It would be interesting to know just how many retirees know, when they finally alight upon a leafy retirement village to while away their twilight years, that they are using their nest eggs to make a large, unsecured, interest-free loan to a property developer.

It is certainly not obvious from the marketing materials.

If you thumb through the balance sheets of three of Australia’s top retirement village operators – Lendlease, Stockland and Aveo – you will find quite a warchest: a $10 billion warchest in fact, a pool of money which is rising rapidly along with the demographics of this country’s ageing baby boomers.

Although terms like “sale” and “purchase”, “freehold” and “leasehold” are regularly bandied about in the retirement living sales banter, the actual accounting treatment is a liability on the balance sheet.

Lendlease boasts “resident liabilities” of $4.6 billion, Stockland $2.5 billion in “retirement village resident obligations” and Aveo $2.9 billion in “resident loans”.

No doubt the wording differs from contract to contract, depending on the operator, but the reality is there is no sale, only a loan and some sort of a right or licence.

It seems counter-intuitive doesn’t it, that Australia’s elderly have become an army of grey financiers. That this $10 billion warchest is consolidated in the financial statements of the three companies in this investigation suggests the money can be used in any way the companies see fit.

Can it be used to finance property developments? It would appear so. Can it be lent onwards to associates of the operator, or a tax haven entity in the Caribbean? Presumably.

Could it be taken down to the track and plonked on the fifth at Doomben? Highly unlikely but the point is there appear to be no constraints.

There is no suggestion here that there is anything commercially awry, only a smashing commercial advantage in a market where the buyers may not have the capacity to understand the complexity of a transaction, and the reality of  their zero interest unsecured lending to property companies. When the loan has to be repaid by the developer as the resident departs – after a handsome chunk of it is subtracted in deferred management fees – the new, incoming resident replaces the old resident’s loan.

The disaster scenario is that the operator goes belly up and, as is inevitably the case in insolvencies, the unsecured creditors – in this case elderly residents – stand behind a lot of other creditors in the wash-up. Staff get paid first, then naturally the liquidators feast on their pound of flesh, followed by secured creditors such as the banks. Bringing up the rear, with little spectre of any return in a liquidation, are grandma, grandpa and the Australian Taxation Office.

We are not suggesting there is undue risk here for residents of Australia’s retirement villages, or clients of Aveo, Stockland or Lendlease for that matter. In the event of a calamity, government would no doubt step in and put taxpayers up to foot the bill.

Nonetheless, as the Senate Inquiry into Financial and Tax Practices of For-Profit Aged Care Providers kicks off next month, it is timely to evaluate both industry risk and the true legal and financial status of the nation’s elderly.

Do retirees know, are they told, they are not really buying an asset but actually financing a property developer? What do they get for their $500,000? Is it a “right”, is it a licence? Can they be turfed out and their loans put back to them?

The lines often blur in this sector, even in the distinction between aged care (which typically uses another debt instrument, bonds) and retirement living. Retirement villages often have aged care attached. If they don’t, there are medical facilities often available at call.

Lend Lease: double dipping and Dutch tripping

Aveo and Lendlease declined to respond to questions for this story. Stockland was upfront, confirming the retiree loans were in fact loans and could be deployed for any purpose.

“There are provisions set out in some states’ Retirement Villages Acts which provide some protection for retirement village residents in relation to the repayment of their funds. For example, in some states a statutory charge applies, or is registered over, the retirement village land to secure the repayment of the monies. This applies regardless of whether the amount is paid by the resident by way of loan or otherwise (e.g. lease premium).

“There are no restrictions as to how we use funds received from incoming residents, however we must repay residents (or their nominated recipient) according to their contract when they depart the village, and the leasehold interest is either bought back, or on-sold to a new incoming resident.”

While it is true that, in the case of retirement villages, the operator is the one taking the loan, not making the loan, this concept of elderly, interest-free financiers is not widely known. And unlike the banks, who are bound by a broad raft of consumer finance legislation and attendant duties of disclosure, the retirement village operators wear no such burden.

