Residents revolt against confusing retirement village contracts

Retirement village residents revolt against confusing contracts was the lead story on Channel 9 program A Current Affair.

"Retirees in Victoria are fighting back against retirement village owners making big profits out of their golden years with what they claim are excessive fees.

Many retirement village contracts are confusing, convoluted and densely legal. But through it all, there's one constant: big companies making big profits.

The big gripe these senior citizens have with their retirement village contracts is that they pay large sums of money to essentially lease a unit in a retirement village.

But because they do not know how long they will be there, it is like an open cheque.

Along the way, retirement village operators charge fees for maintenance, services and, if you move into aged care, an exit fee of up to 35 percent of what they paid initially.

But even after you die, the costs continue."

Read the full story at http://www.9news.com.au

Capital Gain Value Surrendered by Village Residents

Capital Gain values surrendered by retirement village residents can be substantial over the life of a village. Some of the large operators in the retirement village industry do not grant any of the capital gain in the value of the units to the resident.

This has a negative impact on residents over time should they choose or need to return to the property market or as a result of an aged care assessment they wish to enter an aged care facility of their choice. The only option may be to accept a government funded placement which can be geographically away from family and loved ones.



The table above shows that for a village of 100 units and a modest annual capital gain increase of 2.85% the capital benefit lost to residents as a result of their contract can be in the order of ten plus million dollars per 7 year occupancy cycle. (The industry average retirement village occupancy period is 7 years)



 

Deferred Fee Myth

Retirement village operators will defend the deferred fee structure on the basis that every resident should make a contribution toward the village communal hall and recreational facilities. What they fail to detail however is that they get a contribution (deferred fee) from every new resident over the entire life of the village.

The table below shows in a 100 unit village the operator will turn over each unit every 7 years based on the industry average occupancy period.  With an entry price averaging say $500,000.00, a deferred fee rate of 30% and a deferred fee period of 3 years, the operator has the capacity to generate a deferred management fee sum of up to $15.0 million dollars in the first 7 years of the life of the village.

As the value of the units sold increases so does the amount received by way of deferred fees. In the example below with capital growth of just 20% over the 7 year cycle in the years 1 to 7 total deferred fees received were $15.0 million dollars. In the years 8 to 14 $18.0M, in years 15 to 21 $21.6M and in years 22 to 28 $25.92M giving a total for the 4 x 7 year cycles a whopping eighty million five hundred and twenty thousand dollars ($80.520,000.00). It is difficult to argue that the operator was not compensated for the cost of the village communal hall and recreational facilities by year 7 let alone year 28.

Deferred Management Fee Myth

What is the Deferred Management Fee Myth

The ‘deferred management fee’, the first component of the retirement village entry price.
The myth is that it is paid on exit whereas it is in fact paid upfront to the operator before moving in.

The reality is that you write the cheque before you move in not when you move out, the operator simply performs a magic trick naming it an in-going amount on the way in and naming it a deferred management fee on the way out.

The ‘interest free loan’ to the operator, the second component of the retirement village entry price.
The problem is the $ value of the interest free loan to the operator paid on entry is ravaged by inflation, rising property prices, rising nursing home entry costs, loss of earnings until it is due for eventual refund on exit from the village.

The purchasing power of the interest free loan component of the village entry price will be greatly diminished over time to a much lower present day $ value due for refund on exit.

This then creates the potential to be caught in what is called the retirement village poverty trap as a result of this devaluation of capital value over time. The cost of re-entering the property market and the cost of entry into an aged care facility of choice have marched on over time and there may not be enough capital value left on departure from the retirement village to achieve either.

An understanding of the following two components (where applicable) of the entry fee should have a high priority:-
Part 1. The non-refundable capital amount or deferred management fee – generally a deferred management fee has a reducing refundable amount until $0 at the end of the deferred fee period.
Part 2. The fixed refundable amount – due for repayment on exit but can be greatly devalued over time.

Refurbishment - Reinstatement

Refurbishment or Reinstatement - From the recently held Parliament of Victoria inquiry into the retirement housing sector. See also Page 7.

“An ongoing source of contention between retirement village residents and operators is the difference between the terms reinstatement and refurbishment.

‘Reinstatement’ refers to the repairs necessary to bring a unit to the same condition as when the resident moved in; ‘refurbishment’ refers to works that improve the unit beyond that level.

Although retirement village contracts stipulate what residents must do on departure, evidence received by the Committee suggests that many residents do not fully understand this part of their contract.

A view also exists that when residents pay for refurbishment village owners benefit through receiving a percentage of an increased sale price.”

