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.

According to them, the financial industry, with its ostensibly objective online calculators, overstates how much money someone will need in retirement. Some, in fact, contend that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.

The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions.

For a middle-income couple, that could mean trading $400,000 in retirement money for about $3,000 a year more during prime working years to spend on education or home improvement. For a middle-class household, that’s a lot of money, said Laurence J. Kotlikoff, a Boston University economics professor, who is on the forefront of this research into spending and savings, and is selling his own retirement calculator.

Andrew Behla is a case in point of someone who is not saving enough. Mr. Behla, a Los Angeles graphic designer and consultant, is at age 38 just starting to think about retirement. He and his wife, Michele Krolik, a payroll manager, together have just $70,000 squirreled away for their old age.

I think we will have to save a lot more, he said, a point on which the economists and the financial planning industry would agree. Even so, the couple recently bought a house and put extra money they had into improving it, figuring that over their lifetimes it will add handily to their net worth.

But other people like Beverly Alexander, 49, an energy consultant in Marin County, Calif., might be able to slow down. Her financial planner has her retirement finances mapped out to age 105 (her parents are still alive in their 90s), a plan that gives Ms. Alexander, a former utility executive, the freedom to quit her corporate job and live on her consulting income.

One reason I could retire, she said, was that I saved and I always lived below my means.

The findings of the economists are being met as most challenges to orthodoxy are: with stony silence or extreme umbrage.

I count myself as deeply skeptical, said Christopher Jones, the chief investment officer at Financial Engines, a financial planning software company.

The big financial services companies refused to comment on the research but they did say that their use of simple rules of thumb keeps the process of retirement planning less complicated, and thus, less daunting.

After the recent events in the market, we might be hard pressed to find anyone who thinks they have saved too much for retirement.

Nevertheless, I think the key factor in the entire article was the quote from M. Alexander who simply stated the most basic tenet of financial success… “I saved and always lived below my means” .

I don’t think that we need a “professor” to tell us that!

Why This Concerns Me

At a time when many folks should be enjoying life and harvesting the fruits of their labor, they have assumed more debt. Why are taking on more debt?

It appears that many are completing renovations to their homes, and that is not all bad. If the repairs are needed to sustain the home for the rest of their days, like new windows, shingles, furnace etc. then so be it. However, taking out a second mortgage to add a sunroom or additional living space does not make sense for the majority of empty-nesters.

Even worse, some are taking out a second mortgage to buy depreciating assets like vehicles and may find themselves on the car loan treadmill for the rest of their lives if they are not careful.

Why This Is Smart

Taking out a second mortgage is smart if you are not planning on retiring until the mortgage is paid off because mortgages are the cheapest source of capital (next to student loans).  There is no sense paying more interest that you have to, which is why I have a large line of credit on my home.  The line of credit on my home is currently at 4.75% and is interest only.  This works great for acting fast on “no-brainer” investing opportunities.

Another reason that this data might not represent a clear picture of a trend is that it is not indexed to life expectancy rates.  You see, people of  a certain age, even 10 years ago, had a much lower life expectancy that baby boomers do today.  Not only that, their health and quality of life is much better than previous generations.  What this means is that they may be working later in life and they expect to live a healthier and longer life being more active.  All in all, today’s baby boomers may not be in as much trouble as this data may lead us to believe.

My Take

While I certainly don’t plan on having to use the equity in my home when I am in my 60′s (at least for anything other than investing), I suppose we never know what circumstances might present themselves in the future.

I am a relatively conservative individual by nature and I don’t really like to own “stuff” just for the sake of having something, so I can’t see myself wanting to increase my standard of living if I don’t have the additional income stream to provide it.

Have the baby boomers finally fallen victim to the consumer driven marketing ploys  that have been so effective  at convincing  those of us in our twenties and thirties that we must keep up with the Jonses?

What do you think?

I am a huge proponent of buying the best dividend paying stocks when they are value priced. However, if you aren’t sure about picking an individual stock and you still want to reap the rewards of Dividends, check out this list of some different Dividend Exchange Traded Funds (ETF’s).

The Vanguard Dividend Appreciation Fund (AMEX: VIG) is a one of the cheapest dividend ETFs, with an expense ratio of 0.26%. Some rivals charge as much as 0.60%. But fees aren’t everything here. VIG’s current yield — slightly less than 1.77% — is on the low side, as is its total return of roughly 7% since its inception in late April 2006.

VIG is benchmarked to the Mergent Dividend Achievers Select Index, a subset of the Mergent Dividend Achievers Index — a market-cap-weighted index of stocks with a consistent history of increasing dividends. Its holdings are highly concentrated in three sectors: consumer staples at 23%, financials at 20%, and industrials at 17% of assets. The top five stock holdings include Johnson & Johnson, GE, ExxonMobil, AIG, and IBM, each representing roughly 4% of assets.

