Retirement Villages - No Financial U-turn

For many older Australians retirement villages can be a financial disaster by creating a no U-turn situation. The ability to leave a retirement village by choice or a change in circumstance weakens as each year passes due to deferred fees, exit costs, inflation, rising property prices and rising nursing home entry costs.

This can result in a retirement village resident entering a financial trap not forseen or explained at entry by the ever reducing $ value of their original capital base.

The higher the percentage of their total capital base used to pay the entry cost into a retirement village the more certain it will be that they will find themselves financially trapped should a change of circumstance be desired or required.

The following table illustrates what can and is experienced by many of the nations older citizens living in retirement villages.

Retirement Villages - What is really wrong.

What is really wrong with retirement villages particularly in Victoria.

This actual example surely epitomises what is wrong with the retirement village industry, particularly in Victoria.

1. Retirement village operator breaches the legislated provisions of the Retirement Villages Act 1986.


2. Action taken by Consumer Affairs Victoria - Don't do it again !!


3. Outcome - Operator plus $1.5 million dollars, Residents minus $1.5 million dollars.

Advice to operators from Consumer Affairs in their document to retirement village operators following a change in the law effective July 1 2014.

"Under the Act, it is an offence to include a statement that you know to be false or misleading in a material particular either in the factsheet or disclosure statement.

Additionally, under the Australian Consumer Law, it is an offence to make false or misleading representations about goods or services, and you may also be subject to civil claims for misleading or deceptive conduct."

Following the change in the law the village operator failed to issue a fact sheet for an extended period and then once issuing a fact sheet, again for an extended period, advised prospective residents that they were not responsible for the 'refurbishment' of their unit on departure from the village but the contract executed states that they are.

The monetary effect on residents from inaction by Consumer Affairs Victoria to hold the operator accountable under the law is that the affected residents will be out of pocket in the order of $1.5 million dollars increasing each year as refurbishment costs increase each year.

The monetary effect for the village operator from inaction by Consumer Affairs Victoria is that the operator will receive revenues in the order of $1.5 million dollars  increasing each year as refurbishment costs increase each year.

All this as a result of the operator breaching the provisions of the Retirement Villages Act 1986 and the failure of Consumer Affairs Victoria to protect these residents despite CAV being responsible for the application of the applicable law.

Everything talked about, contracts, deferred fees etc. drifts into the background for these residents when you can have a circumstance where a retirement village operator breaches the Act, is advanced by $1.5m dollars while the residents are out of pocket by $1.5m dollars and the regulator simply says, 'don't do it again'.

So what is really wrong with retirement villages in Victoria, Consumer Affairs Victoria.

If the law was administered as the legislators intended then retirement village operators in Victoria would be held to account and both current and prospective residents could have confidence that applicable law would be applied to both themselves and the operator with equal weight.

 



 

 

 

Retirement Village Operators Cry Poor

Retirement Village operators continue to cry poor to organisations such as Consumer Affairs Victoria seeking and being granted relaxed rules on the payment of aged care bonds where a village resident moves to an aged care facility.

In a lease/licence village the operator receives an interest free loan from the resident for the cost of obtaining the lease less the so called 'deferred fee' which the operator retains.

The village operator is actually claiming that when a resident leaves they (the operator) are in such a poor working capital position that they need relief from giving back the resident their own money, money the operator has had the use of interest free for the duration of their occupancy. An important point here is to remember that in a loan/licence village residents have no ownership of the property, only a lease granting a right to reside in this property but for which they pay an amount in the order of the cost of owning a residential unit within the general community.

Why on earth would someone looking for a downsize in residential accommodation following retirement sign up for such a scheme. That is a very good question and one that every older Australian contemplating entering a retirement village must ask themselves. Why would I pay the equivalent cost of ownership when I won't own it only lease it.

The following table presents the basis of _ Why would I do it?   The subsequent table indicates is a village operator actually in such a poor financial position.

Retirement Village Unit, Rent or Home Ownership

There are two primary issues impacting older Australians in relation to retirement villages:-

1. The reduction in value of the capital base of older Australians having entered a retirement village.


2. The visible and the not so visible transfer of capital value from older Australians to retirement village operators.

Which option has the largest negative impact on my capital base?    A Retirement Village Unit, Renting or Home Ownership.

The following table gives an example of the potential financial impact over three different residential accommodation scenarios.

This is the view for a potential resident proposing to lease (not own) a unit in a retirement village governed by the retirement villages act, the following table compares three popular options for older Australians.

