Victorian Statutory Revaluation
Valuer-General Victoria and Municipal Group of Valuers
Guidelines on Valuation Methodology for
Aged Care and Private Health Care
Introduction
These guidelines are to be used when valuing Aged Care and Private Health Care Facilities
for rating and taxation purposes.
Aged Care encompasses Residential Care Facilities, Retirement Villages and Supported
Residential Services; Private Health Care refers to Private Hospitals.
The guidelines need to be used in conjunction with the General Provisions for Specialist
Guidelines, which refer to general requirements, legislation and procedures relating to all
statutory valuations.
Definition
Classification for Aged Care and Private Health Care has been summarised as containing the
following:

Residential Care Facilities (RCF)
Residential care facilities provide accommodation and care services to people
particularly the elderly who can no longer live independently. The industry is governed
by the Commonwealth Aged Care Act 1997 and is subsidised by the government.
The following definition of a residential care is contained in Section 41-3 of the Aged
Care Act 1997:
Meaning of residential care
(1) Residential care is personal care or nursing care, or both personal care and nursing
care, that:
(a) is provided to a person in a residential facility in which the person is also
provided with accommodation that includes:
(i)
appropriate staffing to meet the nursing and personal care needs of the
person; and
(ii) meals and cleaning services; and
(iii) furnishings, furniture and equipment for the provision of that care and
accommodation; and
(b) meets any other requirements specified in the Residential Care Subsidy
Principles.
(2) However, residential care does not include any of the following:




care provided to a person in the person’s private home;
care provided in a hospital or in a psychiatric facility;
care provided in a facility that primarily provides care to people who are not frail
and aged;
care that is specified in the Residential Care Subsidy Principles not to be
residential care.
Guidelines on Valuation Methodology for Aged Care and Private Health Care – August 2011
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Victorian Statutory Revaluation
The Aged Care Act 1997 provisions include:
 a provider of residential aged care facilities must be an approved provider
under s 8 in order to receive government funding.
 government funding is only given to allocated places and approval of the care
recipient.
 the aged care service must be accredited to receive funding through residential
care subsidies.
 certification of aged care services, only a certified service can charge
accommodation bonds or charges or receive accommodation supplements or
concessional resident supplements.
The Aged Care Funding Instrument (ACFI) was implemented on 20 March 2008, and
replaced the Resident Classification Scale (RCS) system.
ACFI assesses residents into three funded levels low, medium or high in the categories of
Activities of Daily Living (ADL), Behaviour Supplement and Complex Health Care.
There are




three types of payment that can be charged by the aged care provider;
accommodation bond
accommodation charge
basic daily fees
Retirement villages
The industry is governed by the state Retirement Villages Act 1986. The following
definition of a retirement village is contained in Section 3 of the Retirement Villages Act
1986:
Retirement village means a community:
(a) the majority of which is retired persons who are provided with accommodation
and services other than services that are provided in a residential care facility;
and
(b) at least one of whom, before or upon becoming a member of the community,
pays or is required to pay an in-going contribution;
A retirement village is a housing development designed specifically to cater to the needs
and lifestyle of the over 55s who are retired from full-time employment. Retirement
villages can be classified into two different categories, resident funded and donor funded
villages (not for profit). Accommodation is in the form of Independent Living Units (ILUs)
for residents who can look after themselves and Serviced Apartments (SAs) designed for
residents whose needs fall between independent self care and some nursing care.
There are several types of contracts with varying forms of tenure and ownership rights
within retirement villages,. These are:
Strata Title – The purchaser becomes the registered proprietor and member of the
owners corporation. The contract may include payment provisions for a Deferred
Management Fee (DMF) capital gains contributions and recurrent charges.
Loan/Lease or Loan/Licence – A resident pays an in-going contribution to the owner of a
sum (lease premium or interest-free loan) equal to the market value of the unit.
Residents are granted a long-term lease or licence of a unit (generally for a period of 99
years). Upon termination or surrender of the lease or licence, the owner is obliged to
make a payment to the resident (or representative) equivalent to the original ingoing
contribution less any DMF and refurbishment obligations set out in the original licence
or lease agreement.
If a refundable in-going contribution has been paid by a resident a charge protecting the
residents interest on the land is created under the Transfer of Land Act 1958.
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Victorian Statutory Revaluation
Periodic tenancy – often utilised within not-for-profit villages, the resident is granted a
lease with no fixed termination date and pays a periodic rental. The resident may be
required to pay some form of ingoing contribution, which may be refundable at the end
of the tenancy in full or in part.
Company title/Unit trust – residents buy shares in the company or units in a trust that
owns the village, which gives rise of a right to occupy a particular unit within the village.
Upon exiting the village, the resident will be entitled to the current market value of the
shares/units less any deductions DMF, share of capital gain etc. This type of contract is
less common in the current market.

