It's common for retirement villages to expect you to forfeit at least a portion of your unit's resale value to the village, which may use the money to keep a lid on operating costs. You need to carefully consider the implications of paying lower levies in exchange for surrendering what could be a large part of your unit's value when you sell.
Of equal importance to how you own a unit in a retirement village are the terms in the contract governing the resale of your unit and how these terms affect the levy you pay.
The contracts of many retirement villages include clauses in terms of which you surrender part of the resale value and this money is used to stabilise or even fix the levy you pay. These arrangements are determined by the contract you sign, but there is no legislation governing the terms these contracts may or may not include, Paul Wisenberg, a lawyer at Maurice Phillips Wisenberg, says.
Sifiso Msomi, a property lawyer with Shepstone & Wylie, agrees there is nothing in the legislation governing retirement villages stating how much you, as the holder of a life right, shareblock interest or sectional title, must be repaid when the unit you occupy is resold.
Msomi says any retirement village established under the Housing Development Schemes for Retired Persons Act is required to draw up - as one of the documents available for you to inspect before you sign the contract - a statement setting out the percentage of the purchase price that shall be paid to you or your estate when occupation expires.
He says a retirement scheme may be structured so that you (or your estate) are reimbursed your initial investment (without interest), or you receive a percentage of the profits on the resale of the unit, or a combination of both.
Msomi says a developer may even structure a scheme in such a way that there won't be a residue on expiration of occupation. This is perfectly acceptable, he says, if you agree to it.
In other words, it's a case of buyer beware, and as a buyer you may struggle to work out whether a particular resale arrangement will, in fact, offer you value.
Carl Scheppening, a retirement village specialist and a director of Cape Retirement Consultants, says non-profit organisations usually rely heavily on both the profits made on a life right when it is resold and on a portion of the original purchase price to fund the village and the organisation itself.
Margie van Zyl is the chief executive officer of the Pietermaritzburg and District Council for the Care of the Aged (Padca), which owns and manages Woodgrove Retirement Village in Pietermaritzburg and sells units in this village on a life rights basis.
She explains that when units in this life rights village are resold, 20 percent of the market-related selling price reverts to Padca to fund its welfare operations, while the village's levy stabilisation fund is funded from surpluses in the levy account.
Scheppening says privately developed retirement villages deal with resales in one of the following ways:
- They may refund you the original purchase price only and use the surplus to subsidise levy increases, or to build up reserves for major maintenance work or improvements. It is important that provision is made for maintenance and improvements to ensure that the standards of the village do not deteriorate.
- They may refund you the original purchase price plus a percentage of the surplus.
- They may refund the price paid by the new resident less, say, 15 percent.
- You may receive 100 percent of the price paid by the new resident.
The range of contracts is diverse. At the one end of the spectrum are the life rights contracts offered by villages such as Heritage Manor in Somerset West.
This village is operated by a managing company, Manor Enterprises, which also runs three other retirement complexes in the Western Cape.
Manor Enterprises has guaranteed residents who have bought life rights in Heritage Manor fixed levies and a fixed frail-care rate for life.
In return, the residents or their estates forfeit all the growth in the value of their units. When their contracts end, the residents are returned only the original capital they invested.
The potential advantages and disadvantages of such an arrangement are illustrated by the case of one couple who bought a two-bedroomed unit in the complex in its initial phase late in 2001 for R350 000. The residents' levy started at R350 a month in 2001 and escalated by R100 a year until 2004, when it reached a ceiling of R650 a month, which they will pay for the rest of their stay in the village.
The rate these residents pay to be accommodated in the frail-care facility at the village is also pegged at R1 950 a month.
In return for these fixed rates, Manor Enterprises retains 85 percent of the enhancement in the value of the unit when it is sold. The remaining 15 percent of the enhancement in the value of the unit is retained in a maintenance fund managed by a residents' association for the benefit of the complex.
This means that should this couple remain in the unit until they die, which could be more than 20 years after they moved in, their estates will be paid out only the original R350 000 they paid for the unit.
The price of a similar two-bedroomed unit in the complex is currently R896 000, Pam Lake, the manager of Heritage Manor, says. People who buy into the village now will pay a levy of R2 050 a month for a similar two-bedroomed unit, while the frail-care rate is now pegged at R8 800 a month, she says.
According to Nick Baines, the founder and former shareholder of Manor Enterprises, Heritage Manor is one of the only complexes in South Africa at which the levy and frail-care rate have been fixed for the life of the retirees in the complex.