Ms Rachel Lane, Author and Principal of Aged Care Gurus made the following statement to the committee:-

“There tend to be two words that the industry use which sound very similar but have very different connotations. The industry use ‘reinstatement’ and ‘refurbishment’. Reinstatement is what most people think refurbishment is, which is basically put it back the way you found it — so a lick of paint, any damage that you have done repaired and steam cleaning carpets. Refurbishment means bring it up to today’s standard, whatever that standard is. People do not understand that those two words have very, very different connotations…

…for a prospective resident you are talking about a difference in reinstatement of $1500 or $2000, something like that, versus refurbishment, which can easily be $60 000 by the time you pull out all the carpet and put in a new kitchen and a new bathroom. So it is very different.”

 

Prospective Retirement Village residents need to fully understand whether their contract requires unit reinstatement or unit refurbishment on their eventual departure from the retirement village.

Retirement Village Units and Capital Gain

Would you sign a retirement village contract where you DO NOT receive the capital gain from the change in value of the unit from when you entered the village to when you leave the village?

There are many different types of retirement village contract provisions when it comes to capital gain, some with 100% to the resident, some shared between the operator and the resident and some with 100% going to the operator.

The table below shows 4 different variations and the differing impacts it can have on the capital base of a resident leaving a village, whether wanting to re-enter the property market or enter an aged care facility of choice. Each example starts with the same capital base of $560,000.00 and the same deferred management fee rate of 35%, the variations are whether the deferred fee is calculated on the ENTRY price or the EXIT price and what is the capital gain treatment at departure. Each contract variation produces 4 very different results that many older Australians do not envisage on entry to the village and unfortunately nor do some legal and financial advisors.



Although a Fact Sheet (it is compulsory in some states for the operator to give you a fact sheet) may say 100% of the capital gain goes to the outgoing resident, the impact of the deferred fee calculated on the sale price is such that the outgoing resident will get only that percentage left after the percentage of the deferred fee is taken.

For example :-

25% deferred fee calculated on sale price / only 75% of the capital gain $ goes to the resident.

35% deferred fee calculated on sale price / only 65% of the capital gain $ goes to the resident. (see example 3 in the table above)

Warning:- Contracts with a capital ‘gain’ provision can include a capital ‘loss’ provision.

Over 65? $300,000.00 Boost to Superannuation Incentive

Under new rules announced by the Australian Federal Government in last week’s budget people aged 65 and older will now be able to make a non-concessional (post-tax) contribution of up to $300,000 – and $600,000 for couples – from the sale of the family home. Take this link to download the fact sheet - Reducing Pressure on Housing Affordability Fact Sheet

From July 2018, people who have owned their home for 10 years or longer will be able to claim the incentive which is exempt from the current $1.6 million transfer balance cap on super contributions. The contributions are also exempt from the work test which only allows those over 65 but under 75 working part-time to make voluntary super contributions and the age test which prevents people over 75 from contributing to their super.

You’ll also be able to make the contributions even if you’re still working part- or full-time, regardless of how much you have in your account already.

The Property Council advises that retirees who downsize to retirement villages will save the Government more than $2 billion each year from fewer GP and hospital visits and delayed entry into aged care compared to the $30 million the incentives will cost the bottom line in the Budget.

Given the retirement village poverty trap some village residents will face on eventual departure has the government factored in the cost of increased government funded aged care placements rather than self fund placements.

Is it a long term saving for the Australian Federal Government or will it become simply a transfer of capital from older Australians to the retirement village industry.  Will it generate a class of capital poor older Australians who will have to return to the government cap in hand to fund their aged care placement.



 

Retirement Village Financial Trap

The impact of the following on the $ value of capital over time both individually and collectively has the capacity to create for many the so named retirement village financial trap.

This can create a no u-turn situation for a sizeable number of retirement village residents.

 

• Deferred fee


• Inflation


• Loss of earnings on the reducing refundable amount (deferred fee)


• Loss of earnings on the fixed refundable amount (interest free loan to the operator)


• Deferred fee calculated on the exit price rather than the entry price.

This so named retirement financial trap is where the $ value of the money you loaned interest free to the retirement village operator is so diminished over time by inflation that it places you at a point where you can no longer afford to leave the village and re-enter the property market or have sufficient money to enter a nursing home of choice.

The higher the percentage of total life savings used to pay the entry cost of the village –

1. the higher the likelihood of being in the so named ‘poverty trap’ on departure.

2. the higher the likelihood of requiring family assistance due to a lack of capital.

3. the higher the likelihood of being dependent on a government funded nursing home placement rather than a placement of choice.