Supported Residential Services (SRS)
The following definition of a supported residential service is contained in section 3 of
the Health Services Act 1988:
Supported residential service means premises where:
(a) accommodation; and
(b) special or personal care are provided or offered for persons (other than members
of the family of the proprietor of the premises) for fee or reward, whether or not
the premises are registered as a health service establishment under this Act, but
does not include a residential care service or a state-funded residential care
service;
Supported Residential Services provide accommodation and personal care services to
people who can not live independently. The SRS is usually privately owned and operated.
The industry is governed by the state Health Services Act 1988 and is not funded by the
government; however residents can apply for assistances from various government and
community health services.
Under the provisions of the Health Services Act 1988 with the Department of Health.
a certificate of registration is issued permitting the proprietor of an SRS to operate from
the said premises. The state government monitors premises to ensure compliance with
certain standards of care and accommodation.
Supported residential services are able to charge residents a fee usually on a per week
under a residential and services agreement. Generally three meals a day are provided
plus domestic and personal services. Accommodation is typically one-bedroom
units/apartments or bedsits.

Private hospitals
The industry is governed by the state Health Services Act 1988. The following definition
of a private hospital is contained in Section 3 of the Health Services Act 1988.
Private hospital means premises where persons are provided with health services of a
prescribed kind or kinds and for which a charge is made and includes a privatelyoperated hospital but does not include –
(a) a public hospital or denominational hospital; or
(b) a day procedure centre; or
(c) residential care service.
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Victorian Statutory Revaluation
All private hospitals must be registered with the Department of Health under the
provisions of the Health Services Act 1988. The registration includes details on bed
numbers and prescribed services. A development of a new private hospital or the
refurbishment and/or extension of an existing one requires a Certificate of Approval in
Principal (AIP) from the Department of Health. The proposal must meet the standard set
out in Design Guidelines for Hospitals and Day Procedure Centres 2005 (Design
Guidelines). The AIP includes a site plan, design and development drawings and schedule
of accommodation.
Private hospitals derive income for the provision of operating theatres
bed facilities, and a range of diagnostics services to patients Private hospitals recoup the
cost from the patients and health insurance funds.
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Victorian Statutory Revaluation
Other definitions and industry terms

Accreditation
Aged Care homes must be accredited under the Aged Care Accreditation Standards
contained in the Quality of Care Principles 1997 in order to receive government
subsidies. The four accreditation standards1 are:




Management systems, staffing and organisational development
Health and personal care
Resident lifestyle
Physical environment and safe systems
There are 44 expected outcomes under these standards.

Affordable retirement
There are two categories of affordable retirement:
 Low cost housing established under the retirement village planning provisions
and legislation. The methodology for valuing this type of property is as set out
in this guideline.
 Residential villages often occupied by retirees established under the planning
provisions and legislation for caravan parks. The methodology for valuing this
type of property is set out in Guidelines on Valuation Methodology for Caravan
Parks.

