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## frednz

1221 posts

Uber Geek

# 1589300 10-Jul-2016 21:15

Just a further thought on this, perhaps a financial whiz could comment on my calculations below. The aim is to see what the cost per week is of purchasing a “Licence to Occupy” (LTO) from a retirement village for a 4-year period assuming the following information:

Purchase price of LTO for resident (equivalent to an interest free loan): \$500,000

Deferred management fee (DMF) 6.25% per year deducted from the purchase price for the first 4 years only: \$125,000 (\$31,250 per year)

Amount received by resident on vacating the village 4 years later: \$375,000 (\$500,000 - \$125,000)

Sale of LTO by the village to a new resident after 4 years: \$608,000 (approx. 5% gain per year)

Village fees paid by the resident over the 4-year period: \$29,120 (\$140 average per week)

The total cost to the resident of the LTO over the 4-year period is:

Deferred management fee (DMF): \$125,000

Village fees: \$29,120

Loss of capital gain on the LTO which was kept by the village: \$108,000 (\$608,000 - \$500,000)

TOTAL cost of owning the LTO over the 4-year period: \$262,120

COST PER WEEK of owning the LTO over the 4-year period: \$1260

Well, the cost of \$1,260 per week is “only” \$180 per night, which I suppose isn’t too bad for staying in a resort with full medical facilities etc. available??

These calculations exclude legal fees and the costs of personal insurance, power etc. Because it is assumed that the DMF of a 6.25% deduction per year from the purchase price of the LTO applies only during the first 4 years, if the LTO is held for longer than 4 years, the cost per week after 4 years of owning the LTO is reduced (depending on the amount of loss of capital gain that occurs after the first 4 years).

Do you agree with the basis for the above calculations?

Thanks

Fred

## lapimate

309 posts

Ultimate Geek

Trusted

# 1589307 10-Jul-2016 21:41

frednz:  ... Do you agree with the basis for the above calculations? ...

No, because you have not been able to include any allowance for contingencies or intangibles.
What happens to the ease of sale or sale value if the management deteriorates and residents en masse start trying to sell their units to exit?

At least if one rents one can relatively easily move to another facility.

## frednz

1221 posts

Uber Geek

# 1589309 10-Jul-2016 21:52

lapimate:

frednz:  ... Do you agree with the basis for the above calculations? ...

No, because you have not been able to include any allowance for contingencies or intangibles.
What happens to the ease of sale or sale value if the management deteriorates and residents en masse start trying to sell their units to exit?

At least if one rents one can relatively easily move to another facility.

True, but if one rents, you are most unlikely to get "resort-like" facilities (swimming pool, bowling green, restaurant etc) and 24-hour onsite medical facilities.

But you make a very good point about the ease of sale because the licence to occupy (LTO) may require a resident to pay village fees after vacating the village until such time as a new resident has been found. However, some villages may set a maximum period of time for which the village fees must be paid after vacating, such as 6 months. The cost of these additional village fees could be added to the calculations I showed above, but it's hard to determine just how long the village may take to resell the LTO.

I doubt, however, whether major villages operated by say Ryman or Summerset are likely to experience the problems you have described, but a smaller village could be more vulnerable to such events.

Regards

Fred

## mattwnz

15141 posts

Uber Geek

# 1589315 10-Jul-2016 22:34

frednz:

Just a further thought on this, perhaps a financial whiz could comment on my calculations below. The aim is to see what the cost per week is of purchasing a “Licence to Occupy” (LTO) from a retirement village for a 4-year period assuming the following information:

Purchase price of LTO for resident (equivalent to an interest free loan): \$500,000

Deferred management fee (DMF) 6.25% per year deducted from the purchase price for the first 4 years only: \$125,000 (\$31,250 per year)

Amount received by resident on vacating the village 4 years later: \$375,000 (\$500,000 - \$125,000)

Sale of LTO by the village to a new resident after 4 years: \$608,000 (approx. 5% gain per year)

Village fees paid by the resident over the 4-year period: \$29,120 (\$140 average per week)

The total cost to the resident of the LTO over the 4-year period is:

Deferred management fee (DMF): \$125,000

Village fees: \$29,120

Loss of capital gain on the LTO which was kept by the village: \$108,000 (\$608,000 - \$500,000)

TOTAL cost of owning the LTO over the 4-year period: \$262,120

COST PER WEEK of owning the LTO over the 4-year period: \$1260

Well, the cost of \$1,260 per week is “only” \$180 per night, which I suppose isn’t too bad for staying in a resort with full medical facilities etc. available??