When the nice salesperson says “Don’t worry about the deferred fee, it is paid on exit and something your children will deal with” do not accept that statement without further research.

The impact of the deferred fee, loss of earnings, inflation etc. is something many will have to deal with. A change in circumstances without further financial resources could leave a person in a financial position they did not envisage at the outset. It is important to anticipate what the financial position might be in say 5, 10, 15 years.

Additional capital resources may be needed to meet the cost of any change in circumstances – ie: choose or need to leave the village, re-enter the property market, meet the cost of a nursing home bond to enable entry into a nursing home of choice.

The following graph shows how quickly a no u-turn situation arises when there is a steadily rising property market, the ability to make a u-turn because of a change of circumstances diminishes as each year passes. Many retirement village residents enter a financial trap they did not see on entry as a result of the ever decreasing value of their in-going capital amount.

Devaluation of Retirement Village Resident Capital

Devaluation - the impact of the deferred management fee, inflation, rising property prices and rising nursing home entry costs on the amount paid to enter a retirement village can be devastating for some retirement village residents.

For many this has the capacity to lead to what is referred as the retirement village poverty trap or the retirement village financial trap. This is a situation where the amount left for repayment on departure from the village is devalued over time to the point where a retirement village resident cannot afford to move back into the property market or pay the entry cost to a nursing home of choice.

The resident must rely on family or government support to move to the next phase of their life.

Take this link for further details on the Retirement Village Poverty Trap .

Deferred Management Fee Reducing Refundable Amount

In the initial years of occupancy the deferred management fee has a reducing refundable component each year until $0 over the deferred fee period.

In the iniital years of occupancy the deferred management fee, a component of the in-going amount paid prior to occupancy, has a reducing refundable amount until it reaches zero at the end of the deferred fee period. From this point only the second component of the in-going amount (the interest free loan to the operator) is due for repayment but only on departure. Contracts with the deferred management fee calculated on the exit price simply drive this refundable amount on departure even lower.

Take this link for further details on the Retirement Village Deferred Management Fee .

Forgone Earnings on Village In-Going Amount

Forgone earnings on a Retirement Village in-going amount which has two components, both paid on entry:-

• The Deferred Management Fee


• The refundable amount on exit (aka the interest free loan)

Although there is no actual property ownership in the great majority of these retirement village transactions despite the payment of a commensurate amount as if you were purchasing a title to a property, the earnings forgone and particularly the devaluing effect of inflation, rising property prices and rising nursing home entry costs has a dramatic impact on this capital amount paid on entry but only refunded on exit.

A Ready Reckoner is offered to help indicate the financial impact of a move into a retirement village.

The Retirement Village Ready Reckoner is not an absolute statement of financial outcomes but it is an indicator of outcomes, there are many variations to the arrangements to enter a Retirement Village within Australia and many input variables.

This link will take you to the Ready Reckoner where you can enter your own personal circumstances - CLICK HERE

 

Earnings Forgone on Deferred Fee Amount

Although called a deferred fee and to be paid on departure the cheque for this amount is written prior to entry. The loss of earnings together with inflation can have a dramatic impact on the capital base of the resident by the time of actual departure.

A Ready Reckoner is offered to help indicate the financial impact of a move into a retirement village.

The Retirement Village Ready Reckoner is an indicator of potential outcomes, there are many variations to the arrangements to enter a Retirement Village within Australia and many input variables, it cannot be an absolute statement of financial outcomes.

Take this link and try the Ready Reckoner with your own personal circumstances - CLICK HERE

 

Residents of forgotten retirement villages finding their voice

Housing for the Aged Action Group (HAAG) has launched a project which, for the first time, hears from the “forgotten” residents of not-for-profit retirement villages in Victoria.

Here is information from their press release:-

" According to researcher Aoife Cooke, there is a lack of awareness around retirement villages run on a not-for-profit basis. Usually named ‘Independent Living Units,’ or ‘ILUs’ these small groups of houses for older people are dotted around Victoria and have generally been overlooked by government and policy makers in recent decades.

“Independent Living Units are a significant option for older people looking for a home in retirement, but they remain off the public radar potentially leaving people at risk. Now residents are having their voices heard.

” The report ‘Independent Voices’ tells us what is going on in not-for-profit retirement villages, both good and bad, through the eyes of the people who live there.

“We spoke to residents who are satisfied with their living situation in ILUs’, explains Cooke, ‘with fair treatment, a community atmosphere, good location. Fundamentally, housing related stress is reduced when older people are being treated with dignity and respect in their homes, and this needs a strong regulatory backbone.