Bonds
An accommodation bond is an amount a resident may be asked to pay when they require
low care or enter an extra service place. It is like an interest-free loan to the aged care
home and by law it must be used by the home to improve building standards, and the
quality and range of aged care services provided. A bond can only be charged by an aged
care home that is certified as meeting minimum building and care standards. 2
The following definition of accommodation bond is contained in Schedule 1 of the Aged
Care Act 1997:
accommodation bond, in relation to a person, means an amount of money that does not
accrue daily and is paid or payable to an approved provider by the person for the
person’s *entry to a residential care service or flexible care service through which care is,
or is to be, provided by the approved provider, and in respect of which the approved
provider holds an allocation of *places.
Bonds can be used by residential care facility providers for purposes relating to the
provision of aged care facilities and services, provided it is in accordance with the Aged
Care Act 1997 and associated legislation and that the funds are applied in accordance
with the prudential standards stipulated in the User Rights Principles 1997. The purpose
of these provisions is to safe guard the bonds (less any retentions and/or deductions) so
that the resident and/or their representative receive the refund upon departure.
1
Schedule 1 Quality of Care Principles 1997
Australian Government, Department of Health and Aging, Information Sheet 16 – Accommodation Bonds for
Residential Aged Care, viewed August 2011
2
http://www.health.gov.au/internet/main/publishing.nsf/Content/ageing-publicat-qcoa-16info.htm
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Victorian Statutory Revaluation
An approved provider is required to comply with three prudential standards which are
set out in the User Rights Principles 1997. Those standards are as follows:
1. The liquidity standard
Requires the providers to maintain a sufficient level of liquidity to ensure that they
can refund the bond
2. The record standard
Requires the provider to keep a register of all bond holdings.
3. The disclosure standard
Requires the provider to provide a written statement on an annual basis to the
Department of Health and Aging annually disclosing compliance with the prudential
standards .

Certification
Certification, part of the Australian Government’s 1997 structural reforms to residential
aged care, is aimed at improving the physical quality of Australian government-funded
residential aged care buildings, including fire safety and privacy and space
requirements.3

Common facilities
Facilities that are part of the property and are not exclusively occupied by any one
person or party but available to all residents as part of the service agreement. Examples
are dining facilities, activity rooms, swimming pools, bowling greens, gardens etc..

Deferred Management Fees (DFM)
The operator’s financial entitlement, upon a resident’s departure, for providing facilities
and services to the resident, e.g. common room, arts and crafts room, swimming pool,
bowling green, landscaped gardens etc..
The DMF is based on a contractual agreement between the resident and the village
operator. They are usually a percentage of purchase price or resale price calculated on
the resident’s length of occupation. There may be a share in capital gains and
contributions are made to a village sinking fund.
Residents are generally responsible for refurbishment upon resale for strata units and
the manager is responsible for the refurbishment of units for loan licenses. The resident
agreement will detail the obligations of the resident.

EBITDA – Earnings before Interest Tax Depreciation Amortisation
EBITDA is generally used in assessing the value of the going concern and is used as a
guideline in assessing and establishing the market rent.

Stay at Home Programs –
Reference to other government services that encourage residents to remain in their
home.
CACP – Community Aged Care Packages
HACC – Home and Community Care Packages
EACH – Extended Aged Care Packages
Australian Government, Department of Health and Aging, Certification, viewed August 2011
http://www.health.gov.au/internet/main/publishing.nsf/Content/ageing-certification.htm
3
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Victorian Statutory Revaluation

Personal services
Services offered on a user-pays basis such as hairdressing, personal health care, in-house
assistance.

Service agreement
An agreement for services provided, that is entered into at the commencement of the
lease/loan/license or on purchase of the unit. A fee for defined services is paid on a
periodic basis, usually weekly and may vary from village to village. Additional personal
services are usually offered for additional fees, the type of personal services available
may vary between villages. The intention is for the fees attributed to the service
agreement to be cost neutral, that is the costs incurred in providing the services equate
to the fees charged.
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Victorian Statutory Revaluation
Additional Victorian legislation and cases applicable to aged care
Victorian legislation:
The following Acts are relevant to the Aged and Private Health Care Industry in Victoria:








Aged Care Act 1997 (Commonwealth)
Aged Care (Bond Security Act) 2006
Aged Care (Bond Security Act) Levy Act 2006
Aged Care Act 1997 (Commonwealth) – Principles made under
subsection 96-1 (1) of the Act
Retirement Villages Act 1986
Health Services Act 1988
Health Services (Supported Residential Services) Regulations 2001
A new Act to regulate SRS, the Supported Residential Services (Private
Proprietors) Act 2010 was passed by Parliament in August 2010. The new act
also makes consequential changes to the Health Services Act 1988. It is
expected the new Act and regulations will come into effect 1 July 2012 if not
proclaimed earlier.
Court cases:

