True value of bed licenses misconstrued

The bed license values recently released by Industry body, Aged and Community Care Victoria (ACCV) have created a stir within residential aged care facilities (RACFs).

Of the article published in DPS eNews on 28 July, director of Knight Frank National Health and Aged Care, Gordon Price said: “I can’t say I disagree with the potential selling prices quoted other than  to say that I would have thought they could achieve premium prices for the smaller numbers of beds at a site. 

“Nor would I disagree with the factors they quote that may impact on the bed licenses i.e. location, type of bed licence and age of asset etc,” Mr Price commented.

“But where I would suggest that the report’s author has been irresponsible or potentially negligent, is suggesting these potential selling rates, whether conservatively used or not, provide a suitable guide for RACF operators in reporting bed licence values within their financial reports.

“The Australian Property Institute’s Valuation Guidance Notes for valuations for reporting purposes under either the Australian Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) confirm that under IAS 16 the value of the non-current property and plant assets should initially be carried in financial reports at cost less any accumulated depreciation and any accumulated impairment losses and thereafter by either the cost model or the ‘Fair Value Model’”.
 
Mr Price explained that under the Fair Value Model where there is appropriate market evidence (and as the below article confirms there is no doubt that a market for bed licences exists, as there is also a very substantial market for RACF’s operating as going concerns, even as specialised assets which they no doubt are) and where the entity is a “going concern” as is the case for most RACF operations i.e. they are not public assets, the value of the going concern must be considered when reporting (apportioning) values to piecemeal components.

“What this means is that unless it is the Director’s immediate intention to cease the going concern operation and dispose of the asset in a piecemeal fashion, then the reported fair value should reflect the realisable value as a going concern.

“The below reported selling prices of bed licenses reflect the market value of only surplus bed licences (i.e. sales where the bed licence is no longer required either for reasons of uncommercial/viability, building non compliance and/or age, even where they are purchased to top up the number of beds for an existing or new facility – where the cost can be spread over a larger number of existing bed places),” he said.
 
The reported valuation guide was:

• Unencumbered pre-1997 bed licenses $50,000 to $60,000
• High care licenses sold with freehold as going concern $30,000 to $40,000
• Low care licenses sold with freehold ranged from $35,000 to $135,000 during the year

According to Mr Price, with a modern compliant RACF operating as a going concern and particularly for a brand new RACF, the removal of bed licences would likely have a far greater negative impact on the asset/property value if removed.

“Therefore by applying the stated values on a piecemeal basis of land, cost of building and value of bed licences there would be a high risk of significantly overstating the reported fair value of the overall asset.

“This would particularly occur if market values are applied to the land and current replacement costs to the improvements. Exceptions may include where the land has been held for a long period of time and the historical cost allows a higher proportion of value to be allocated to the bed licences,” he said.

“Depending on the age of the asset/building the value of bed licences would range from zero for newer assets, up to those prices suggested where the asset has almost reached it’s useful economic life. This also explains as to why allocation of licenses are granted for no consideration other than the cost of the application and the viability of the majority of new developments will depend upon successful application of initial bed allocations,” he concluded.