Retirement Village Residents Decimated Financially

Retirement Village Residents Decimated Financially

Differing Financial Impacts on Retirees of Four Retirement Village Residential Occupancy Models.

The 2017 PwC/Property Council Retirement Census shows that:-

• 21% of retirees offered a retirement village occupancy model that has the capacity to completely decimate the amount due for repayment to the resident on departure.

• 20% of retirees offered a retirement village occupancy model that has the capacity to drastically reduce the ‘present day value’ of the amount due for repayment to the resident on departure.

The longer the period of occupancy the greater the damage done. It is quite possible for residents with a longer term occupancy period to actually have a debt to the operator on departure from the village.

All caused by the combination of factors:-

• The deferred management fee calculated on the exit price of the unit rather than the entry price.


• The increase in the value of the unit occupied (capital gain) retained by the village operator.


• The devaluing effect of inflation on the refundable amount (ingoing amount minus the deferred management fee) retained by the operator for their own use until refunded to the resident on departure.


• Fees paid to maintain an asset owned by the village operator.  A resident pays an ingoing amount often commensurate with an ownership cost but only obtains conditional occupancy.

Differing financial outcomes of four retirees over the four occupancy models.

The Property Council Census records the average occupancy period in a retirement village as 7 years. Table 3 below examines the financial journey of 4 retirees over this 7 year period, each choose a different occupancy model being offered by retirement village operators:-

1. 21% of Retirement Villages offer this accommodation model - Deferred Management Fee on the EXIT Price, Capital Gain to the Operator.  Financial outcome - Capital base of Retiree at Ingoing - $500,000.00 down to $ -2938.00 after 7 years. A weekly cost of $1377.91 for conditional residential accommodation.


2. 20% of Retirement Villages offer this accommodation model - Deferred Management Fee on the ENTRY Price, Capital Gain to the Operator.  Financial outcome - Capital base of Retiree at Ingoing - $500,000.00, down to $ 81,043.00 after 7 years. A weekly cost of $1150.98 for conditional residential accommodation.


3. 14% of Retirement Villages offer this accommodation model - Deferred Management Fee on the EXIT Price, Capital Gain to the Resident.  Financial outcome - Capital base of Retiree at Ingoing - $500,000.00, down to $237,094.00.00 after 7 years. A weekly cost of $ 722.26 for conditional residential accommodation.


4. 45% of Retirement Villages offer this accommodation model  - Deferred Management Fee on the ENTRY Price, Capital Gain to the Resident.  Financial outcome - Capital base of Retiree at Ingoing - $500,000.00, down to $321,121.00 after 7 years. A weekly cost of $ 491.42 for conditional residential accommodation.

Note:- A residential rental of a commensurate value property within the general community would be in the order of $480.76, a 5% per annum return to the landlord.

Table .

Currently there is no legislated protection for retirees against outcomes 1 and 2.

Retirement Village Residents Decimated Financially

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Should Be Outlawed

The 2017 PwC/Property Council Retirement Census shows that:-

1. 21% of interested retirees are being offered a retirement village occupancy model that has the capacity to completely decimate the amount due for repayment to the resident on their departure from the village.

1. 20% of interested retirees are being offered a retirement village occupancy model that has the capacity to drastically reduce the ‘present day value’ of the amount due for repayment to the resident on their departure from the village.

The longer the period of occupancy the greater the damage done to the refundable amount. It is quite possible for residents with a longer term occupancy period to actually have a debt to the operator on departure from the village.

All this is caused by a combination of factors:-

• A deferred management fee calculated on the outgoing price of the unit rather than the in-going price.


• 100% of any increase in the value of the unit occupied (capital gain) retained by the village operator.


• The devaluing effect of inflation on the refundable amount (ingoing amount minus the deferred management fee) which is retained by the operator for their own use until the resident departs the village.

Issue 1.  Deferred Management Fee calculated on the exit price, 100% of the capital gain to the operator.

Table 1 below shows that as the capital value of the unit increases, the deferred management fee charged increases, the refundable amount due to the village resident on departure decreases.

Should the capital gain over the length of the occupancy be high enough the outgoing resident could lose up to 100% of the refundable amount or worse still be in a position where they owe the operator money.

Note: Currently there is no legislated protection for retirees against this business model.

Table 1



Table 1 above does not include unit refurbishment costs or exit fees which would make the financial situation of the retiree even worse.

This Retirement Village Model Should Be Outlawed - The retiree in the occupancy model above (35% DMF on EXIT price, 100% capital gain to operator) has been subjected to a reducing refundable amount (possibly negative) over the period of the occupancy plus exit costs whilst the operator has seen a growth in capital value of the asset from $500,000.00 to in the order of $2,000,000.00. The industry is stating that 21% of all contracts are issued in this form.

