What are Life Leases?

In basic terms, a life lease is a form of prepaid rental housing.  The owner of a life lease purchases the right to occupy a unit and use the common facilities for as long as the lease remains in place. The length of the lease term could be for life or for a fixed number of years. Depending on the contract structure and jurisdiction, as we will learn later in the article, a life lease is a legal agreement that usually lies somewhere between renting and owning a residential premises.

Depending on the legislative environment, the occupant of a life lease unit may be referred to as the purchaser, lessee or tenant.  The developer or owner of the life lease units may be referred to as the sponsor, lessor or landlord. A life lease is not equivalent to the ownership of a condominium or strata unit even if the life lease project has been registered with a condominium or strata plan.

Typically, life lease projects are targeted at those over 55 and may also be targeted at specific ethnic or religious groups.

A life lease may, depending on the terms of the lease (see below) be sold, either to a third party or to the lessor. Construction of new life lease projects may be undertaken by for-profit or not-for-profit entities.  Where a for-profit entity develops a life lease project, ownership of the project is generally transferred to a not-for profit entity after completion.

Few jurisdictions have legislation covering life lease projects.  In most jurisdictions, the life lease is simply a contractual arrangement between the lessor (generally a not for profit entity) and the lessee.

Advantages of Life Leases

• Most commonly provides accommodation for seniors in a community of seniors.  Amenities are generally geared to this target market.
• May allow lessees to obtain “ownership” of a property at below market levels.  This can occur because land may be donated or sold to the sponsor at below market rates or the sponsor may not earn the usual developer’s profit on the project.  New construction may not always provide this opportunity as sponsors are often inexperienced and profits given up by a not for profit developer may be partially or wholly offset by increased consultant costs.
• Can allow individuals on fixed incomes to tailor level of rents to their incomes.
• Generally not subject to the will of a condominium or strata council.
• Life leases may avoid land transfer tax in some jurisdictions where this applies.
• Redemptions by, or sales back to, the lessor (which may have a waiting list) may reduce market risk.

Disadvantages of Life Leases

• Units may not be freely marketable (e.g. lease may require units to be sold back to the lessor at predetermined prices).
• Lease transfer restrictions (such as a requirement for new lessees to be “approved”) may depress resale prices.
• Title is held by the lessor and registration of a lease on title may or may not be possible (in jurisdictions with land transfer tax, lease registration generally triggers tax payment).
• New construction is generally not covered by the usual new home warranty program.  As such, deposits are often used to fund development costs and are uninsured (i.e. the lessee risks losing the deposit if the development is unsuccessful).
• Lessee does not have input into operations through a condominium or strata council.
• Lessee generally does not have registered title to his/her unit.
• It may be difficult to obtain residential mortgage financing of a life lease unit.
• Lessor may not have liquid assets to fund redemptions.
• Lessees who wish to vacate may need to find their own substitute tenant.

The Life Lease Ownership Process

• Applicable terms and conditions of life leases vary widely but the general features are similar.  Life leases should not be confused with ownership of a dwelling unit on leased land.
• The lessee of a life lease unit pays a sum of money to the lessor.  The amount of money paid may be the full cost of the unit leased or it may be a lesser amount.  If the lessee pays the full cost of the unit, then (subject to the terms of the lease), the lessee will generally only pay a monthly maintenance fee (roughly equivalent to condominium or strata fees).  If the amount paid by the lessee is less than the full cost of the unit, the lessee will also pay a prorated rent (e.g. if the cost of a unit is $200,000 and the lessee pays $100,000 up front, his/her rental payment will be approximately equivalent to a payment on a $100,000 mortgage plus the monthly maintenance fee)
• Most not for profit lessors of new life lease projects expect full payment in order to cover construction costs.
• The lessee does not generally obtain title to the unit.  Some leases do not permit the registration of the lease but, where this is permitted, registration of the lease generally triggers the payment of land transfer tax.

Types of Life Leases

• Zero balance lease/life estate: the purchaser pays in advance for the right to occupy a unit for the duration of his/her lifetime.  No redemption value exists (i.e. the lessee or the lessee’s estate cannot sell the leasehold interest).
• Declining balance redemption value: the redemption value of the unit is fixed and reduces on a pro-rata basis over a fixed term until a redemption value of Zero Dollars is reached.  Generally, if the lessee moves or dies while there is a redemption value, the unit is returned to the lessor and the lessee (or estate) has a claim for the redemption value.
• Fixed value: the redemption value is constant for the life of the lease.
• Indexed redemption value: the redemption value is based on an initial fixed value with periodic indexing to an inflation-sensitive index.
• Future value:  probably the most common type of life lease.  The lease may be sold at market value with the lessor usually taking an administration fee to facilitate transfer of the unit.  The tenant may bear the market risk if the value of the life lease unit has fallen.

Who Develops Life Lease Properties?

• Life lease project sponsors are often religious or charitable foundations.  While these may have been successful in raising the initial funds for the project, they may have limited development experience and they may lack the ability to fund cost overruns.
• A full review of the history, resources and capacity of the developer should be undertaken by the buyer.
• Life lease projects are often targeted at the constituencies of the charitable or religious foundation developers.  It is essential, therefore, to ensure that the life lease agreements are non-discriminatory.