1. Sell the family home and enter a Retirement Village under a lease arrangement,


2. Sell the family home, invest the capital amount received from the sale and rent a unit within the community,


3. Stay in the family home.

After the first 7 year period the table shows the impact on the original Capital Value of $500,000.00:-
Column 1. Retirement Village – the impact is minus $275,000.00 capital to a lower value of $225,000.00
Column 2. Rental Unit – the impact is minus $70,000.00 capital to a lower value of $430,000.00
Column 3. Family Home – the impact is an increase of $210,000.00 capital to a higher value of $710,000.00

The parameters for the table above are:-
Deferred Fee Period – 3 years
Deferred Fee Rate – 35%
Capital Gain Rate – 42% flat over 7 year period
Capital Gain Share– 100% to operator
Unit Turnover Period – 7 Year Average



 

Retirement Village Legislative Reforms Essential

Long time activist for reforms to the Victorian Retirement Village Act 1986 Mr. Charles Adams says the No.1 reform required is a legislative change to the current requirement that to enter a retirement village you must pay an in-going contribution and that contribution cannot be classified as rent.

In a recent letter to the Premier Mr. Adams wrote:-


"Dear Premier,

For the last 31 years the Retirement Village Act 1986 has been
disadvantaging "Retirement Village" lessees. Don't you think that is
long enough?

This is because the RV and donation definitions, supplied back in 1986
by the developers, in their own interests, by making the contract model
raise and defer, and thereby obscure, the cost until after termination.
This may be legal, but is certainly not the stated purpose of the
Victorian Act. The LSIC 150 page report on this subject omitted the
three, in 760 submissions, that illustrated this point.

US village contracts are residential tenancy, with secure tenure, as the
critical element necessary to provide security for retiree lessees.

Changing those two definitions to rationally allow transparent costing
and should make for a major increase in retiree lessees into retirement
villages for the benefit of the whole community. It would reduce the
demand for more infrastructure. The developers will howl, but the
community will benefit.

Instead of 5% of the demographic going into retirement villages,
Victoria could expect 15%, as in the US."

The matter has been referred to Consumer Affairs Victoria, a body heavily criticised by retirement village residents in their submissions to the State Government enquiry into retirement living. https://www.parliament.vic.gov.au/lsic/article/2970

Retirement Housing Enquiry a damp squib

Levitt Robinson Solicitors claim:-

"The report of the Victorian Enquiry into the Retirement Housing Sector has proven to be a damp squib and disappointed many genuinely aggrieved Victorian residents of retirement villages."

They go on to say:-

"The enthusiasm with which it was greeted by the Property Council of Australia’s Victorian Division, when it was released on 7 March 2017, is a strong indication that it was a fillip to developers and brush-off to resident retirees.

The Property Council proposed that there should be a special industry Advocate to represent residents’ interests and did not endorse the Committee’s recommendation for the appointment of an Ombudsman for the sector.

The Financial Ombudsman Service nationally has done little to help bank customers other than to forestall legal proceedings, while complaints to the Financial Ombudsman Service are considered. However, FOS bends over backwards to see things the banks’ way and even where it finds wrongdoing by a bank, generally proposes minimalist redress, from the borrower’s perspective. Rarely is there a satisfactory remedy achieved for a borrower which does justice between the parties through the FOS complaints process.

I am no big fan of Ombudsmen. I rather prefer considered and strategic law reform which provides effective consumer protection.

The Chair of the Retirement Housing Enquiry Committee, Margaret Fitzherbert MLC, introduced the Report by stating that “The Committee was not tasked with solving every problem identified by those who contributed to the enquiry.” She expresses satisfaction that “Most residents are happy in their retirement community”. Recognising that many residents did not (and may still do not) understand their management contracts and did not receive proper legal advice, she recommends that the Law Institute of Victoria support better training for the legal profession.

At page 10, under “Key Concerns”, the Committee noted that developers are encouraged to look for strategies to redevelop facilities to a more expensive form of retirement housing because they are not content to see the owners of Independent Living Units (“I.L.U.s”) obtain the benefit of capital gains themselves. (Section 1.3.3 at p.10).

The Committee appears to see nothing wrong with retirement village developers undermining the property rights of I.L.U. owners and fails to call out industry malpractice for what it is.

At Section 5.1 on page 45, the Committee appears to have found that residents ought to have known that buying into a Retirement Village is a “terrible investment but if you want a lifestyle, it is a reasonable investment based on the contract”.

The Consumer Action Law Centre believes that many retirees enter into villages falsely believing they are buying a property rather than a licence to reside in a property.

With respect, that is largely because of the way in which such properties are marketed and the duplicity of Retirement Village operators in the way they describe interests, inconsistently with the substantive interest being conveyed.

All in all, the Committee seems to have accepted the industry’s self-promotion over the complaints of hundreds of residents who had made submissions and, in a rather superficial and generalised manner, the Report appears to accept that operators are providing what the residents are paying for.

You may see a lot of retirement villages painted white in Victoria in years to come, since the Victorian Parliament has given the Victorian Retirement Housing Sector a pretty thorough-going whitewash.

At Levitt Robinson, we are ready to challenge what we see in many instances constitutes de facto elder abuse and unconscionable conduct by the industry, committed against retirees in the sector."

The full story here:- Levitt Robinson Solicitors