What is a deferred management fee?
Updated: Jun 30, 2019
If you are considering moving into a retirement village, you may have seen or heard the words ‘deferred management fee’, ‘DMF’ or 'exit fee' and be wondering exactly what this means.
When moving into a retirement village, you will likely be asked to pay to the operator of your retirement village, an amount known as an ‘in-going contribution’. When you leave the village, this amount will be repaid to you or your family, less several deductions accrued during your time residing in the village. One such deduction is known as the deferred management fee or exit fee.
A deferred management fee is essentially the retirement village operator’s profit. The benefit to residents of a deferred management fee is that upfront costs of living in a village are more affordable for residents. This means that people can afford to live in their preferred area where likely the cost of purchasing a freestanding home would be far more than the cost of a right to reside in a retirement village in the same area.
The Retirement Villages Act does not regulate the form of the fee or the amount and is therefore calculated in accordance with the terms of the residence contract. It is usually calculated as a percentage of the in-going contribution paid by you, or the resale price obtained from a new resident when you leave the village. The percentage amount is typically based on the length of time you reside in the village and is required to be calculated on a pro-rata daily basis rather than an entire year.
That is, previously, if you resided in a village for 1 year and 22 days, the 22 days would be classified as an entire year. These days, the 22 days would be calculated as just that, 22 days. For example, if your in-going contribution was $250,000 with a deferred management fee calculated at 5% per year, up to a maximum of 5 years and you reside in the village for exactly 3 years, your deferred management fee would be $37,500. That is $250,000 x 5% per year x 3 years.
As mentioned above, the Retirement Villages Act does not prescribe the form or amount of the deferred management fee. It is because of this that the method for calculating the deferred management fee varies from contract to contract. It is essential to ensure that you understand the amounts that you will be liable to pay when leaving the village.
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