BY NICK GRANGER
Did you know that with the care village model the biggest profit is taken by the developer/financier? This is why many of these large-scale care villages run into financial difficulties at a later date requiring a bailout by the local authority, which means by YOU, the Council Tax payer.
How does this play out?
The developer sets up a shell company, Company 1, into which the financier pays the money just prior to when bills need settling for building out the site. As many units are sold before the building is completed, this lessens the amount being put up by the financier so they try and complete the sales process as quickly as possible. To aid this process it is not unusual to submit a phase 2 of the development for planning permission so that buyers are not put off by any suggestion of overdevelopment. Company 2 is then set up.
The aim of this Company 2 is to wind up the shell Company 1 within two years of most of the apartments being sold. This means that the risk of subsequent claims against the profits, because of structural problems associated with the buildings and site, are avoided.
Company 2 is the “property” company which is carefully constructed so that it has no financial liability for any aspect of the care village. This company is the one that will sell the apartments both initially and then when they come back on the market. It is the role of this company to provide all legal documentation required by the solicitors acting on behalf of either the buyer or seller of the apartments.
It is this company that will often “buy” the remaining apartments in the care village from the developer so that there is no delay in winding up Company 1. Such purchases are often bought at full market price, thus allowing the maximum profit to be removed with the winding up of Company 1. Company 2 can offset any losses on these properties against tax. It is often Company 2 that owns the freehold thus deriving an income from the residents. This has often caused problems as the cost of the ground rent is frequently subject to 5-yearly increases at a sharp rate.
Yet another operation, Company 3, is set up as the operating company of the care village. Their income comes purely from the management charges each resident is required to pay. In many cases when residents have queried items of expenditure it is pointed out that the management company has the sole right to judge how the budget should be spent. The management charge is usually hiked up each year.
Many residents believe that, at the time of moving into a care village, they have sufficient capital and income to meet all the costs. However, and too frequently, after 10 to 15 years (and in some cases even less) of moving in, their savings are spent and their income becomes insufficient to meet the ground rent costs and service charges. As proven by the “Elderly Accommodation Counsel” with around half of new build retirement homes falling in value; nearly half by more than 50%, raising money against your asset to meet care needs may not even be a viable option. The Local Council are then called upon to help and they are rarely able to move the resident to more affordable accommodation due to local housing shortages. Thus the Council Tax payer has to pick up the charges – plus the Council start losing any income from Council Tax.
Often the fantastic services and facilities promised by the developer and those selling the apartments in the glossy brochure fail to appear in the sales contract or it is so worded that the management company (Company 3) have the right to make any decision to cancel or curtail any of the services. This has manifested itself in the recent past in the UK with key features such as a mini bus service being cancelled or charged additionally on a trip-by-trip basis, residents being charged for wheelchair movement around the site, and the use of a swimming pool never materialising – or only being provided for a short period of time before being turned into something different, supposedly due to lack of use.
The lack of car parking space on the grounds that older people will want to give up their cars is most often an absolute myth put out by the developer to get away with providing fewer parking spaces than is necessary. They want to avoid paying for major road alterations, or risking refusal of the Planning Application on the basis that the road system cannot deal with the amount of increased traffic. There is historic evidence that 75% of potential residents do not intend to give up their cars, and the developers tend to gloss over the number of further traffic movements from staff cars and delivery vehicles.
So if you are a potential resident looking at the glossy brochure, or a Councillor or Planning Officer deciding an application replete with a whole slew of apparent benefits, BEWARE! Everything that glistens is not gold, and may cost you way more than you think.