” However, not all stories were positive. Low-income tenants in particular told of exploitation and mistreatment. HAAG chairperson Daisy Ellery says ‘We wanted to find out from residents what it’s like to live in an ILU and whether older people feel safe, secure, and fairly treated. Unfortunately we have learned of unfair fees and charges; inaccessible routes for dispute resolution; a lack of legal protections for residents and significant instances of mismanagement.

’ The release of the report is timely, as it coincides with a parliamentary inquiry into retirement housing. Recommendations from this report will be submitted to the inquiry, particularly around legal issues, contracts and management culture.

Further reading:

www.oldertenants.org.au/independent-living-units-ilus

http://www.theage.com.au/victoria/ombudsman-for-retirees-greens-push-20160220- gmz4ph.html "

Deferred Fee on Exit Price

The practice of a Retirement Village Deferred Management Fee calculated on the exit price can be harmful to retirement village residents without maximum capital gain protection. This practice along with inflation has the capacity to decimate the capital base of an outgoing resident and can mean the difference between a nursing home place of choice or a federal government funded placement. There is the potential for a long term retirement village resident without capital gain protection to lose an ever increasing portion of their in-going amount. – for further details see -  Retirement Village Deferred Fee .

There is currently no legislative protection against consumers being required to sign a lease contract where the so called ‘deferred fee’ is calculated on the exit price but the village operator, not the resident, receives the capital gain in the value of the unit over time.

Deferred Management Fee

The Deferred Management Fee is paid at entry to the operator as one of two components of the entry price to the retirement village.  

The retirement industry and particularly retirement village operators use the terminology that you pay the deferred management fee only on departure. Village operators like this because it sounds better and sells better when something is way off into the future.  The retirement village industry creates an illusion by naming it an in-going amount on the way in then naming it a deferred management fee on the way out. The deferred management fee has a reducing refundable amount but this period can be as short as 3 years after entry.  The inescapable truth is that you only ever write one cheque, the one you write on the way in.

LSIC Recommendation 13

The Victorian Parliament’s Legal and Social Issues Committee inquiry into Retirement Living has made 15 recommendations.

RECOMMENDATION 13: That the retirement housing sector engage more proactively with disability and aged care design professionals when designing villages to facilitate greater choice and an ability for people to age in place.

The State Government is yet to respond to the recommendations.

Issues and concepts around Retirement Villages are presented at http://www.retvill.net/

LSIC Recommendation 12

The Victorian Parliament’s Legal and Social Issues Committee enquiry into Retirement Living has made 15 recommendations.

RECOMMENDATION 12: That the Victorian Government ensure that an appropriate minimum Certificate level applies to retirement village management courses.

The State Government is yet to respond to the recommendations.

Issues and concepts around Retirement Villages are presented at http://www.retvill.net/

LSIC Recommendation 11

The Victorian Parliament’s Legal and Social Issues Committee enquiry into Retirement Living has made 15 recommendations.

RECOMMENDATION 11: That the Victorian Government give consideration to developing a model for mandatory accreditation for all retirement housing providers.

The State Government is yet to respond to the recommendations.

Issues and concepts around Retirement Villages are presented at http://www.retvill.net/

LSIC Recommendation 9

The Victorian Parliament’s Legal and Social Issues Committee inquiry into Retirement Living has made 15 recommendations.

RECOMMENDATION 9: That the Victorian Government require that retirement village operators provide every resident with an estimate of their exit fees every financial year.

The State Government is yet to respond to the recommendations.

Issues and concepts around Retirement Villages are presented at http://www.retvill.net/

LSIC Recommendation 8

The Victorian Parliament’s Legal and Social Issues Committee inquiry into Retirement Living has made 15 recommendations.

RECOMMENDATION 8: That the Victorian Government require that deferred management fees are applied on a pro rata basis.

The State Government is yet to respond to the recommendations.

Issues and concepts around Retirement Villages are presented at http://www.retvill.net/

LSIC Recommendation 7

The Victorian Parliament’s Legal and Social Issues Committee enquiry into Retirement Living has made 15 recommendations.

RECOMMENDATION 7: That the Victorian Government require that retirement village operators disclose in-going prices with and without deferred management fees.

The State Government is yet to respond to the recommendations.

Issues and concepts around Retirement Villages are presented at http://www.retvill.net/

LSIC Recommendation 5

The Victorian Parliament’s Legal and Social Issues Committee enquiry into Retirement Living has made 15 recommendations.

RECOMMENDATION 5: That the Victorian Government investigate measures to ensure that all retirement village units hold the same owners corporation voting rights.