Defending the banks is not a popular activity these days but they do pay for their money – usually via interest rates on deposits and bonds.

The retirement village operators borrow from the banks too, yet even in their public materials you have to fossick hard to find a mention about who the owner of the retirement asset is.

The ABC’s Four Corners exposee on Aveo, Bleed Them Dry Until They Die, went to air last June just before financial-year end.

In its annual report to shareholders which was filed with the ASX in late September, Aveo made this disclosure in the notes to its accounts:

“A critical accounting judgement affecting resident loans is whether the significant risks and rewards of ownership of the underlying retirement unit have been transferred to the occupier. If so, then a sale is recognised on the occupation of a retirement unit and a resident loan is not recognised. The Group believes that those risks and rewards have not been transferred in respect of any of its retirement units, regardless of the legal form of title granted to the resident, which may be freehold or leasehold. Consequently, the Group recognises resident loans in respect of those of its retirement units that are occupied by residents.”

This disclosure is not apparent in earlier Aveo accounts. Why would Aveo have to ponder whether the “risks and rewards of ownership of the underlying retirement unit” had been transferred to its residents, “regardless of the legal form of title granted to the resident, which may be freehold or leasehold” if there were any doubt over who owned the unit?

Aveo’s billions: behind the impenetrable aged-care empire

It does seem perverse that the resident is not the owner/occupier but the lender/occupier – and the operator is not the vendor but rather the borrower/owner – but that’s the way it is.

There is nothing awry in the tremendous commercial advantage to be had as a retirement village operator. Disclosure and regulatory stewardship of the sector however must surely be in consideration for the looming Senate inquiry.

Another indication of the grey area in ownership can be seen in a “Retirement Living Accounting Workshop” presentation by Stockland which refers to the “sale”, in inverted commas, of a typical retirement property.

A typical “sale” is made to the resident for $350,000. The resident gets $365,000 back after 12 years and the incoming resident moves in for a price of $541,000.

The original resident is “entitled to original loan plus capital gain, being $541,000 ($350,000 @ 3.7 per cent pa over 12 years.

“Stockland collects DMF (deferred management fees) at 32.5 per cent of exit value, being $176,000 (10 years @ 3 per cent pa DMF + 2.5 per cent administration fee).

As Stockland is also the developer it makes, under this example, another 18.6 per cent upfront as the “cost of sale” was $285,000.

There is a market here, plenty of rival operators, so the prices, while tilted heavily in favour of the operators are at commercial rates. The issue for public interest is with disclosure and when undue advantage is taken of the commercial opportunity.

The Fairfax/Four Corners investigation of Aveo found “dense” contracts, hard to understand, over 120 pages in length and legalistic, sometimes leaving residents to fork out more than $100,000.

Subsequently, two class action lawsuits were announced into gouging of elderly residents. Aveo rejects the allegations and is defending the actions.

Aveo is by no means alone in being subject to allegations of gouging. The Senate Inquiry will hear from a number of industry players as it canvasses options to better protect the elderly. Another other conundrum is delivering an eldercare set-up which will withstand the explosion in numbers under care in coming years – and getting the balance right between private profits and public funding.

The three players mentioned in this story are large but a fraction of the total picture. None of them pay much in the way of tax. Stockland is only in retirement villages and, although these are feeder systems for aged care, has no formal age care facilities of its own.

Lendlease is in a similar position, having sold out of aged care in 2013, but – as laid down in the investigation linked earlier in this story – has adopted aggressive tax positions in its eldercare operations, having shifted away from leases to loans.

Aveo is expanding further in aged care and is therefore likely to continue to attract government subsidies (which have been running at $9 million a year) for the aged care places it provides).

Neither of the three pay much in the way of tax and all deploy trust structures so it is incumbent on the trust members to pay the tax at their marginal rates.

The Senate Inquiry will consider the tax position of aged care providers and their financial structures. It will also consider how to best protect the elderly and, to this point, it is essential that the financial transactions explained in this story are adequately explained and disclosed when retiring Australians – and Australians in need of care – are making the final significant financial transactions of their lives.

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