Deferred Management Fee

The Retirement Village Deferred Management Fee model creates an accelerated transfer of wealth from retirees to village owner/developers.

Table 1a below inclusive of inflationary adjustments shows the capital wealth for one unit transferred from a retiree to a village owner / developer over a 10 year period.

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

Table 1a

 

[caption id="attachment_296" align="alignright" width="300"] retirement village poverty trap[/caption]

The major problem with the DMF model is that it was created decades ago to enable charity and not-for-profit organisations to provide retirement accommodation to retirees with limited financial resources, where they had little income but some capital.

Today in these private enterprise times the ingoing amount required to enter a retirement village is typically closer to or even at the price of a similar property within the general community. The Deferred Management Fee model is a way of hiding the high cost until the lessee leaves to go into assisted care.

All of this transfer of capital wealth to predominantly private investors comes at the direct cost of the life savings of Australian retirees. This has the capacity to place them at financial risk should the need arise for a change of direction in their life, eg: return to the property market or enter an aged care facility. 

 

 

 

 

 

Table 1b below shows accelerated returns to retirement village investors from the deferred management fee model in the order of 2 to 2.5 times that of an investor for a traditional residential investment unit.

These accelerated returns for a retirement village investor are driven by:-

1. 
   

   The property fully maintained and refurbished at the cost of the retiree

   
   


2. 
   

   Capital gain from the increase in value of the village property – can be subject to contract provisions

   
   


3. 
   

   Use of the retiree's refundable amount - 0% capital provided by the occupant – refundable only on the departure of the occupant

   
   


4. 
   

   Multiple deferred management fees over multiple occupancies – the shorter the deferred management fee payment period the greater the opportunity to charge a new maximum fee

   
   


5. 
   

   Deferred management fee charged on sale price - subject to contract provisions

   
   

Table 1b

If there is no discount to the entry cost there is no justification for a Deferred Management Fee.

If there is a Deferred Management Fee then it should reflect only the applicable discount.

Retirement Village = Asset Stripping

Retirement Village = Asset Stripping - The use of the Deferred Management Fee where a Retirement Village owner/developer charges an in-going price commensurate with a similar property within the general community can equate to simply asset stripping from the retiree.

Respected finance reporter Alan Kohler wrote in an article titled Retirement Village rorts: the booming scandal in 2014 -

"Taking them one at a time, deferred fees are where you buy a unit in a retirement village at full price, but when the time comes to sell you have to pay the village owner a large percentage of what you get."

"There are a variety of deferred fee schemes contained in retirement village contracts and they all rely on the fact that when an elderly couple signs it, they tend not to pay much attention to what might happen to the assets when they die."

In a retirement village the retiree does not gain ownership of the property, the retiree pays the costs of ownership, the retiree does not get the benefits of ownership. Through the deferred management fee, maintenance costs, exit costs and the impact of inflation the retiree faces a dramatic loss in asset value in what can be a very short period of occupancy.

The retirement village industry advises prospective residents that you are not buying property you are buying a lifestyle. The question has to be put however but at what point is this lifestyle cost fair and reasonable.

The table below shows the various impacts on the value of the capital base of a retiree together with a comparison of simply renting within the general community.



 

For serious retirement village reform in the best interest of retirees legislators should give consideration to the following:-

• The use of the Deferred Management Fee model should be restricted to not-for-profit organisations.


• If there is no discount to the entry cost there is no justification for a Deferred Management Fee.


• Where there is a Deferred Management Fee it should reflect only an applicable discount from a property value available generally commensurate with  the retirement village in-going fee.

NSW Enquiry into Retirement Villages

NSW Government Fair Trading announced:-

NSW Enquiry into Retirement Villages - "As part of its four-point plan to improve retirement village living, the NSW Government has commissioned Kathryn Greiner AO to lead an inquiry into the NSW retirement village sector.

The inquiry will review the protections offered to residents, and ensure that Fair Trading has the necessary powers to make sure retirement village operators are complying with the law.

The investigation will look at concerns raised about the fairness and transparency of business practices of retirement villages in NSW, and includes:

• transparency and honesty of marketing activities


• clarity of fees and contractual rights and obligations for prospective residents and their families


• suitability and fairness of village maintenance and operational practices to maintain resident safety


• availability and cost-effectiveness of dispute resolution mechanisms


• fairness of arrangements to levy maintenance fees to maintain the village and address building defects.

The inquiry will also look at opportunities to improve Fair Trading’s administrative and operational practices that could help address unfair practices in the sector.

The inquiry seeks the views of current and former residents, their families and advisors, on the issues raised in the Terms of Reference (PDF size: 161kb).

Residents and members of the community are invited to attend a consultation forum to discuss their concerns at locations across the State. Forums will be held in Sydney, Hornsby, Ballina, Port Macquarie, Newcastle, Wollongong, and Wagga Wagga during October 2017.

Register for your free seat to a community forum here.

If you are unable to attend a public forum, you can still make a submission by using the online submission form or written submission to the address listed below. "

Abandoned residents spark village warning

Brisbane Times in an artcle by Adele Ferguson reports -

'Steer clear' - abandoned residents spark village warning

" "Stay well clear of retirement villages," say the families of residents and former residents at Berkeley Living, a retirement village that saw state authorities forced to intervene on Friday evening after unpaid staff walked out.

What is equally shocking is that the retirement village has been dogged with issues for years, yet the regulators have been missing in action.