Elletson v Buloke SC (1996/43917) Vic
The Grounds for the appeal were that the interests held by various persons have not
been correctly apportioned and that the lands which should be included in one valuation
have been valued separately. There were ultimately six grounds of objection in this
appeal. The issues that arose on the hearing, however appeared to only relate to two of
them, namely that the valuation assigned was too high and that the persons named in
the assessment notice are not liable to be named. The Tribunal reduced the site value,
but confirmed the CIV and NAV and disallowed the appeal relating to incorrect
apportionment.
Other relevant material:
The following sites may provide useful information:
 Australian government Department of Health and Ageing. The Residential Care
Manual.
http://www.health.gov.au/internet/main/publishing.nsf/content/1CC3ACD21
3466762CA256F19000FC9A5/$File/RCMUpdates.pdf
 Retirement Village Association http://www.rva.com.au/
 www.agedcareguide.com.au – select the Residential Aged Care tab to search by
suburb or municipality to see the number of beds and type of care (low, high)
provided
 the June 2011 Productivity Commission inquiry into caring for older
Australians –http://www.pc.gov.au/projects/inquiry/aged-care
 Aged Care Certification Assessment Instrument – http://www.health.gov.au/
Home>For Consumers>Ageing>Residential Care>Quality of Care>Certification
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Victorian Statutory Revaluation
Identification of properties
Australian Valuation Property Classification Codes (AVPCC)
To appropriately categorise aged care and private health care facilities in a municipality,
refer to the Australian Valuation Property Classification Codes (AVPCC) available at
http://www.dse.vic.gov.au/valuation.
The following codes apply to aged care and private health care:
Retirement/Aged Care Accommodation/Special Accommodation

Retirement Village Unit – 140

Retirement Village Complex – 141

Aged Care Complex/Special Accommodation/Nursing Home – 142
 Unspecified – 141.1
 Aged Care Complex – 142.2
 Nursing Home – 142.3
 Special Accommodation Residence – 142.4
Private Hospital

Private Hospital – 711
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Victorian Statutory Revaluation
Rental questionnaire – specific requirements applicable to aged and private
health care
In addition to the general requirements for rental information, the following is a guide to the
specific information required for aged care.
Residential care facilities
Number of beds
_____ Low care places
_____ High care places
_____ High care extra service places
_____ Total number of beds
Bonds
Accreditation
Certification
Future development
Liability for works and orders
_______ Bond number
$_______Average bond value
_____ Number of beds currently certified
______Number of beds
________________________________________________
________________________________________________
(Please detail any orders issued from any
government body requiring works to be carried
out).
Retirement villages
Number of units
Age of units
Year last refurbished
Type of unit
_____ Independent living
_____ Serviced apartments
_____ 1 Bedroom
_____ 2 Bedroom
_____ Other
Type of sale
 Strata
 Loan Licence
Typical DMF
_____ % for _____ years
Future development
_____ Number of units
Responsibility for capital
refurbishment
 Tenant
 Landlord
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Victorian Statutory Revaluation
Private hospitals
Type of hospital
 Surgical
 Psychiatric
 Rehabilitation
No of registered beds
_____ Single rooms
_____ Double rooms
_____ Triple rooms
_____ Other rooms
Occupancy
_______ %
Surgical mix
_____ % Medical patients
_____ % Surgical patients
_____ % Other patients
Is the building leased or
owner occupied:
 Leased
Additional services
Are additional services provided, such as
consulting rooms:
 Yes
 No
 Owner occupied
If Yes:
Type ____________ approx bld area_______m2
Type ____________ approx bld area_______m2
Type ____________ approx bld area_______m2
Is there a separate tenancy agreement in place:
 Yes
 No
If Yes please provide rental details.
Development potential
Is there development potential for the site:
 Yes
 No
If Yes please provide details.
Emergency department
 Yes
 No
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Victorian Statutory Revaluation
Property inspection – specific requirements applicable to Aged and Private
Health Care
1. Inspection of premises.
(a) Hospitals
Establish type of hospital
 Surgical
 Psychiatric
 Rehabilitation
Number of beds
Number of rooms
 xx single rooms
 xx double rooms
 xx triple rooms
 xx other rooms
Occupancy
Surgical mix, i.e.:
 Medical x% patients
 Surgical x% patients
 Other x% patients
Development potential
2. Retirement village
No. of units:
Future development:
Type of sale:
Typical DMF:
Age of units:
Type of units:
x Independent living
x Serviced apartments
x units
Strata or loan license
% p.a. for xx years
x one bedroom
x two bedroom
x other
3. RCF
Total number of beds:
Number of low care places:
Number of high care places:
Number of high care extra service places:
Bond number and average bond value: Number
Price
Future development:
Accreditation:
Certification:
Future development:
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Victorian Statutory Revaluation
Methodology