Among other ETFs focusing on high-yielding equities, the iShares Dow Jones Select Dividend (NYSE: DVY), the first dividend ETF, has gathered more than $7 billion in assets. It invests in 100 of the highest dividend-yielding securities (excluding real estate investment trusts) in the Dow Jones U.S. Total Market Index.

First Trust Morningstar Dividend Leaders (AMEX: FDL) invests in the top 100 stocks of the Morningstar Dividend Leaders Index. These are the index’s highest-yielding stocks, ranked by the consistency with which they pay dividends and the ability to sustain those dividends going forward. Three securities — Citigroup, Bank of America, and Altria — together make up more than one-fourth of the fund.

State Street SPDR Dividend (AMEX: SDY) invests in the 50 highest dividend-yielding S&P Composite 1500 constituents. This index tracks equities that have consistently increased dividends every year for at least 25 years. Investing in these long-term dividend-paying stocks reduces the risk that the fund’s holdings will cut their dividends.

For Dividend Daredevils
More adventurous investors might consider the Claymore/Zacks Yield Hog ETF (AMEX: CVY), which aims to double the yield of other dividend-paying ETFs. The fund invests in high-yield securities such as preferred shares, master limited partnerships, closed-end funds, American Depository Receipts, and Real Estate Investment Trusts. It’s a riskier play, since the holdings don’t all have a long history of regular, stable dividends.

Paying the piper
Tax law changes in 2003 lowered the tax on most dividends to 15%, making dividend-paying stocks more appealing. This law is set to expire at the end of 2008, and if it does, dividend-paying stocks may become less desirable.

Courtesy of Motley Fool

It has long been a strategy of mine to invest in high quality Dividend Growth Stocks as a  for retirement and I’m about to show you why you should do the same!

The beauty about this strategy is that it is not rocket science and that everyone can understand the basic principles behind it. I’m not promoting trickery or complex technical mumbo jumbo, just good old fashioned common sense with a side of logic.

The Stock Market Crash Scare Tactic

I’m sure that we have all heard that the baby boomer generation is aging and entering into retirement. We have also been told that all of these individuals are going to make a mass exit out of the stock market, causing the greatest stock market crash that we have ever known.

Some so called “Gurus” have suggested that the aging demographic is going to cause havoc with the markets by selling all of their stocks to fund their retirement.

Is This Possible?

In theory, the outlined scenario could be possible if all of the baby boomer’s withdrew their money from the stock market at the same time. But, as we know, the boomer generation lasts for a couple of decades…they were not all born in the same year! And even if they were, not everyone can or will remove their equity from the markets at the same time.
Therefore, we can clearly see that this scenario is highly unlikely.

But Aren’t All of The Baby Boomers Going to Buy Bonds?

While conventional wisdom dictates that fixed income (bonds) should comprise a larger portion of ones portfolio as they near retirement, it might not be as simple as black and white these days.

For instance, as time goes by the life expectancy of retirees becomes longer and longer. This means that a retiree will need to make their nest egg last for several more years than they my have previously thought.

Therefore, the retiree will need to take on additional risk in order receive higher returns in order to ensure that they do not deplete their principal prior to death. Taking on more risk means investing in more equities (stocks) gaining capital growth in their portfolio to fund a longer retirement.

So Why Should I Buy Dividend Paying Stocks?

The reason we must invest in dividend paying stocks now is because they will be the investment of choice to fund the retirement of Baby Boomers.

You see, dividend paying stocks have the potential for both capital gain and income production. Not only that, these investors will be looking for stocks that have a track record of increasing dividends…giving them yet another hedge against inflation. This combination, as explained earlier, will be necessary to fund the lengthening retirement that comes with a greater life expectancy.

If we combine this factor with today’s low interest rate environment, we can see that fixed income instruments (with the exception of TIPS) such as bonds and CD’s provide little, if any, protection against inflation.

Factor that in with the fact that historically, dividend paying stocks have outperformed non-dividend paying stocks.

So what do I do now?

In order to provide potential capital growth, income, and protection against the erosion of purchasing power, we must buy the best dividend growth stocks and hold them for a very long time. Read How To Choose Dividend Growth Stocks.

Even if you are young, the generation of retirees that are looking for this 3-part combination of shareholder yield to fund their retirement will start to accumulate shares in high quality, dividend growing, blue chip companies in order to fund a long retirement and help to hedge against inflation.

The accumulation of these stocks will, of course, drive up the share price which means big profits for you!

The Closing

You see, it doesn’t take rocket science to see what is going on. I’m certainly not leading the charge with this idea.

Get out there and search for some great companies that grow their dividends year after year. You won’t get rich overnight, but the strategy works.

Remember to always do your due diligence and as Charles Kirk reminded me, don’t buy a stock just for the dividend!