Heritage Manor does not have a levy stabilisation fund because the fixed levy and frail-care tariff are guaranteed by Manor Enterprises. As Manor Enterprises is a private company, it does not provide the residents with details of how the money from the units it resells is spent or any details of how it will meet its guarantee not to increase the levies and frail-care rate in future. However, its auditor provides the management association's auditor with assurances that funds have been set aside to meet the guarantees, Baines says.
Levy stabilisation funds
Most retirement villages retain only a portion of the resale value and this money is paid into a levy stabilisation fund that is used to stabilise but not fix the levies.
It is important to understand that in these villages the levies will increase annually, but the increases will not be as high as they would be if a levy stabilisation fund was not in place.
For example, at Chartwell Estate, a village in Winston Park in KwaZulu-Natal that is sold on a life right basis, residents forfeit up to 20 percent of the resale value of their units to fund a levy stabilisation fund. Chartwell Estate is operated by a non-profit organisation, Kloof Rest Homes, which also runs three other retirement villages in the Hillcrest and Kloof areas of KwaZulu-Natal.
Geoff Stead, the chief executive officer of Kloof Rest Homes, says if residents sell their units within one year of buying at Chartwell Estate, their resale value will be only 90 percent of the value at which Kloof Rest Homes is able to resell the life rights to their units.
If they sell after one year, the value will be 89 percent, and each year thereafter the value drops by another percentage point until, after the 10th year, the resale value is only 80 percent of the life rights regrant value. On resale, 10 percent of the enhancement in the value of the unit is diverted into a levy stabilisation fund, and if more than 10 percent of the value is forfeited, Kloof Rest Homes uses the money wherever it sees fit to run its welfare organisation.
The potential advantages and disadvantages of this arrangement are illustrated by the example of a couple who bought into Chartwell Estate in the second half of 2001. They paid R450 000 for a three-bedroomed unit. When they bought into the complex, their levy, which included water, was R587 a month. Six years later, in 2007, they are paying R1 187 a month, including water.
Stead says the levy increases have been below inflation at about five or six percent, but there was a large increase when the village had to start paying rates. When the couple in this example moved in, the estate did not pay rates, he says.
When the couple moved in in 2001, the frail-care rate was R7 000, but if they had to go into frail care now they would have to pay R8 500 a month.
Their unit is now worth between R1.35 million and R1.45 million, the agent for the complex says.
The examples of the couples in Chartwell Estate and Heritage Manor illustrate some of the things you need to consider when you buy into a village.
If you choose a village that does not expect you to forfeit part of the resale value and does not have a levy stabilisation fund, you may be able to leave your heirs a much bigger legacy.
But if you are going to retire on a fixed income or on an income that won't keep pace with inflation, or that could be eroded quickly by ongoing medical costs - which are likely to continue to outpace inflation - the certainty of a fixed levy or, at the very least, a levy that is cushioned from the harsh effects of inflation, could be invaluable.
Depending on your income in retirement and its ability to keep up with inflation, your heirs may even have to help you to pay your levy in future years, and this could present them with cash-flow problems and erode the value of their inheritance, Baines says.
He says a resale contract such as the one offered by Heritage Manor needs to be acceptable to the whole family so they understand why they are forfeiting a potential inheritance.
You also need to remember that if you buy into a scheme in which the scheme retains a significant portion of your resale value, this may seriously hamper you if you decide you no longer want to live in that retirement village, or if you decide you want to scale down within the village or move into one of the units that offers assisted living, for example.
Depending on how much of the resale value the retirement scheme retains and the extent to which property values have escalated by the time you decide to move, you may be unable to afford to move to a similar home.
After six years in Heritage Manor, the couple who moved there in 2001 are now enjoying a much lower levy than the couple in Chartwell Estate, but they also have little option but to remain at Heritage Manor because they would receive only the amount they originally paid if they sold their life rights. This amount has not kept pace with the growth in property prices, leaving the couple unable to buy property of a similar standard elsewhere.
An article in a recent edition of Property Magazine cited the example of a Johannesburg retirement village, Elm Park - one of the villages of the welfare organisation the Flower Foundation - where 50 percent of the resale value of the life rights is returned to the departing life right-holder. The article quoted Flower Foundation marketing manager Heather Withers as saying the value of the units in the village has doubled every seven years, which means that after seven years life right-holders "get their money back" and "after that they start to make a profit".
You should, however, consider that in recent years there has been a significant increase in residential property prices in South Africa and "getting your money back" after seven years also means a lost investment opportunity for seven years because you would only be back where you started.
This lost opportunity cost is what you need to weigh up against the savings on your living costs.