Capital improved value (CIV)
Residential Care Facility (RCFs)
Value of approved places
The main asset of a residential care facility is the approval of the number of places.
Applicants are notified by the Secretary of the Department of Health and Ageing of the
number of places that have been allocated; and the types of subsidy that applies. Given
the limited number of approved places available and the funding attached to them, these
have a significant impact on value.
Accommodation Bonds
 Where accommodation bonds are received from residents a service provider is
required to maintain sufficient liquidity so that the bonds can be paid upon a
residents departure.

The liability to the service provider relates to the balance of the accommodation
bonds (less the retention amount) that must be refunded to residents or their
estate on departure. If the facility sells, then the bonds also transfer with the
resident.

A key issue in undertaking a sales analysis is to determine if the sale price
includes or excludes the bonds and analyse the value of the various components.
 For example, if the business is valued at $1,750,000 (i.e. 50 beds x $35,000 per
approval) and there are 40 residents paying an average accommodation bond
of $100,000 (i.e. total bond liability $4,000,000), then the vendor is required to
transfer the bond entitlement over to a purchaser. Therefore the net outlay
required by the vendor is $2,250,000.
 If the value as a going concern is $5,000,000 (i.e. 50 x $100,000 per approval)
and there are 40 residents who have paid an average accommodation bond of
$150,000 (i.e. total bond liability $6,000,000), then the vendor is required to
transfer the bond entitlements over to the purchaser. Therefore the net outlay
required by the vendor is $1,000,000.
Value of freehold land/buildings
Residential care facilities on a going concern basis would be made up of the following
components:
1. the value of the operations (business),
2. the value of the freehold (land and buildings)
For rating and taxation valuations, only the freehold land and buildings is valued.
A valuation should consider whether the buildings are conducive to efficiency in both
construction and operating costs. Some of the design features of the buildings to be
considered include:
 Accommodation size and style – older style ward accommodation for 4–6 beds
as opposed to modern single rooms with ensuite.
 Location and proximity to services, such as hospitals and medical centres.
 Site design and topography – a functional layout which addresses issues such
as surface levels and finishings, access to higher levels and wheelchair
provisions will make it easier for residents to navigate the facility.
 Positioning of nurses stations and emergency call buttons.
Residential care facilities within a municipality can be categorised based on the four
factors outlined above.
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Victorian Statutory Revaluation
CIV methodology –
The value of the freehold interest is generally derived by capitalising the current market
rental based on market evidence. The market rental is normally a percentage of the
EBITDA. The provider is entitled to receive interest earnt from accommodation bonds and
this component can be included as earnings. The market rent is described on a rent per
bed basis.
The following information is a working example only:
Benchmark
EBITDA per bed p.a.
Bonds. 50 @ $100,000
Interest ($5,000,000 @ 5% p.a.)
$10,000
$ 5,000
Total Earnings
Rental %
Rental per bed p.a.
Multiply bed numbers
Capitalise
$15,000
40%
$6,000
X
%
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Victorian Statutory Revaluation
Retirement villages
The financial operations of a retirement village can be broken into three distinct
business units:
 Freehold interest
 Going concern/business (refer industry information)
 Management (refer industry information)
For rating and taxation valuations, only the freehold land and buildings is valued.
Value of freehold land/buildings
There are various categories of occupancy within a retirement village. They are
separately occupied units, partly developed land (incomplete units).and surplus land.
The value of common property is inherently taken into consideration in the unit’s value
and not separately assessed.
The following are general considerations in determining the market value of retirement
village units:
 A review of any competitors in the local area to ascertain whether the units are
priced at a comparable market value and terms commensurate with the level
and quality of facilities and services provided.
 Unencumbered freehold sales (sales outside of the village).
 Sales with terms in line with industry standard.
 The ingoing sale price reflects the DMF Structure. In the analysis of sales the
DMF structure/terms should be considered, if the terms associated with the
transaction(s) are outside industry standards this may result in an ingoing that
is not in line with market.. An adjustment needs to be made if the DMF
structure is one which reduces or increases the ingoing price compared to
industry standards.
 There is an additional contract arrangement with regard to the provision of
services and retirement village facilities. This is not to be included in the
freehold as it is a business component.
 Sales of retirement village units are frequently refurbished prior to sale so a
refurbishment adjustment needs to be incorporated in look up tables. If a
refurbishment is included in the revaluation, the change in value will reflect
two components, the additional value attributed to the
refurbishment/renovation and the change in market value.
 Comparable sales of Loan/Lease, Loan/Licence or strata units may be used by
the valuer as an indication of the value.
 Sales for new strata units are subject to GST. Sales need to be checked to see if
GST is excluded or included in sale price.
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Victorian Statutory Revaluation
CIV methodology
The retirement village should be categorised within a municipality based on the following
considerations:
 Accommodation age, size and style
