The following example shows how the Deferred Management Fee (DMF) is worked out in New Zealand and how it affects the final payout.
Example – Mr C
Mr C chose a unit in a village near to his old home. He did his homework which included:
- Using the village checklist
- Visiting several villages
- Talking to key people involved with the village including residents
- Reading and understanding the paperwork provided by the various villages on his short list
- Visiting a lawyer experienced in retirement villages to have all the essential legal components and financial implications explained (ORA, legal title, Deferred Management Fee [DMF], weekly fees, etc.)
The financial arrangement
- Mr C decided to spend $500,000 on the unit (having understood the unique components of an Occupational Rights Agreement - ORA)
- The weekly fees were $150 per week (fixed for life)
- The DMF was 5% per year to a maximum of 20%
- Mr C does not share in any capital gain or loss
Mr C enjoyed six years in the village and continued to pay the weekly fee of $150 per week.
When Mr C died
The calculation for the DMF (the amount deducted from the payment his estate received) was as follows: (Remember the purchase price was $500,000)
|
Year 1 |
Year 2 |
Year 3 |
Year 4 & thereafter |
|
5% loss |
Additional 5% loss |
Additional 5% loss |
Additional 5% loss |
|
$475,000 |
$450,000 |
$425,000 |
$400,00 (no further loss) |
Mr Cs estate received $400,000 (less refurbishment costs of $27,000).
Updated: 21 Apr 2023