These calculations exclude legal fees and the costs of personal insurance, power etc. Because it is assumed that the DMF of a 6.25% deduction per year from the purchase price of the LTO applies only during the first 4 years, if the LTO is held for longer than 4 years, the cost per week after 4 years of owning the LTO is reduced (depending on the amount of loss of capital gain that occurs after the first 4 years).

Do you agree with the basis for the above calculations?

Thanks

Fred

Nearly half the cost in your calcs, is due to the capital gain, even though when you buy a LTO, you don't ever benefit from the capital gain. So it  probably shouldn't be factored in as a cost, becuase if that same money was just left under the mattress you  also wouldn't get a capital gain on your capital. YOu are however losing the value of that capital due to inflation, which is something you may want to factor in.  It is also assuming there is a capital gain on the property , and not a loss. eg. the company sells it for less than the previous buyer paid, which is possible when property bubbles burst, or the house prices go sideways.

It all comes down to whether the person/couple want to live in a rest home village or not, and whether they are comfortable with a reduction in their assets when it come to EOL, in what they leave behind to family.

## frednz

1221 posts

Uber Geek

# 1589564 11-Jul-2016 12:07

mattwnz:

Nearly half the cost in your calcs, is due to the capital gain, even though when you buy a LTO, you don't ever benefit from the capital gain. So it  probably shouldn't be factored in as a cost, becuase if that same money was just left under the mattress you  also wouldn't get a capital gain on your capital. YOu are however losing the value of that capital due to inflation, which is something you may want to factor in.  It is also assuming there is a capital gain on the property , and not a loss. eg. the company sells it for less than the previous buyer paid, which is possible when property bubbles burst, or the house prices go sideways.

It all comes down to whether the person/couple want to live in a rest home village or not, and whether they are comfortable with a reduction in their assets when it come to EOL, in what they leave behind to family.

There are some villages that pass on at least part of the capital gain to residents when they leave the village. For example, I know of one “Licence to Occupy” (LTO) that gives 30% of the capital gain to residents, which is better than nothing! It certainly pays to shop around when looking for a suitable retirement village!

I agree that, for some people, the overall cost of being in a retirement village doesn’t matter to them because they are comfortable and well looked after, have their medical needs attended to, and in some cases may really need to be in care or in a hospital. Some families just have to accept this situation and realise that the cost of looking after a very sick relative is inevitably going to reduce their assets considerably.

However, the cost of a LTO is simply an interest free loan to the village if the capitals gains are not shared with the residents when they vacate the village. Now, if you really do leave all your money under a mattress, you may be justified in saying that any capital gain the village earns from the LTO is not part of your costs of residing at the village! Or, if your money is in one bank that pays 0% interest, you may look at the situation in the same way. But even then, I would argue that, if the lender could easily earn money from this capital by putting it into another bank’s term investment, the loss of this money by making an interest free loan should be regarded as a cost of making the loan.

For example, if you can easily earn at least, say, 3% after tax from your savings, then if you make an interest free loan to anyone, the loss of this 3% interest would be regarded by many people as a cost to them of making the interest free loan.

And if you have to sell your home to go into a retirement village (as many people do), then after a while your overall financial position is probably a lot worse off when you leave the village than it would have been if you had stayed in your own home. So, when making financial decisions, it’s logical to compare one option with another and decide which option provides you with the best return on your capital.

The only financial “upside” (as you point out) of a LTO is that most villages don’t pass on any capital losses to residents when they leave the village, and I agree this could happen. But, if it happened too frequently, the village might go into liquidation and the residents might end up losing money because of that!

Regards

Fred

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