Retirement Village Definition Amendment Urged

Retirement Village Definition Amendment Urged - Savvy retirement village residents are urging resident representative bodies across all states to push for a change to the legislated definition of a retirement village.

Concerns come from the fact that various State legislation frameworks require an in-going payment to be made before a lease/licence of occupancy is permitted and that this payment is prohibited from being rent.

Residents believe this to be a key factor in the ability of an operator to camouflage the full cost of the conditional residential accommodation until exit from the village and protects the operator from market forces such as market driven residential rental costs. One examination ( renting can be cheaper than a retirement village ) has shown that the full weekly cost of accommodation in a retirement village can be almost twice the cost of simply renting a commensurate property within the general community.

The following letter was sent by a village resident to the Retirement Village Residents Association of NSW.

"Interstate* Retirement Village Contracts - Implications.
The definition of a retirement village in the Victorian Retirement Village Act 1986 produces many of the problems your state members have. That definition called for payment of an “ingoing contribution” before a lease would execute. The definition of ingoing contribution calls it a “donation” and in addition requires that the donation “does not include rent”.
Those two definitions together mean that lessees provide an interest free loan of the nominal value of the unit, for the duration of the lease. That is tantamount to buying the unit, but not getting ownership.
Very, very, very few lessees, resident committees, residents’ advocates or legal advisers appreciate the full implications of that combination of definitions. Even the relevant legislative oversight and village resident advocacy bodies in Victoria have struggled understanding the full implications. The main effects are:-
The resulting contracts prevent free market competition because there are so many variables in the costing that it is impossible to compare daily, weekly or monthly rentals between villages
Lease rates vary as the duration of the contract lengthens.
Contracts are so convoluted as to be incomprehensible for lessees, or experience shows, their legal advisers.
Costs are not calculated or disclosed until a couple of months after the contract terminates which shows the Act fails its stated purpose “to clarify and protect the rights of persons who live in, or wish to live in retirement villages”
The market is artificially limited, and restricted by the definitions, by means of the contracts.
The definitions produce contracts that make the Victorian Act not fit for its stated purpose of protecting lessees and prospective lessees. This applies to all Australian states and territories.
The definitions together mean the operators have the remarkable advantage of getting a cost free return on the lessees’ capital.
In the last 14 years, virtually all lessees’ complaints address the symptoms that result from the two definitions in this unique legislation, and the resulting contracts.
All of these issues would be exposed and solved with the cost rate disclosed before entry, and the only way known to do that is by requiring that all contracts must offer conventional residential tenancy with security, only then may other contract forms, such as loan lease be offered. Residential tenancy is the norm for retirement village contracts in the US."

The following graphic details the current definition basis and why the retirement village definition amendment is urged.



Retirement Village Definition Amendment Urged.



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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?

 

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.

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

 

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.