Other issues affecting resales
In many retirement villages resales are done only through the management committee or body corporate and with the assistance of a particular estate agent. This agent also takes a fee for selling your unit when you leave the village or die.
Chartwell Estate, for example, has a dedicated agent who takes a two-percent commission on the regrant of a life right or resale value before the amount is split between the seller or the seller's estate and the stabilisation fund and Kloof Rest Homes.
However, Stead says some villages use estate agencies that charge up to four percent of the resale value.
A deduction will probably be made from the resale or regrant value for refurbishment. At Chartwell Estate, up to R2 500 is deducted from the seller's portion of the regrant to refurbish the unit for the new owners.
Check what your contract says about the cost of refurbishing your unit after you leave, because refurbishment costs are often a source of conflict, especially for the heirs of retirement village inhabitants.
One village insisted on deducting the cost of new carpets after a resident fell and died in her unit. Another has rules about removing every single picture hook and shelf the residents put up so that the unit is returned to the state in which it was before they moved in.
When it comes to your capital gains tax (CGT) liability, if you do forfeit a percentage of the resale proceeds to the village, you can add this amount to the base cost of the unit, Billy Joubert, the director of tax services at Deloitte, says. Alternatively, the agreed percentage will accrue directly to the developer.
The exact CGT consequences will depend on the terms of your contract, he says.
What your levy will and won't cover
You need to know what your monthly levy includes and excludes in order to determine your living expenses. The major items that may or may not be covered by the levy are:
- Water and sewerage.
- Electricity.
Some residential units, especially newer ones, have their own prepaid electricity meters.
- Garden service.
If you have an exclusive-use garden, check if this service includes your garden.
- Maintenance.
In some schemes, maintenance may cover all the communal infrastructure and the individual units, while in others the owners of individual units are expected to pay for certain repairs to their units. For example, it is standard practice in a sectional title scheme to exclude maintenance of the geysers in the individual units. If you live in such a scheme and anything goes wrong with your geyser, the repairs will be for your account.
Check who is responsible for maintaining the electrical and plumbing installations, repainting your unit internally and externally, and cleaning the carpets. You should also establish whether a portion of the levy is set aside to build up reserves for major maintenance and improvements.
- Satellite television.
- Meals.
In some retirement complexes your monthly levy includes meals. For example, the levies are on average R180 a day at the St James Retirement Hotel in Kalk Bay in Cape Town, Gael Herring, the managing director of the hotel, says. This levy includes servicing the suites, and three meals and tea twice a day.
Find out if the complex charges extra to accommodate specific dietary requirements if you have them.
Some villages offer optional meals in a communal dining room. It is likely you will have to pay an additional amount as and when you use this service.
- Rates.
Rates may or may not be included in the levies of life right and shareblock schemes, but sectional title owners are likely to receive separate rates accounts. In 2004 the Local Government: Municipal Property Rates Act was promulgated stipulating that each sectional title owner must receive a separate rates account. This Act is being phased in, and most of the country's sectional title owners are likely to receive individual rates accounts from the middle of 2008.
- Security.
Many retirement villages offer "24-hour security", but check whether this only means electrified fencing or if it includes panic buttons for each resident, patrols of the perimeter of the property and controlled access to the complex. Some units are built without burglar bars and security gates because the village is supposed to be secure, but you may be vulnerable if the perimeter security measures are breached.
- Insurance.
Homeowner's insurance is usually paid from the levy, and the excess on any claim will usually also be covered, unless the claim arises from your negligence - for example, if you leave the tap running in your unit and the carpets are damaged.
- Care services.
Some villages offer some limited care services as part of the levy. Frail-care facilities, however, are always an additional cost (see related article "Checking up on frail care").
- Housekeeping and laundry.
Most retirement villages do not offer housekeeping and laundry services to residents in independent-living units; these services are for people in the assisted-living and frail-care facilities.
However, at some villages the levy includes the services of a domestic worker to clean your unit once a week. If the village doesn't provide a cleaning service and you want to hire your own domestic help or laundry service, check whether the village has a list of "preferred providers" with which you are expected to contract.
- Special levies.
Check the rules of the village to determine how and when the body corporate or management committee may raise a special levy.
Even in a complex where the levies are fixed for life, residents can agree to raise a special levy to, for example, build a tennis court.
Once you know what the levy includes and how it is set, look at the village's past increases to get an idea of how the levy is likely to escalate in the future and ask to see the management committee or body corporate's accounts.
Carl Scheppening, a retirement village consultant and the director of Cape Retirement Consultants, suggests that when investigating how levies are set and financed you should obtain a copy of the operating budget of the village and find out how operating deficits are financed.
