Value of the Unit ($1,6m)***Scenario 2**

Capital
Gain (CG) share to resident = 100%

Methodology
($800,000 + $800,000 CG = $1,600,000 - 40% DMF x outgoing value of
$1,600,000 = $640,000 = $1,600,000 - $640,000 = $960,000 refundable
amount.

Capital
Gain (CG) share to resident = 75%

Methodology
($800,000 + 600,000 CG = $1,400,000 - 40% DMF x outgoing value of
$1,600,000 = $640,000 = $1,400,000 - $640,000 = $760,000 refundable
amount.

Capital
Gain (CG) share to resident = 50%

Methodology
($800,000 + $400,000 CG = $1,200,000 - 40% DMF x outgoing value of
$1,600,000 = $640,000 = $1,200,000 - $640,000 = $560,000 refundable
amount.

Capital
Gain (CG) share to resident = 25%

Methodology
($800,000 + $200,000 CG = $1,000,000 - 40% DMF x outgoing value of
$1,600,000 = $640,000 = $1,000,000 - $640,000 = $360,000 refundable
amount.

Capital
Gain (CG) share to resident = 0%

Methodology
($800,000 + $0 CG = $800,000 - 40% DMF x outgoing value of $1,600,000
= $640,000 = $800,000 - $640,000 = $160,000 refundable amount

**There is no legislative protection for retirees against the above methodology.***NOTE:- In Scenario 1 and 2 there is an inherent deception in the Fact Sheet which can state 'the resident will be entitled to 100% of any increase in capital value of the unit”. Deceptive because in those calculations the deferred management fee (DMF) of 40% is calculated on the total of the in-going value of the unit and any % share of a capital gain (Scenario 1) or the outgoing value of the unit (Scenario 2). In these calculations the resident actually only receives 60% not 100% of the actual capital gain $ amount, 40% is taken by the DMF.*

**Scenario 3.**

Calculation
of the Refundable Amount $ =

*.***The in-going $ ($800,000) minus a Deferred Management Fee of 40% calculated on the in-going amount. On top of the result of this calculation the departing resident then receives 100% percent of their % percentage share of any capital gain***(as per the statement in the fact sheet)*
Note
the benefit to the retiree in Scenario 3 of this calculation methodology
as opposed to Scenario 1. The refundable amount due to a departing
resident where the deferred management fee is calculated on the
in-going amount and the payment of any agreed capital gain percentage
is paid in full on top of the initial calculation.

**Scenario 3**

Capital
Gain (CG) share to resident = 100%

Methodology
($800,000 + $800,000 CG = $1,600,000 - 40% DMF x ingoing value of
$800,000 = $320,000 = $1,600,000 - $320,000 = $1,280,000 refundable
amount.

Capital
Gain (CG) share to resident = 75%

Methodology
($800,000 + $600,000 CG = $1,400,000 - 40% DMF x ingoing value of
$800,000 = $320,000 = $1,400,000 - $320,000 = $1,080,000 refundable
amount.

Capital
Gain (CG) share to resident = 50%

Methodology
($800,000 + $400,000 CG = $1,200,000 - 40% DMF x ingoing value of
$800,000 = $320,000 = $1,200,000 - $320,000 = $880,000 refundable
amount.

Capital
Gain (CG) share to resident = 25%

Methodology
($800,000 + $200,000 CG = $1,000,000 - 40% DMF x ingoing value of
$800,000 = $320,000 = $1,000,000 - $320,000 = $680,000 refundable
amount.

Capital
Gain (CG) share to resident = 0%

Methodology
($800,000 + $0 CG = $800,000 - 40% DMF x ingoing value of $800,000 =
$320,000 = $800,000 - $320,000 = $480,000 refundable amount.

**Scenario 4.**

Calculation
of the Refundable Amount $ =

*.***The in-going $ ($800,000) minus a Deferred Management Fee of 40% calculated on the in-going Value of the Unit***There is no access to any share of capital gain.***Thi****s is applicable to 41% of the retirement village industry.**

**Scenario 4**

Methodology
($800,000 + $0 CG = $800,000 - 40% DMF x ingoing value of $800,000 =
$320,000 = $800,000 - $320,000 = $480,000 refundable amount.

Note
the vast difference in financial outcomes for retirees between Table 4 and Table 3 where a reasonable % percentage of any capital gain is
granted to the resident.

For
example – In Scenario 4 a retiree would suffer an inflationary
devaluation on their projected refundable amount of $480,000 at 3%
inflation over a 10 year occupancy period of $122,834.92. The future
present day value of their refundable amount would on departure be only $367,165.08 not $480,000.00.

**Scenario 5.**

Calculation
of the Refundable Amount $ =

**The in-going $ ($800,000) minus a Deferred Management Fee of 40% calculated on the out-going Value of the Unit ($1.6m)**.*There is no access to any share of capital gain.***41% of retirement village residents do not have access to any capital gain.****Scenario 5**

Methodology
($800,000 + $0 CG = $800,000 - 40% DMF x outgoing value of $1,600,000 =
$640,000 = $800,000 - $640,000 = $160,000 refundable amount.

**There is no legislative protection against the use of the above methodology.**For those retirement village residents that are granted access to all or a share of any capital increase in value of the unit they occupy, a flatter property market could lead them to what is referred to as the retirement village 'poverty trap'. A position where the refundable amount due to a resident on departing a village is no longer sufficient to allow them to return to the property market or fund an aged care placement of their choice.

Refer
Table D -

Table
D

This
negative impact is difficult to foresee in monetary terms at the time
of executing a lease or licence to occupy. Refer - https://retvilldotnet.blogspot.com/p/povertyfinancial-trap.html

Where
retirees accept access to a % share of any capital gain in the unit
they are to occupy, they also accept responsibility for the payment
of a proportional share in any capital loss.

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