Without a doubt, exit fees are one of the most maligned and disputed aspects of the retirement village industry. Potential residents see them as unfair and rapacious, and even retirement village operators would dump them if there was a better alternative.
So what are exit fees, why do village operators use them and how do they work?
What is an Exit Fee?
Exit fees are also known as Deferred Management Fees or DMF’s. It is a fee charged to the resident over the duration of their stay in the village, with the accrued dollar amount deducted from the refund paid to the exited resident after resale of their unit. Note that it is accrued during the resident’s occupation, but not paid until resale of the unit.
How does the Exit Fee work?
The Exit Fee is a % of either your purchase price or the value achieved on resale of the unit after you leave. It is accrued on a daily basis and would typically “max” or “cap” out at around 30-35%, although the total percentage amounts vary greatly.
The fee stops accruing upon termination of the lease or licence, the death of the resident, or once the total exit fee amount has been accrued.
Here are a couple of examples:
Exit fee on Entry Price
This example shows an exit fee of 30% based on the original purchase price of the unit:
| Purchase Price | $800,000 |
| Exit Fee – 30% | $240,000 |
| Net to Resident on exit | $560,000 |
The exit fee of 30% is accrued on a daily basis and would be split over several years. Continuing the example below, the exit fee of 30% is split over 6 years as 5% per year:
| End of: | % per Year | Cumulative |
| Year 1 | 5% | 5% |
| Year 2 | 5% | 10% |
| Year 3 | 5% | 15% |
| Year 4 | 5% | 20% |
| Year 5 | 5% | 25% |
| Year 6 (Total) | 5% | 30% |
The dollar accrual would look as follows:
| End of: | $ per Year | Cumulative | Net to resident |
| Year 1 | $40,000 | $40,000 | $760,000 |
| Year 2 | $40,000 | $80,000 | $720,000 |
| Year 3 | $40,000 | $120,000 | $680,000 |
| Year 4 | $40,000 | $160,000 | $640,000 |
| Year 5 | $40,000 | $200,000 | $600,000 |
| Year 6 (Total) | $40,000 | $240,000 | $560,000 |
Because the fee is accrued on a daily basis, if the resident exited the village partway through one of the years, then only part of the fee would be charged – 5% / 365 days = 0.1369% per day, or $109.59 dollars per day.
The good thing about exit fees charged on your Entry price is that you know exactly what the accrual amount is going to be. With exit fees charged on resale values, you wont know what the final charge will be until the unit has been resold.
Exit fee on Resale Value
This example shows an exit fee of 30% based on the achieved resale price of the unit, after an assumed stay of ten years:
| Original Purchase Price | $800,000 |
| Resale Value | $990,000 |
| Exit Fee – 30% | $297,000 |
| Net to Resident on exit | $693,000 |
This example also assumes that the exiting resident is entitled to the full resale value, net of the exit fee. There would be other fees and charges, primarily associated with renovating the unit – read the article on What happens when you leave a retirement village.
Exit fee variations – tips and tricks
The examples shown above are very simple, and in practice there is a huge range of variations to exit fee calculations, depending on the state, the operator and the village. The exit fee calculation will be clearly explained in your residence contract, with “clearly” being a matter of opinion.
A couple of things to watch out for:
No cap exit fees
Recently, a mid-tier retirement village operator introduced no cap exit fees, where the exit fee accrues every day for the duration of the occupation, with no maximum or cap. While this sounds rapacious, the exit fee is usually lower than industry standard at around 3-3.5% of the purchase price per year. If you take an industry- standard occupation tenure of 10 years, this equates to a 35% exit fee on exit, which is about average.
This type of exit fee works in favour of older people entering the village vs younger retirees, which I guess is the point. If you are in your mid to late 70’s, grab this deal with both hands. If you are in your mid-60’s maybe look somewhere else.
Front-loaded exit fees
On the other end of the scale to “no cap” exit fees are front-loaded exit fees. This is where the total exit fee is accrued in a short period of time, say around three years, with the bulk of the fee accrued within the first two years.
A typical front-loaded exit fee arrangement would look as follows:
| End of: | % per Year | Cumulative |
| Year 1 | 7% | 7% |
| Year 2 | 14% | 23% |
| Year 3 (Total) | 7% | 30% |
The trouble with front-loaded exit fees is that you are severely penalised if you move out after say two to three years. You would not be left with enough money from the resale of your unit to start over somewhere else. With this kind of agreement you are “crossing the Rubicon” as it were, with no way back. I would not recommend anyone signs an agreement featuring a front-loaded exit fee.
Management Fees Upfront
A new contract variation offered by retirement village operators is to pay your exit fee upfront, in addition to the ingoing contribution (purchase price). In this arrangement, you dont pay an exit fee when you leave the village – you pay a “management fee” up front which is only partly refundable if you leave within the first two years of occupation. The management fee is typically less than the exit fee that would be applicable on that same unit, because you are paying the fee “upfront”.
This contract option can be good if you have to pay more for the unit to reduce your bank balance for pension purposes.
The last word
Exit fees are basically the only way a village operator makes money. An operator may not, under law, make a profit from your ongoing village fees, so the only way they can earn an income is through the exit fee.
Many people, including the mis-informed media and the knuckle-heads at National Seniors Association who are too lazy to do proper research, seem to think that the money you pay when you move into the village is revenue for the operator. But this is not the case. The money you pay when you move into the village is used to pay out the former resident, less their exit fee. Your ingoing contribution (or original purchase price) is held as a liability on the operator’s balance sheet, because it has the nature of a bond or debt, that has to be paid back to the resident when they leave the village and the unit is resold.
Are exit fees extortionate?
I don’t think so. If exit fees were extortionate, village operators would be making stacks of money and building retirement villages everywhere, yet this is simply not the case. Retirement village operators struggle to make new developments profitable, particularly if they are competing with residential developers for sites. Residential developers (build and sell) will usually always make more money than a retirement village.
When national property behemoth Stockland Group sold their retirement village portfolio (they were one of the top three owner/operators in the country) in 2022, their CEO justified the sale with comments around the returns being only 4% and not high enough for the company. Note Stockland invests across a range of property sectors, yet determined that retirement living was simply not a viable investment.
It’s a fun narrative to view retirement village operators as money-hungry crooks and this is certainly the biased angle taken by Adele Ferguson and her repeated attacks on the industry. But it is just not supported by the facts. Retirement villages remain a small, boutique downsizing option for retirees, housing only 5% of the population aged over 65 years, and it is rare to find an operator who doesn’t take seriously their duty of care to ageing residents.