Retirees should be given legislated protection against the business model detailed above.

For those who feel the above scenario will never come to pass, eg: a 300% increase in unit value, please examine the recorded increase in real estate values in Table 3 and Table 4.

 

Issue 2.  Deferred Management Fee calculated on the entry price, 100% of the capital gain to the operator.

Table 2 below compares the retirement village occupancy model with three other models offered in the market place. Occupancy model 2 shows the adverse financial position of the village resident on leaving the village as opposed to the occupancy models in option 3 and option 4.

Note: Currently there is no legislated protection for retirees against this business model.

Table 2.



Table 2 above does not include unit refurbishment costs or exit fees which would make the financial situation of the retiree even worse.

The retiree in occupancy model 2 above (35% DMF on ENTRY price, 100% capital gain to operator) has been subjected to a stagnant refundable amount of $325,000.00 ravaged by inflation over the occupancy period plus exit costs whilst the operator has seen a growth in capital value of the asset from $500,000.00 to in the order of $2,000,000.00. The industry is stating that 20% of all contracts are issued in this form.

Retirees should be given legislated protection against the business model detailed in occupancy model 1 and occupancy model 2.

For those who feel the above scenario will never come to pass, eg: a 300% increase in unit value, please examine the recorded increase in real estate values in Table 3 and Table 4.

 

Table 3 below shows the capital growth in the Melbourne housing market for the period 1985-2015.  Melbourne Property Market 1985 - 2015.

Table 3.

[caption id="attachment_325" align="alignnone" width="667"] Melbourne Residential Propoerty[/caption]

 

Table 4 below shows the capital growth in the Australian housing market.

Table 4.



 

Property Rental or Retirement Village

Property Rental or Retirement Village - Australian retirees can suffer a dramatic reduction in their capital base depending on whether they choose to rent a property and retain the capital amount from the sale of the family home or purchase a lease for accommodation within a retirement village.

In this example a retiree has access to $850,00.00 in capital and can face the following options.

1. Purchase a lease/licence enabling the retiree to occupy a unit in a Retirement Village. The Deferred Management Fee is 35% of the entry cost of $850,000.00 plus annual maintenance fees and a unit refurbishment cost on departure. The retiree obtains 0% of any capital gain in the value of the unit.


2. Purchase a lease/licence enabling the retiree to occupy a unit in a Retirement Village. The Deferred Management Fee is 35% of the entry cost of $850,000.00 plus annual maintenance fees and a unit refurbishment cost on departure. The retiree obtains 100% of any capital gain in the value of the unit.


3. The retiree could rent a communsurate property within the general community and pay a weekly rental amount.


4.  Stay in the family home.

The graph and the tables below illustrate the dramatic reduction in capital wealth of the retiree over just a 7 year occupancy period within a retirement village.  Financial outcomes can depend on the contractural provisions offered by the village operator.  Renting a property within the general community can have a much less dramatic impact on capital wealth but as in all financial decisions there are multiple issues to consider.

Scenarios are illustrated using standard retirement industry parameters:-

Option 1.

• Deferred Management Fee of 35% on the in-going value of village unit.


• 0% of the capital gain to the village resident.


• Maintenance fees


• Unit refurbishment cost.

Results Option 1 -

Village Resident   Start - $850,000.00  Finish - $228,087.00

A capital reduction of minus $621,913.00

 

Option 2.

• Deferred Management fee of 35% on the out-going value of village unit.


• 100% of any capital gain to the village resident.


• Maintenance fees.


• Unit refurbishment cost.

Results Option 2 -

Village Resident   Start - $850,000.00  Finish - $493,373.00

A capital reduction of minus $356,627.00

Note:- This improved result over Option 1 is totally dependent on the size of any capital gain. Should there be 50% less capital gain ($204,066.00) the result would be a capital reduction of minus $560,693.00.

 

Option 3 -

• Rental property value $850,000.00


• Rental return to Landlord initially 5% then a 5% annual increase in rent


• Retiree retains $850,000.00, the proceeds from the sale of the family home


• Retiree invests the retained capital, calculation uses 4% return on investment compounded

Results Option 3 -

Renter   Start - $850,000.00  Finish - $772,506.00

A capital reduction of minus $ 77,494.00

 

Graph 1

Table - Option 1

Table - Option 2

Table - Option 3

 



 

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Loss of Capital in Retirement Villages

The Melbourne Age reports in an article regarding a class action against prominent retirement village operator Aveo:-

"Professor Murray Gillin is one of 200 retirees who have signed up for the Levitt Robinson claim.