The State Government is yet to respond to the recommendations.

Issues and concepts around Retirement Villages are presented at http://www.retvill.net/

LSIC Recommendation 4

LSIC Recommendation 4 - The Victorian Parliament’s Legal and Social Issues Committee inquiry into Retirement Living has made 15 recommendations.

RECOMMENDATION 4: That the Law Institute of Victoria's Elder Law Committee develop professional accreditation for specialists in retirement housing and also provide training to general practitioners to improve their understanding of this area of law.

The State Government is yet to respond to the recommendations.

Issues and concepts around Retirement Villages are presented at http://www.retvill.net/

LSIC Recommendation 3

The Victorian Parliament’s Legal and Social Issues Committee enquiry into Retirement Living has made 15 recommendations.

RECOMMENDATION 3: That Consumer Affairs Victoria collate its online 'Retirement villages' information into a booklet. Retirement village operators must provide this booklet to potential residents either as a hard copy or electronically.

The State Government is yet to respond to the recommendations.

Issues and concepts around Retirement Villages are presented at http://www.retvill.net/

Retirement Residents Call for Reforms

Reforms called for by Retirement Living Residents

"On the 1st May, a group of 140 residents of retirement villages, residential villages, caravan parks and
independent living units came together at a Retirement Housing Forum at Victoria University to ensure the
recommendations from the recently released Parliamentary Inquiry are acted upon urgently to address
serious concerns.

The forum was supported by Housing for the Aged Action Group, Consumer Action Law Centre, Residents
of Retirement Villages Victoria and Council on the Ageing as part of an ongoing collaboration on issues
facing residents of retirement housing.

Fiona York, co-manager from Housing for the Aged Action Group, said “The forum was a great opportunity
for people to work together on a strategy to ensure that the Inquiry recommendations are adopted by
Parliament”. Parliament has six months to respond to the Inquiry recommendations, which were released
last month.

The group were addressed by experts in the field, Katherine Temple from Consumer Action Law Centre,
Rhonda Held from Council on the Ageing, Lawrie Robertson from Residents of Retirement Villages Victoria
and Fiona York from Housing for the Aged Action Group.

 

After much discussion, the residents group identified the top five areas for urgent action. These are:
• An alternative dispute resolution process, such as a Retirement Housing Ombudsman
• Appropriate training for managers of retirement housing
• A process of accreditation for that all retirement housing providers
• A review of the Retirement Villages Act 1986
• Clarification of deferred management fees and clearer contracts

Fiona York (HAAG) noted, “We know from our years of action that we are more powerful when we work
together, and it was great to see so many people attend to express their concerns, prioritise them and plan
for the best way to influence change to improve the lives of residents of retirement housing”.
The group hopes that the Government will act swiftly to make the reforms necessary to make living in
retirement housing a safe and secure option for all older Victorians.

For more information contact HAAG, 9654 7389"

Criticism of Recommendation 10 in LSIC Enquiry

The Victorian Parliament’s Legal and Social Issues Committee Recommendation 10: That the Victorian Government make provisions to allow retirement village operators to pay either the refundable accommodation deposit (RAD) or daily accommodation payment (DAP) for residents entering aged care until the resident’s unit is sold received some criticism at the Retirement Housing Forum held in Melbourne on Monday May 1st. As part of their entry payment to a retirement village residents provide to the operator an amount of money on an interest free loan basis thus reducing if not eliminating the capital borrowing requirements of a village owner/operator. Retirement village residents have expressed the view that as operators are merely paying back money belonging to the resident, any prudent and competent owner/operator should be capable of making sufficient capital provisions to meet this occurrence. The adoption by the Victorian Government of this recommendation would in the words of some retirement village residents simply allow less efficient and less prudent operators to exist in the marketplace at the ultimate cost of consumers.

The Victorian State Government is yet to respond to the LSIC recommendations.

Issues and concepts around Retirement Villages are presented at http://www.retvill.net/

Criticism of Retirement Village Transition from Owner Occupied to Leashold

At the Retirement Housing Forum held in Melbourne on Monday May 1st residents from AVEO villages expressed deep dissatisfaction with the process taking place in their villages. There is a push within the retirement industry for village owner/operators to convert villages where the units are individually owned and occupied by the village residents to where the units are simply leased as this gives total ownership and control over the village to the owner/operator. Conveners of the Retirement Housing Forum Housing for the Aged Action Group, Residents of Retirement Villages Victoria, Council of the Ageing and Consume Action Law Centre had to establish a special session such was the number and the feeling among the residents affected by this process, calls were made by residents for immediate consumer protection actions to address their concerns.