 Facilities provided and available within the retirement village complex e.g.
community facilities, activities, personal services, medical facilities etc.
 Location and proximity to services, such as transport and shopping facilities and
amenities
 Site design and topography.
Direct comparison is the primary method of valuation for all unit/contract types. The
valuation is assessed on the basis of occupancy assuming a separate rateable property
held for an estate in fee simple. Refer to definition of occupancy in General provisions.
The CIV assessment should have regard to size, number of rooms and bedrooms, age,
condition and refurbishment status.
When valuing each unit, be mindful that most sales will reflect a sale of a refurbished unit.
The valuer must determine any adjustments that are to be applied and these adjustments
should be benchmarked against the sales evidence.
The capitalisation method can be used as a check by assessing the market rent of each
unit. However it is acknowledged that market rental and capitalisation rates evidence can
be scarce.
When using the capitalisation method, capitalise the sum of the assessed market rental for
each unit at the relevant date. The capitalisation rate should have regard to the strength
of the retirement village, the number of units within the development, if the units are
capable of separate occupancy, age, function and location attributes.
Net Annual Value
Retirement villages in accordance with the definition of Net Annual Value b) iv) of the
Valuation of Land Act 1960, the NAV is 5 per cent of the CIV.
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Victorian Statutory Revaluation
Supported Residential Services (SRSs)
CIV methodology
If the supported residential service is assessed on the basis of occupancy assuming a
separate rateable property, refer to the direct comparison approach methodology for
retirement villages. Refer to definition of occupancy in General Provisions for Specialist
Guidelines.
If the supported residential service is not assessed on the basis of occupancy assuming a
separate rateable property a capitalisation method is adopted. Refer to definition of
occupancy in General provisions When using the capitalisation method, capitalise the sum
of the assessed market rental for each room at the relevant date. The capitalisation rate
should have regard to the strength of the SRS, the number of units within the
development, age, function and location attributes.
The following example is for a 20 room SRS. The information is a working example
only:
Rent Per room
No of rooms
Rent per annum
Capitalise
CIV
$150
20
$156,000
%
$-------------
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Victorian Statutory Revaluation
Private hospitals
The following are general considerations in determining the market value of private
hospitals.
 The valuation of hospital facilities requires an understanding of not only the
physical assets but also the workings of the business component
 Hospital facility businesses may own the freehold land and building. Land and
buildings, which provide the physical structure for the business, are of critical
importance in the overall value of a hospital. The type, nature and design of
the improvements have a bearing on both management and revenue, in as
much as a poorly designed facility will be more difficult to manage on a dayto-day basis. Buildings that offer sub-standard accommodation, even though
they may comply with requirements, will do little to maintain or increase
occupancy rates. A valuation should consider whether the buildings are
conducive to efficiency in both construction and operating costs.
 The majority of private hospitals are owner occupied thus ascertaining market
evidence can be difficult.
CIV methodology
The value of the freehold interest is generally derived by capitalising the current market
rental based on market evidence. The market rental and capitalisation rate rental should
reflect the risk profile of the property. It is important to understand that the market rental
by a private hospital is a function of its profitability and not normally based on a rate per
bed or rate per square metre.
Market rental
When arriving at an assessment of the current rental values of a hospital, the valuer
relies upon comparative lease agreements for hospitals throughout Australia. As an
example, upon review and analysis of various leases, the market rent for a private
hospital may equate to:
 a percentage of gross income; or
 a percentage of net operating profit (EBITDA); or
 $ per bed per week.
When assessing appropriate market rentals for the subject hospital consideration needs
to be had to the age and condition of the properties, the location, size and facilities
provided, the forecast financial performance of the hospital businesses and in particular,
the terms and conditions of the lease.
Capitalisation approach
The capitalisation approach examines the potential net rental from the property at the
date of valuation, which is then capitalised at a rate that reflects the risk profile of that
property. This involves estimating the maintainable net market rent and capitalising the
rent at an appropriate rate. Adjustments are then made for any rental overage or
shortfall to arrive at an assessment of the current market value.
Private hospitals should be categorised within a municipality (or broader geographical
area) based on the following factors:
 Age, condition and size of the building
 Size and type of services provided, e.g. theatre, pathology, radiology, etc.
 Location, size, site design, topography, car parking other services on site i.e.
medical consulting
 Area of speciality.
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Victorian Statutory Revaluation
The type of hospital in most cases will impact the rent per bed per annum and the
revenue the hospital generates. For example a major surgical hospital may generate daily
revenue in the order of $900 per day whereas a rehabilitation hospital may only generate
revenue in the order of $400 per day. Similarly the EBITA per bed per annum and the
rent per bed per annum is usually considerably less for a rehabilitation hospital than a
surgical hospital.