Professor Gillin, who lectured in entrepreneurship and innovation at Swinburne University, told Fairfax Media his decision to sell his townhouse and move into a retirement village at Sackville Grange in Melbourne's blue ribbon suburb of Kew, ultimately cost him hundreds of thousands of dollars in exit fees, foregone capital gains and other fees including maintenance fees.

He bought the freehold property in March 2010 for $850,000 and walked away after six years with $669,076, after the various fees were deducted."

This experience is highlighted in the chart below showing 4 different paths a retiree can take 1. Retain or obtain ownership of residential accommodation, 2. Rent residential accommodation, 3. Lease/licence residential accommodation in a retirement village with 100% capital gain but with the deferred management fee calculated on the exit price, 4.  Lease/licence residential accommodation in a retirement village with 0% capital gain but with the deferred management fee calculated on the entry price.

Retiree Capital Wealth Smashed by Deferred Fee

The capital wealth of Australian retirees is being smashed by the deferred management fee business model used by a large part of the retirement village industry.



Both the retiree and the village operator bring identical capital wealth to the transaction, the retiree $850,00.00 in capital and the village operator a unit with an asking price of $850,00.00 for the right to occupy it but not own it.

The graph and the table below illustrate the dramatic reduction in capital wealth of the retiree over just a 7 year occupancy period within the retirement village.  Also illustrated is the even more dramatic increase in capital wealth gained by the village operator using the deferred management fee business model.

Two scenarios are illustrated using standard retirement industry parameters:-

Scenario 1.

• Deferred Management Fee of 35% on the in-going value of village unit.


• 100% of the capital gain to the village operator.


• Maintenance fees


• Unit refurbishment cost.

Results Scenario 1 -

Village Operator  Start - $850,000.00  Finish - $1,990,697.00

Village Resident   Start - $850,000.00  Finish - $242.773.00

 

Scenario 2.

• Deferred Management fee of 35% on the out-going value of village unit.


• 100% of the capital gain to the village resident.


• Maintenance fees.


• Unit refurbishment cost.

Results Scenario 2 -

Village Operator  Start - $850,000.00  Finish - $1,725,362.00

Village Resident   Start - $850,000.00  Finish - $508,107.00

 

Graph 1

 

Table 1

 

 

Capital Value Lost Percentage

Capital Value Lost Percentage - The table below show the loss of capital value suffered by a retirement village resident expressed as a percentage of the in-going amount paid.

Also shown is a comparison calculated at an identical growth rate in property value for those who may remain in the family home.

Governments through incentives and legislation encourage older Australians to make the move from the traditional family home into retirement accommodation such as a retirement village. Although there are aspects of life in a retirement village that are beneficial to the retiree, the reduction in capital value is clearly excessive and does not represent fair and reasonable value for those intangible benefits as claimed by the industry.





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Retiree Loss of Capital Wealth

Capital wealth transfer comes from the Deferred Management Fee model used in the Retirement Village industry and is financially damaging to Australian retirees. The Deferred Management Fee model creates an accelerated transfer of wealth from retirees to village owner/developers. Table 1 below, inclusive of inflationary adjustments, shows the capital wealth transferred from a retiree to a village owner / developer over a 7 year period, this is for just one unit in just one retirement village.

The table uses common contractural parameters within the industry although there can be variations.

The capital value reduction to the retiree is at the rate of -$1,668.21 per week of occupancy.

The capital value gain to the owner / developer is at the rate of +$3133.78 per week.

The major problem with the DMF model is that it was created decades ago for not-for-profit organisations to enable retirees with limited financial resources to obtain affordable retirement accommodation, accommodation at a price much lower than a commensurate cost within the general community.

Today in these private enterprise times the in-going amount required to enter a retirement village is often commensurate with a similar property within the general community. This in-going amount being above development costs and higher than can be justified to warrant the use of the historic Deferred Management Fee model.

Retirement Village but at what cost?

As the baby boomer generation moves through that phase of their lives where they consider their retirement options, many will consider life in a retirement village. In fact governments are incentivising the move to downsizing from the family home with a retirement village well in the frame as one of the options to be considered.

For the boomer generation of property owners where values have increased year on year many will be shocked by the deferred management fee model highly promoted by village developers and favoured by governments and regulators. This deferred management fee model has many features contrary to what this generation has been used to, features unique to this sector of the residential accommodation industry.

Some of these negative features are:-

• Losing up to 35% of the amount paid to enter the village.


• The operator uses the remaining 65% of the amount paid to enter the village interest free until refunded on your departure from the village.