Earlier this month Fairfax Media revealed that Berkeley, run by convicted criminal Stephen Snowden, stands accused of not paying more than 30 families when the units sold. In some cases they were on-sold to new residents, who didn't get paid when the units were re-sold. Snowden denies the allegations and has called the families "scumbags". He denies not paying staff.

A recent media investigation into one of the biggest operators Aveo laid bare concerning business practices including punitive fees, churning of residents, complex contracts, misleading marketing promises and questionable safety and emergency services. In the case of its Aveo Way contract, the exit fees are 35 per cent after three years, and its Freedom Aged Care contracts exit fees are 40 per cent after two years. This means if a resident pays $600,000 for a Freedom unit, then leaves or dies after two years the exit fees are $240,000.

It is why the federal government needs to stop procrastinating and launch an inquiry into the sector or adopt recommendations made back in a 2007 parliamentary inquiry and regulate the sector federally.

If there was any doubt, it should take a look at the Victorian government, which recently held a parliamentary inquiry then outlined a set of industry reforms that are a damp squib.

The Andrews government's idea of what reform looks like prompted various housing residents and advocates to issue the following scathing statement: "The pleas of residents have fallen on deaf ears, with many of the proposed reforms pushed off into the long grass of more reviews."

What was particularly flabbergasting was the decision not to create an ombudsman to help residents resolve disputes, despite the overwhelming evidence. The report said "significant further analysis and evidence are required before a position on this recommendation can be determined". "

Full story available here:-  'Steer clear' - residents spark village warning

Retirement Village Contracts

What’s wrong with retirement village contracts -

Nestegg.com.au reports in an article by Lucy Dean:-

"Retirement village contracts can be so complex that Australians should seek legal advice before signing them, a consumer protection lawyer has urged.

The senior policy officer at the Consumer Action Law Centre, Katherine Temple said it can be “difficult” for retirement village residents and their families to understand their rights as a result of the complexity of the contracts.

Noting that some contracts can be more than 100 pages in length, she said: “I would suggest to residents and their families to get legal advice before moving into a retirement village.”

She highlighted three main “red flag” areas to “really be aware of”:

The deferred management fee

This fee is usually a percentage of the sale price of the unit. “Obviously, you don't know what the sale price of your unit will be so you don't know how much that fee will cost you,” she said.

The lawyer explained that due to the deferred nature of the fees, people often don’t have enough money to move somewhere else once the exit fees are taken out.

Reinstatement and refurbishment costs

“Although in the contract you'll be liable to pay them, you don't know what the amount will be until you go to move out,” she said.

The loan-lease arrangement

Ms Temple said the “other big trap” is understanding that many retirement villages operate under a loan-lease purchasing arrangement. This means that tenants are not actually purchasing property, rather the licence to reside in the village.

“That's not obvious a lot of the time in the sales pitches that people hear that talk about buying into a retirement village. You're not buying a unit, you’re just buying the right to live there and that's very different and so they can impose a lot of restrictions on what you can do while you live in the village.”

Full article here:- what's wrong with retirement village contracts "

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.

Real Retirement Village Reform

Real Retirement Village reform outlined by Paul Latimer - Swinburne University of Technology - Swinburne Law School

It's Time for Federal Regulation of Retirement Villages

"As Australia’s population ages, increasing numbers of seniors move to a growing number of retirement villages. Unlike time shares, which are ‘managed investment schemes’ and therefore regulated as ‘financial products’ under corporate law administered nationally by the Australian Securities and Investments Commission (ASIC), the Commonwealth withdrew from the regulation of retirement villages in the 1980s on the basis that at that time they were local, usually run by religious bodies and charities and were not of national concern. The regulation of retirement villages was taken over by the States and Territories under their non-uniform Retirement Villages Acts and the common law. Until then retirement villages, often indistinguishable from Commonwealth regulated timeshares, were regulated in the original State and Territory Uniform Companies Acts in 1961 as ‘interests’, and then in later Commonwealth legislation as ‘prescribed interests’ by the forebear of ASIC, the then National Companies and Securities Commission (NCSC) with the State and Territory Corporate Affairs Commissions as its ‘delegates’.

Today retirement villages, which are largely owned and managed by the corporate sector, raise many issues of national concern such as accountability, fees and the rights of residents. Some aspects of retirement villages such as directors’ duties, fundraising, prospectuses and unregistered schemes are regulated as corporations by ASIC under the Corporations Act 2001 (Cth), but retirement villages are not regulated as ‘financial products’ under corporate law.

This article challenges the effectiveness of State and Territory regulation of retirement villages and calls for federal regulation of retirement villages by bringing retirement villages into the definition of ‘financial product’ in the Corporations Act 2001 (Cth) and in the Australian Securities and Investments Commission Act 2001 (Cth). As financial products, retirement villages would then be regulated by Commonwealth legislation which deals with financial services and financial markets, as regulated by ASIC. These laws include consumer protection provisions such as the prohibition of misleading or deceptive conduct, unfair contract terms, unconscionable conduct, licensing and high standards for those in the retirement village industry. This would result in a return to Commonwealth leadership of the regulation of retirement villages to harmonise and to consolidate the current mix of State and Territory regulation with federal legislation including an enforceable Retirement Villages Code of Conduct."

Full paper here:   It's Time for Federal Regulation of Retirement Villages