Vi Residents Sue Over CCRC Entrance Fees

A class action lawsuit filed recently in California is raising questions about the way continuing care retirement communities handle entrance fees in cases where residents or their estates are eventually repaid a portion of the upfront fee.

Residents of Vi at Palo Alto allege in a complaint that Vi (formerly Classic Residences by Hyatt) transferred $190 million of entrance fees to corporate parent CC-Development Group Inc., leaving those residents with no assurance they’ll get their money back. The California community is now running a $300 million deficit as a result, says the lawsuit, led by current resident Dr. Burton Richter, a 1976 Nobel Laureate in Physics.

While in recent years some CCRCs have encountered difficulty meeting current refund obligations, the Palo Alto plaintiffs are preemptively suing over fears Vi won’t be able to meet future obligations, even though the community has to date repaid all its obligations to residents, according to one of the company’s lawyers. 


“Everyone who has made a claim for a refund [at Vi at Palo Alto] has been paid in a timely manner,” says Paul Gordon, partner at HansonBridgett and part of Vi’s counsel. “The reserve requirements under the law have been met or exceeded. The implication of failure to fund [entrance fee] reserves are wrong.”

Vi’s policy is to repay entrance fee obligations upon reselling a unit to a new resident. In other words, departing residents aren’t given a portion of the same entrance fee they originally paid; rather, they are repaid through funds Vi receives in the form of an incoming resident’s entrance fee—a standard practice throughout the CCRC industry, Gordon notes. 

The CCRC, which has 388 apartment units along with a 106-unit healthcare center, is fully occupied with a waiting list, he says.
“[The plaintiffs] are acting as if the money they paid as an entrance fee still belongs to them and is supposed to be held in trust for their benefit,” says Gordon. “In fact, in the contract that they read and signed, it says that fees are not held in trust for their benefit.”
Once entrance fees are paid, they belong to Vi and can be distributed to investors, as is the case at the Palo Alto community, he continues, an action the plaintiffs are protesting.
“Dr. Richter was never informed that CC-Palo Alto intended to transfer his entrance fees upstream to (CC-Development Group),” says the complaint. “Nor was he informed that CC-Palo Alto did not intend to maintain cash reserves to cover its entrance fee obligations. Dr. Richter expected CC-Palo Alto would maintain sufficient reserves.”
Despite the transfer of those entrance fees, Vi does not anticipate issues in meeting contractual obligations, the company says.
“Vi at Palo Alto is economically successful and has no bank debt,” Sam Singer, a Vi spokesman, told Mercury News. “Since inception of the Palo Alto community we have repaid $121 million in entrance fee repayments.”
CCRCs in California are regulated by the Department of Social Services, which reviews each community’s annual audited financial statements to ensure compliance with statutory requirements. The CDSS worked with Vi to develop a refund reserve for the possibility of a unit not reselling within 10 years, part of Vi’s “back-up guarantee” for repaying entrance fee obligations once contracts are terminated. 
For new contracts signed in the second half of 2012, Vi at Palo Alto must have a refund reserve of about 15% per contract, but according to Gordon, considering the community’s high occupancy and historical performance, there’s only a small chance the reserve will be necessary.
“The contract is approved by the state of California, and entrance fees are not to be held in reserve for the purpose of repayment,” Gordon says. “I believe this community has done everything they can, and they’re in the right in terms of their contractual obligations.”
The class action lawsuit also alleges that Vi at Palo Alto is inflating monthly service fees by charging residents for items not contractually specified.

However, the contract all residents sign says that all costs of operating the community will be paid by monthly fees, rather than entrance fees, including property taxes and marketing expenses, according to Gordon. Still, he says Vi has made some temporary concessions pending a property tax appeal in an effort to satisfy residents. 


“Vi is able to meet its obligations, and those obligations for entrance fee repayments are conditioned on a third party re-occupying the unit,” Gordon says. “Vi has proven itself ready, willing, and able to make that happen, and it does make that happen, as it has since the day it opened. There’s no reason to believe it isn’t going to do that going forward.” 

Vi has not returned a request for comment as of press time. 

Written by Alyssa Gerace 

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