• No ownership only a conditional lease of the property, despite paying an amount commensurate with ownership values of a similar unit within the general community.


• Capital gain provisions are determined by the terms of the contract.


• The payment for all unit maintenance despite no ownership the property.


• The payment for full refurbishment of the unit on departure from the village .despite no ownership the property


• The payment along with the other village residents for the maintenance of the common areas and any recreational facilities despite no ownership the property.

As the industry points out the baby boomers are buying a lifestyle not real estate and whilst this is true the real question is but at what cost to the capital savings of this sector of the Australian population.

The table below takes the example of a retirement village with an in-going cost of $850,000.00.

It clearly shows what happens to the capital savings of older Australians over a relatively short period and the commercial values transferred to the village owner/operator within this period. The matter for governments and regulators to address is whether this $ amount as shown in the table for just one resident, for one short period, in just one village, is both reasonable and of course just.



 

Retirement Accommodation but at what cost?

Retirement Accommodation – Would you pay the $ amounts being asked by the industry not for ownership but simply conditional occupancy of residential accommodation in a Retirement Village?

Don't answer now - answer at the end.

What is the cost of moving into this Retirement Village? The in-going amount in his village is $850,000.00. Commensurate with those in the freehold development next door where you would obtain ownership but here you get a lifestyle in addition to the conditional right to occupy. I don’t actually get ownership for $850,000.00, all I get is a conditional right to occupy? Correct.

Is there a Deferred Management Fee and what is the amount? Yes, the Deferred Management Fee payable to this operator is 35% or $297,500.00 of that in-going price of $850,000.00. I don’t get all my money back when I leave the property even though I don't have ownership only a conditional right to occupy? Correct.

Why do I lose 35% of my in-going amount if I don't have ownership? That 35% or $297,500.00 amount helps pay for the $2.5m communal recreational facilities and helps the operator make a profit so they can continue to provide this type of accommodation which is well liked by both State and Federal Governments. You want me to believe that the developer has made no profit over development costs at the $850,000.00 per unit price point.  You have over 100 units here so that $297,500.00 taken per unit totals $29.7m for a once only communal and recreation facility cost of $2.5M. Retirement village units turnover around every 7 years or so, you will get at least $29.7m now at the start of the village and then again around every 7 years over the entire life of the village for a once only communal and recreation facility cost of $2.5M. Correct.

When do I get the 65% or $552,500.00 of that total in-going payment refunded? On your departure from the village after say 5, 10, 15 years of occupancy.  But inflation will have decimated the present day value of my money by that time, I will struggle to have enough capital value to return to the property market or afford a nursing home placement. This has the capacity to put me into what many describe as the retirement village financial or poverty trap where the present day value of that 65% of the in-going amount refundable to me on departure is decimated in by inflation, rising housing costs and rising nursing home entry costs. Correct.

What happens to my 65% or $552,500.00 of that in-going payment while I reside in the village? The operator can use that 65% or $552,500.00 of that in-going payment interest free for their working capital needs or to repay their commercial borrowings or simply to invest for a profit until repayment to you on your exit. You have over 100 units here, that would generate an interest free cash pool of over $55.0m million dollars increasing over time as each unit increases in price. Correct.

I paid an in-going amount commensurate with a purchase price do I get any capital gain? No, under this particular occupancy contract 100% of the capital gain goes to the operator.

Are there any other costs associated with this conditional occupancy agreement? Yes, you pay all the maintenance costs of the unit. Yes, you pay any selling costs of the unit on your departure. Yes, you pay an administration fee on your departure. Yes, you pay the full refurbishment cost of the unit on your departure, around $60,000.00 at present day values. Yes, you and your fellow residents pay all the maintenance costs associated with the common areas and the recreational facilities. But I don't get ownership of the property only conditional occupancy! Correct.

What do you think now, would you pay the $ amounts being asked by the industry not for ownership of a unit but simply the conditional right to occupy a unit in a Retirement Village?

 

Retirement Village has Powerful Persuasion.

The words RETIREMENT VILLAGE have a powerful persuasion on older Australians.

An initial enquiry process for entering a retirement village may go something like this:-

• Selling Agent - The unit price is $850,000.00, close to those in the freehold development next door where you would obtain ownership but here you just get a conditional right to occupy.


• Enquirer -  What, I don't actually get ownership for $850,000.00, all I get is a conditional right to occupy!


• The Deferred Management Fee payable to this operator is 35% or $297,500.00 of that in-going price of $850,000.00.


• What, I don't get all my money back when I leave the property even though I only have conditional occupancy!