Who looks after the money
Regulations under the Housing Development Schemes for Retired Persons Act state that once a developer sells you an interest in a retirement village, a management association must be established.
Each person who buys into the village becomes part of the management association (or body corporate in the case of a sectional title scheme or shareowners' association in the case of a shareblock scheme).
The management association is responsible for enforcing the scheme's rules and managing the scheme. The management association may elect a committee to act on its behalf, and it may also cede any of its rights and obligations to a managing agent, Sifiso Msomi, a property lawyer with Shepstone & Wylie, says.
Carl Scheppening, a retirement village specialist and a director of Cape Retirement Consultants, says some management associations appoint managers instead of managing agents to oversee the day-to-day running of the village. It can be a good idea if the manager lives on site, but some choose not to for privacy reasons.
Although developers are often involved in the management of retirement villages after they have been built and earn money from the resale of units, Msomi says levy stabilisation funds are controlled by the management association and not by the developer. When an unexpected expense arises, the committee will draw money from this fund instead of calling for a special levy from the other members. The fund is usually in the form of a normal banking account, although the managing agent may invest it in other interest-bearing accounts, he says.
Paul Wisenberg, a lawyer at Maurice Phillips Wisenberg, says if a levy stabilisation fund is set up for a retirement village, the money should be paid into the body corporate or management association's bank account, and this account should be audited.
Scheppening says purchasers need to be very cautious if a third-party guarantor receives any portion of the resale surpluses to the detriment of the residents. In addition, any guarantees, such as fixed levies or tariffs for frail care, also need to be fully investigated, particularly how these guarantees will be funded and by whom.
However, Scheppening says the benefits of being accommodated in a retirement village where you will be cared for appropriately if you need it, far outweigh the possible appreciation in any potential inheritance.
Scheppening says retirement villages need to accumulate funds. He favours the model in terms of which a percentage of the surpluses from resales accrue to the body corporate or management committee, and these funds are used to finance marketing costs, the cost of managing the waiting list, subsidising levy increases, subsidising the cost of frail care and building up reserves for major maintenance and improvements.
He says the decision as to how to allocate these funds is best vested with the body corporate or management committee, rather than with a third-party guarantor.
Syd Eckley, a director of the board of the Older Persons Forum and formerly the national director of the Council for the Aged, says it is important that the developer of a retirement village remains partly responsible for running the village and doesn't just wash its hands of it. Problems can arise if the developer passes on the running of the village entirely to a homeowners' association or body corporate.
However, Eckley says, in most developments developers do hand over the management of the scheme to a body corporate or management association, except in the case of life rights schemes.
"The most critical challenges in managing a retirement village are that residents have to take full responsibility of all facets in managing such a facility. Running the normal facilities and services can be most taxing and demand special expertise," Eckley says.
He says the management boards of retirement villages often do not have the required knowledge to run the village. Residents and/or investors are often complacent and there may be a lack of transparency and communication.
Autocratic management styles manifest when boards are uncertain of their tasks and roles, Eckley says.
In terms of the Housing Development Schemes for Retired Persons Act, the accounts of the management association or body corporate need to be audited, and residents need to be fully informed of them. Residents also need to approve the annual budget, Scheppening says.
Hoffie Hofmeyr, the chairperson of the Interest Group for Retirement Villages, a voluntary organisation representing the controlling bodies of retirement villages mostly in Gauteng but also in the Free State, says the governing body of a village plays a very important role and you should satisfy yourself that it is a reliable body.
Hofmeyr says although the law provides you with the opportunity to be represented on the managing association, the law is not policed, and so you should examine the actual structure of the governing body and find out if the residents have at least a 50 percent representation on it or if they are only able to make recommendations.
He also advises that you ask for a certified balance sheet for the village, showing its accumulated profit or loss, as well as its liabilities and investments.
Many non-profit organisations that run retirement homes and villages have been doing so for years and are thus highly experienced in this regard. In most cases, the organisation owns the property, and units are made available through life rights.
The organisation is represented on the village management committee and is also responsible for the maintenance of the village.
Margie van Zyl, the president of the South African Association of Homes for the Aged, says well-established non-profit organisations that run retirement villages include: Rand Aid in Johannesburg, the Flower Foundation in Johannesburg, Methodist Homes for the Aged in Johannesburg, the Echo Foundation, the East London Services for Care of the Aged, the Cape Peninsula Organisation for the Aged, the Pietermaritzburg and District Council for the Care of the Aged and The Association for the Aged in the Durban area.
This article was first published in Personal Finance magazine, 1st Quarter 2008. See what's in our latest issue