‘As new’ renovation costs eat into return
Retirement village units where the resident gets the capital gain might not be as rosy as they first sound, the retirement village watchdog cautions.
The Commission for Financial Capability’s national manager of retirement villages, Troy Churton, said the Karaka Pines Villages model was similar to agreements that were offered before 2006.
From September 2006, a new code of practice forbade retirement village operators charging for fair wear and tear.
Churton said residents attracted to the capital gain model should ‘‘tie down’’ with their lawyers what the refurbishment costs would be on a unit and what refurbishment meant. Refitting a unit could cost $100,000.
They also needed to understand how the capital gain was calculated and how the resale process was managed.
After September 2006 operators could still have clauses in the Occupation Right Agreement (ORA) enabling them to claim ‘‘a contribution to refurbishment’’, but it had to be set out explicitly, such as the amount and what it was for.
In some of the older ORAs the wording was loose enough to enable ‘‘quite exorbitant refurbishment costs to be deducted’’, Churton said.
Residents might receive a share of the capital gain in the value of the unit, but the full refurbishment of a unit to bring it to as-new standard ‘‘might be a charge of $100,000’’, he said.
‘‘They still get some form of financial return in the form of the capital gain, but it’s not nearly as big as how people might believe.’’
Refurbishment costs varied from village to village.
A few operators might have a standard clause with a standard sum, while some might itemise the sorts of refurbishment work and others specified refurbishment ‘‘to an asnew condition’’.
The commission had taken independent advice on ‘‘as-new condition’’, and that related to the state of the unit at the time the resident entered into the ORA and not at the time they left.
That was accepted by the Retirement Villages Association, which represented operators.
‘‘So what’s new in 2000 might be a little bit different aesthetically from as new in 2018,’’ he said.
‘‘From where I sit it’s always good to see operators innovating and offering new options for the marketplace to consider because certainly the dominant model used by all the large operators and the publicly listed ones does not enable any share of capital gain.’’
Getting a share of capital gain was really only relevant when a resident terminated their occupation. For 90 per cent of residents, that happened when they died. This meant the capital gain was more of a benefit to their heirs, and Churton advised buyers talk to their family before purchasing a unit with capital gain.
In most cases an operator controlled the resale of a unit, and the revaluation for resale, and there could be a time lag on getting the capital gain to the resident’s estate.
Families needed to understand that: ‘‘a) They probably won’t be receiving the full amount of the capital gain; and b) they won’t be getting it immediately. They will have to wait for the unit to be resold,’’ Churton said.
The incentive for the operator to sell the unit was that the operator could take its facilities fee once it was resold.
‘‘In New Zealand you can’t become a retirement village resident without prior independent legal advice about the implications of the documents,’’ he said.