Estimated annual value
Note: Residential care facilities and retirement villages are both exempt from land tax.
However, private hospitals are still subject to land tax.
The EAV for residential care facilities and private hospitals is required to be calculated in
accordance with Appendix L of the Valuation Best Practice Specifications Guidelines.
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Victorian Statutory Revaluation
Industry information
The following provides some additional information on the various industry operations.
Retirement villages

Rollovers and Deferred Management Fee (DMF) structure
On an ongoing basis, the DMF forms the source of income within the village, and is only
realised upon the resident exiting the village (termed the rollover). The number of
rollovers per annum within a village is largely linked to the average age profile and
length of stay for residents within the village, i.e. a high average age will typically lead to
an increased number of rollovers per annum.

Underlying residential market and capital growth of units
The Deferred Management Fee (DMF) is calculated as a percentage of either the ingoing
or outgoing price, and may also include a component of capital gain for the operator. As
such, the capital growth within the unit values is imperative to the cash flows. Capital
growth within retirement village units can also be linked to the underlying residential
market as the sale of the family home typically forms the asset base from which the
ingoing/purchase price of a retirement village is paid. While this is the general rule, it
should also be noted that in some circumstances the value of village units may exceed
general residential values within the immediate area.

Development profit
During the start up/development phase of a retirement village, the development profit
achievable will form a revenue source. As with conventional residential development, the
margins achievable will be a factor of construction costs, sales rates, sale prices and
experienced development management.
Going concern - rollover business
Current and projected surplus/deficit

The rollover business of a retirement village relates to the DMF detailed in the contract
of sale or resident agreement between the resident and the operator. Upon rollover of
the unit, whereby the resident is deceased or relocates to a different type of
accommodation (i.e. residential care facilities) the operator is entitled to a DMF. The DMF
is predominantly calculated as a percentage of the original purchase price or resale price
and is limited by a maximum number of years in occupation (usually around 10) and/or
a maximum percentage).

It is these fees which generate the main ongoing revenue for the retirement village
operator and will enable long term maintenance to be undertaken. It is also common for
a ‘sinking fund’ allowance to be retained in addition to the DMF to ensure that major
maintenance expenditure in the future will be covered, to maintain the quality and
therefore the resale value of the units. In some states, a sinking fund component is
required under legislation.