• Why do they call it a 'deferred' fee. Because you don't pay it until you leave.  But I will give it to you on entry in the $850,000.00.  No you don't pay it until you leave. But I will give it to you on entry in the $850,000.00.  No you don't pay it until you leave.  Can we move on!


• That 35% or $297,500.00 amount helps pay for the $2.5m communal recreational facilities and helps the operator make a profit so they can continue to provide this type of accommodation which is well liked by both State and Federal Governments.


• What!  You want me to believe you have made no profit over development costs at the $850,000 per unit price point. 


• You have over 100 units here so that $297,500.00 taken per unit totals $29.7m for a once only communal and recreation facility cost of $2.5M.


• Retirement village units turnover around every 8 years so you will get at least $29.7m now at the start of the village and then again around every 8 year period over the entire life of the village. Yes but we don't like to draw attention to that.


• You get 65% or $552,500.00 of that $850,000.00 in-going payment refunded but not until you depart the unit after say 5, 10, 15 years. 


• What!  But inflation will have decimated the present day value of my money by that time, I will struggle to have enough capital value to return to the property market or afford a nursing home placement.


• This has the capacity to put me into what people describe as the retirement village financial or poverty trap. Yes but we don't like to draw attention to that.


• The operator gets to use that 65% or $552,500.00 of that in-going payment interest free for their working capital needs or to repay their commercial borrowings or simply to invest for a profit until repayment on your exit.


• What!  But you have over 100 units here, that would generate an interest free cash pool of over $55.0m million dollars increasing over time as each unit increases in price.  Yes but we don't like to draw attention to that.


• Because the unit is owned by the operator, the operator keeps any capital gain.


• What!  I pay an in-going amount in the order of a purchase price but I do not share in any capital gain. Yes under this contract 100% of the capital gain goes to the operator.


• Although the unit is owned by the operator you must pay all the maintenance costs of the unit.


• What!  But you said I don't have ownership only conditional occupancy!


• Although the unit is owned by the operator you pay the full refurbishment cost of the unit on your departure, currently around $60,000.00.


• What!  $60,000.00 to refurbish the unit that I do not have ownership only conditional occupancy.  Yes that is the cost today but of course it will likely be more in 5, 10, 15 years time.


• Although all the units are owned by the operator you and your fellow residents pay all the maintenance costs associated with the common areas and the recreational facilities.


• What!  But you said I don't have ownership only conditional occupancy!


• To summarise, you and other residents pay an in-going amount near to or commensurate with an ownership cost but the operator retains ownership and you get only conditional occupancy. The operator keeps 35% of this in-going amount for their purposes and uses the other 65% interest free until refunded to you on exit.  The residents pay all maintenance costs on the units and on both the communal property and the recreation facilities. The residents pay the full refurbishment cost of the unit they occupied upon departure from the village. The operator as owner of the unit keeps the value of any capital gain on the unit. 


• Isn't this form of retirement accommodation just an outdated system originally designed for not for profit entities but is now dominated by private enterprise. It simply accelerates the transfer of the lifetime savings of older Australians into the hands of private enterprise under the guise of buying a lifestyle not real estate.  Perhaps but we don't like to draw attention to that.


• Property developers in capital cities and areas like the Gold Coast can build a large unit complex with communal recreational facilities then market them to owner occupiers or rental market investors, they make their profit and move on to their next development. Wouldn't this system better protect the capital value of older Australians?   Yes but we don't like to draw attention to that.


• Are you really sure this is all legal.


• Oh yes it is all clearly enshrined in State Government legislation.


• Isn't it the role of governments to protect it's citizens, not to continue an outdated residential accommodation scheme that actually generates financial harm to these citizens.  Perhaps but we don't make the rules, the State Governments do!


• How long can this go on for.


• Oh they propose tinkering with common contracts, pre-sale information, perhaps a new watchdog, industry protocols, industry accreditation but until governments fix the heart of the legislation nothing will stop this, but we don't like to draw attention to that.


• What do you mean by fix the heart of the legislation. 


• In the Victorian legislation for the property to be officially termed a 'retirement village' you can only purchase a right to become a resident, the developer although obtaining a price in the order of a purchase price does not by law have to transfer ownership nor can they rent it to you. 


• This hardly seems fair on older Australians compared to other forms of residential accommodation does it?   Perhaps but we don't make the rules, the State Governments do!


• These State Governments and the Federal Government don't really understand how this system works do they and particularly what it does to the hard earned life savings of older Australians.      Perhaps but we don't make the rules, the State Governments do!                                                                                                           

Despite a range of terms and conditions as described above, an increasing number of older Australians choose to live in a retirement village..

A Retirement Village unit, would you pay to live in one?

 

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)



 

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.