As we can see, the concept of the life lease is very complex. Because each development may have a different set of lease parameters, and many jurisdictions have no legislation governing the parameters of life lease developments, it is essential to get an informed legal opinion on the specific development to type of life lease contract that you are considering.

To be completely honest, they are right…sort of.

Some people do find the less volatile dividend paying stocks boring, I find them exhilarating! As you may have noticed, I’m a huge fan of cash flow. Cash flow is the ticket to play the game of life and dividend growth stocks will eventually allow me to play the game on my own terms!

Yes, it is a long road and the process can be uneventful at times. And no, I’m not going to get rich overnight. However, I also won’t go broke overnight and I am compounding my future cash flow with every dividend payment that is reinvested.

Yes, there is money to be made in growth stocks. There are actually a lot of people making a lot of money in high growth stocks. However, that just isn’t my style and I’m not ashamed to admit it.

I like to have cash flow back to me so that I can make the decision whether or not to re-invest it into the company. I also like the fact that I don’t have to watch the market every day to see if my “high-growth” stock has tanked and left me with nothing!

I have nothing against traders and I actually learn a lot of useful techniques from very good stock traders. However, I have recognized that over the past 14 years an investment in the S&P 500 would have you receiving all of your original investment back just in dividends.

So I guess one could say that dividend stocks are boring, but I’ll give you one more thought to ponder before I get off of my dividend paying soap box!

Take a boring old dividend paying stock — or at least one that seems that way — paying 5% in dividends yearly and racking up a conservative 5% in capital appreciation. Begin with $1,000 and reinvest those dividends. After 30 boring years, you’ll possess a staggering $18,700! (Let’s multiply that number by 10X for a more realistic example)

$187,000 How boring is that?

With number of income producing investment products increasing, one should notice the growing selection of Dividend paying ETF products that sample indicies from around the globe.  With low expenses and exposure to hundreds of companies worldwide, ETF’s may become the choice investment for the future.

How To Choose Exchange Traded Funds

When selecting income producing ETF’s and allocating assets to these various funds, planning for income in retirement and managing portfolio risk becomes a bit easier!  Take this sample portfolio for instance:

iShares MSCI Pacific Ex. Japan (EPP) 20%
The fund uses a representative sampling strategy to try to track the MSCI Pacific ex-Japan index. The index consists of stocks from the following four countries: Australia, Hong Kong, New Zealand and Singapore. This investment is non-diversified.

This ETF is down over 12.0% so far this year and now sports a juicy Dividend Yield of 5.25%, while holding the expense ratio at 0.50%. This may present an excellent buying opportunity for a long-term investor.

BLDRS Developed Markets 100 (ADRD) 30%
For exposure to Japan, The United Kingdom, France and Germany, ADRD does the trick just fine as it seeks to provide investment results that correspond, before fees and expenses, to the price and yield performance of the Bank of New York Developed Markets 100 ADR Index.
ADRD provides a Dividend Yield of 2.88% and has an extremely low P/E ratio of just 9.36.  The expense ratio for ADRD is reasonable at 0.3% with a standard deviation of 9.69. 

iShares Dow Jones Select Dividend (DVY) 35%
The fund uses a representative sampling strategy to track the Dow Jones Select Dividend index. The index is comprised of one hundred of the highest dividend-yielding securities (excluding REITs) in the Dow Jones U.S. Total Market index, a broad-based index representative of the total market for U.S. equity securities.

This Dividend ETF Yields a respectable 4.5%, making it well worth the tiny expense ratio of 0.40%.  DVY also sports a relatively low standard deviation of 6.64, allowing you to sleep at night during your retirement!

Vanguard REIT Index (VNQ) 15%
The Vanguard REIT ETF seeks income and moderate long-term capital growth. The fund normally invests at least 98% of assets in stocks of real estate investment trusts (REITs) that are included in the Morgan Stanley REIT index.

Real Estate Investment Trusts have long been used in retirement portfolios for their income producing nature and this ETF is no exception.  VNQ delivers a 5.1% Yield and has a return of 2.29% YTD.  As usual, Vanguard keep their expenses to the bare minimum at 0.12%.

The Story Behind The Story
This portfolio is not necessarily built for tax efficiency, but the use of Exchange Traded Funds and the emphasis on dividend income is taylor made for retirement planning.  This portfolio covers a host of asset classes as well as having a great geographic asset mix.  I am a huge believer in investing outside of North America in order to capitalize on both capital growth and higher dividend yields offered in other markets.

Why Not Bonds?

I am not, however, a huge believer in fixed income going forward as the supply of money should be greater than the demand. Baby boomers will not be requiring loans, but will be investing their hard-earned savings. 
This coupled with pension fund managers seeing a 6.0% fixed income return as attractive will likely hold bond returns lower moving forward.  Money will be cheap for those of us looking to borrow.

That said, a portion of a portfolio dedicated to fixed income in retirement will certainly reduce risk.  However, with longer life spans, it is absolutely necessary to have capital growth in a retirement portfolio…we could live a lot longer than we think!

I certainly don’t want to run out of money, or places to spend it when I reach 114 years old.  But, I guess I’ll cross that bridge when I come to it …hopefully walking on my own two feet.