A further component of the rollover business is the value of any capital gain which may
result from the resale of the unit. Depending on the original sale documentation or
resident contract, operators may retain either a proportion (say 50/50 split) or the full
amount of any capital gain achieved through the resale value of the unit.

It is important to understand that the DMF component of a retirement village operation
represents the major revenue generator for any retirement village operator.

Therefore, on average, a retirement village operator at a new village could be waiting
anywhere between four and 12 years before any DMFs can be generated on each unit.
The long-term financial success on any retirement village depends on the unit sales
covering construction costs, including infrastructure such as a community centre and
facilities and DMFs (including any capital gain component).
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Victorian Statutory Revaluation
Management – operations/care business
The legal right to receive future income through DMFs and share of capital gains.

The operations/care business relates to the day to day running of a retirement village
and the provision of services to residents. A weekly or monthly service fee is charged by
retirement villages to cover the provision of these services and is similar to that levied by
an owners corporation. The amount of this fee will vary according to the services
are provided. Fees in independent living units will usually cover rates, insurance, garbage
collection, management costs, general maintenance and the use of communal facilities.
Residents in serviced apartments will usually pay a higher service fee as they require the
provision of additional services such as cleaning, laundry and daily meals.

A properly structured retirement village should receive sufficient weekly fees once the
village is close to 90 per cent occupancy, to meet all operating costs (i.e. break-even).
This will generally depend on the overall size of the village and its ability to achieve
economies of scale. It should be noted that, in many cases, until the village is fully
occupied, the developer may incur operational losses which are required to be funded by
external sources. In the event of a surplus occurring, the operator is usually required to
reinvest the funds for the benefit of the village.
The large range in the above percentages is reflective of the high degree of variability in:
 Age of the facility (maintenance)
 Facilities included (property/gardening); and
 Split between ILUs and SAs (food/salaries/administration).
Private hospitals as a going concern

The valuation of a hospital as a going concern will primarily rely on the capitalisation of
net income approach. The capitalisation approach is an accepted method of valuation
where the net income (EBITDA) from the hospital is capitalised at a rate that reflects the
risk profile of that property (and business). Adjustments may then be made for income
shortfalls and valuers undertake the summation approach to determine the real estate
value and business values.

In determining the value of the hospital using the capitalisation approach on the basis of
a ‘going concern’, it is the net profit (EBITDA) that is capitalised, providing a total
valuation that encompasses hospital plant, equipment, furniture and furnishings and
business goodwill.

The capitalisation approach is a particularly meaningful valuation tool where there are a
sufficient number of transactions that are of comparable size, age and condition, with
similar amenities, facilities and future growth expectations. In such instances the
capitalisation rates identified through an analysis of sales may be applied with little
adjustment to the property being valued.

As a check of the values arrived at by the capitalisation approach, compare the assessed
values directly with sales of similar properties on a rate per bed basis.
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Victorian Statutory Revaluation
Conventional property trust lease structures
Historically a property trust would have the following private hospital lease structures:
Rental
Period
Outgoing payment
Market rental
Sinking fund
Operational
maintenance
Capital works
Reversionary
interest
Fixed that would increase annually to CPI with a periodic market
review
Lease period usually 25 years
Usually responsibility of tenant
Usually set at the start of the lease equating to a percentage of
EBITDA
Usually allowance by landlord for carpets, repainting, etc.
Usually allowance by operator
Cost of landlord who would increase the rent to a percentage of
cost
Business reverts to landlord at the lease expiry. Plant and
equipment generally purchased.
There are a number of issues relating to this structure, including:

Non alignment of interests. The operator may want to expand to grow business or
restrict competition and if landlord funds works, rental increases for example at
say 10 per cent. This may not be sustainable for the business.

In the final years of lease, the operator could not afford to pay for capital works
as the reversionary interest is with the landlord. Therefore erosion of value.

The operator is taking all financial risk. Landlord receives fixed rental no matter
what return is being made.

Disputes on what is landlord/tenant works.

Yield to be paid at for example 9 per cent to 11 per cent well above other debt
costs.
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