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Within Australia and New Zealand there are a number of different business models for the operation of retirement living assets, however three most common structures are:

• Freehold
• Rental
• Deferred Management Fee (DMF)

Be under no illusion: the business models used for retirement living are designed to enhance the profit and tax outcomes for the owner of the complex, whilst maintaining a desirable, saleable product within the marketplace. This not necessarily a bad thing - villages are businesses and need to make a profit for the owner. If the village is unprofitable, services are reduced and the village is likely to run down over time.

An explanation of the structures is as follows:

Freehold

The Freehold structure is similar to any freehold property investment, although these properties are generally located in retirement villages which may be registered as a retirement village under state legislation, are exclusive to a particular age group such as over-55's, and may charge a weekly fee and/or body corporate fee.

Rental

The Rental structure operates under standard residential tenancy agreements, whereby the owner or operator leases a residence to a tenant. The rent payable under the lease is generally determined by the level of government benefits received by the residents, from programs such as the Age Pension and Rent Assistance Allowance.

This structure is typically used in fringe and suburban locations and is popular with retirees who possess a limited capital and income base. These facilities are usually not registered retirement villages (see section on the importance of being a registered retirement village).

Deferred Management Fee

A Deferred Management Fee (DMF) or "Lease/Loan" is an annual fee charged for each year of occupancy, capped at a set number of years, and calculated as a percentage of either the original sale or subsequent re-sale value.

The DMF is structured around a long term "right to occupy" contract which the resident of an individual unit executes with the village owner. This is a long-term contract between the owner and the resident, and commits the resident to paying a management fee that is deferred until such time as they vacate their unit. The DMF is accrued over the duration of the resident's tenure in the property and is physically received by the operator only upon departure of the resident. The fee is usually retained from the proceeds of the re-sale.

The fee is generally calculated on a base of length of tenure, calculated as a percentage of the entry or exit value of the contract.

A resident accrues a percentage of the fee each year.   A resident is free to vacate the unit at any time, but is liable for the accumulated portion of the fee, if the departure occurs prior to the capped fee year.

Under some structures, a resident is not released from their contract until a refurbishment and re-sale of the unit has occurred. This is done to protect the owner from vacancies and effectively ensures the complex is able to operate at 100% occupancy. Other complexes buy your unit back themselves or commit to do so if you haven't sold after a period of time.

Under the DMF model residents pay a weekly service fee to the owner to cover the costs of operating the village, such as insurance, rates, utilities and staffing. The owner of the village also contributes to these costs on behalf of the common areas and any units yet to be sold. Legislation prevents operators from making a profit on service costs so weekly fees are set at the level of total costs, including the owner contribution.

Additional services may be offered to residents such as meals, laundry and cleaning. The charge for these services to residents may include a profit component, although this is generally held within a reasonable, commercial range to encourage utilisation of the services by residents. These services may be provided by the owner or outsourced to third parties and some even attract a government subsidy.

Under the DMF or Lease/Loan structure an "Occupation Right" is used in place of a "sale" of the freehold title.

In addition to the Deferred Management Fee, the resident may be obliged under their contract to share any capital gains with the owner on the re-sale of their Occupation Right. Generally, if the DMF is calculated on the exit price, there will be limited or no capital gains payable. If it is calculated on the entry price, the resident gets the benefit of knowing what the fee will be up front, but will likely have to share any capital gains with the owner.

Capital gains are realised when a resident vacates their unit and the Occupancy Right is sold to a new resident. Upon re-sale, the owner returns the sale proceeds to the previous resident after subtracting the DMF and an agreed component of the capital gain. Consequently, the longer the tenure of the resident, the greater the likelihood of receiving capital gains upon re-sale.

The owner's share of the capital gain is generally only applicable under contracts where the DMF is calculated as a percentage of the entry value of the Occupancy Right and not as a percentage of the re-sale price to the in-coming resident.