Vi seniors take case to federal court

Class-action lawsuit alleges CC-Palo Alto illegally transferred millions of dollars owed to its residents

With walkers and canes in hand, more than 40 seniors mobilized in the U.S. District Court in San Jose on Tuesday to show their displeasure with how the parent company of senior-care community Vi at Palo Alto is handling their money.

Lawyers from the company, CC-Palo Alto, tried to knock out a federal class-action lawsuit filed on Feb. 19 by seven residents of the high-end continuing-care retirement community located on Sand Hill Road. The suit alleges the company transferred more than $174 million in refundable entrance fees from the senior retirement community to its corporate parent, CC-Development, in Chicago, jeopardizing the financial security of the residents.

The lawsuit also claims that CC-Palo Alto overcharged the residents by improperly allocating tax assets, earthquake insurance and marketing costs to Vi at Palo Alto's operating expenses and representing the charges as inflated monthly fees.

The complaint, which was filed on behalf of 500 residents, is believed to be the first of its kind in the Bay Area challenging a continuing-care retirement community's financial practices.

CC-Palo Alto's attorneys Tuesday asked the court to dismiss the class-action suit on grounds that the case was "not ripe" for judicial hearing. The seniors have not been harmed by the transfer of millions of dollars in entrance fees to the Chicago headquarters, attorney James McManis told the court. The contract residents signed also does not actually specify that the money should be retained at the Palo Alto community or how it should be used, he added.

Residents (or their heirs when they die) are supposed to receive a portion of the entrance fee which can be millions of dollars when they choose to no longer reside at Vi. The first occupants of the 388-unit independent-living facility are supposed to receive as much as 90 percent, with subsequent occupants receiving a lesser amount on a sliding scale, according to court documents.

CC-Palo Alto collected $347 million in entrance fees during its first three years of operation, it told the Santa Clara County Assessment Appeals Board in 2012. More than $200 million was used to recover construction costs, with most of the balance, the $174 million, going to the parent company. Entrance-fee refunds come from the fees paid by subsequent occupants, CC-Palo Alto told the board, according to the documents.

The seniors' attorneys claim that this practice has destroyed CC-Palo Alto's finances, and CC-Palo Alto lacks the ability to cover the amounts due, the seniors' attorney Niall McCarthy said.

McManis argued that CC-Palo Alto has always been able to return the money to residents or their families, so no harm has yet occurred, he said. The court must follow the rule of contract law in its decision, he added.

But the seniors' attorneys said it isn't that simple. Sending the money to Chicago created a concrete detriment to the seniors' security interest in the entrance fees. California case law has recognized that lenders, such as the seniors, have a security interest in the property subject to the loan (the entrance fees) and that impairment of that security interest is a harm.

CC-Palo Alto lawyers, however, claim the entrance fees are "unsecured loans" though the contract and promissory notes simply state they are "loans."

A Santa Clara County Assessment Appeals Board in 2012 seemed to support the contention that the practice has caused a financial deficit at CC-Palo Alto. The company had appealed a tax-increase assessment by the Santa Clara County Assessor on its real property that would cause it to owe more than $3.4 million in back taxes. CC-Palo Alto claimed, among other things, that the $174 million it transferred from 2005-06 through 2007-08 should not be calculated into its property valuation and is kept on the books as a liability. But the Appeals Board found that the entry fees are essentially part of the real estate, and therefore should be part of the property's appraisal.

The company claimed the deficit was caused by insufficient cash flow coming in from investors.

In addition to the entrance fees, attorneys said, the seniors pay monthly fees that cover certain repairs. The seniors have also been harmed because they have paid inflated fees for earthquake insurance for the buildings at Vi, marketing charges that did not benefit the Vi at Palo Alto and the additional $3.4 million in property taxes caused by the diversion of funds to Chicago.

United States District Court Judge Edward Davila said he will issue a decision in writing at a date uncertain.

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4 people like this
Posted by Member
a resident of Old Palo Alto
on Sep 12, 2014 at 10:06 am

The Pritzker family did the same thing in with the Vi development in Naples Florida and in La Jolla California. Used the Hyatt Classic Residences name to sell them, then changed the name to Vi and ran away with the deposits. Took the money from the initial sales, and put them into a different corporation. Class action lawsuits all over the place.

Penny and JB should be ashamed at how they handled this. Pump and dump.

4 people like this
Posted by Dubious
a resident of Atherton
on Sep 12, 2014 at 10:53 am

Sounds a lot like the documentaries covered on "American Greed!" Sometimes known as "Kiting," or "Ponzi?"
Use one group's $$$ to fund the next development and pray to God that those $$$ will be available when the bill comes due...

2 people like this
Posted by Joe
a resident of Another Palo Alto neighborhood
on Sep 12, 2014 at 11:26 am

It's not clear that the VI has done anything illegal--particularly since it's clear that as long as each senior's estate is refunded according to their individual contract, that no harm has been done to anyone.

If people feel strongly about this sort of thing--they should be talking to their local legislative representatives, requesting a review of the matter by Sacramento. If concerns are valid--then California law could be changed to ban these sorts of financial transfers from a local company to a parent company.

Also--people do have to ask themselves--why did you feel that giving VI (or whomever) $1+M for "free rent" was a good idea? Did you think that the VI people were doing this out of the goodness of their hearts?

It would pay people critical of VI to figure out how much money it would cost to build the local facility if the parent company had to borrow money at market rates to fund the construction of the facility. Then, using those total construction costs (constructing and financing)--try to determine what the monthly rent would be.

Perhaps such a facility constructed with borrowed money would be attractive to the super-rich, who want to live in a Palo Alto/Stanford setting. But then again, maybe not.

What's interesting here is that the contested money (approximately $170M) is about what VI would have to pay in interest for the $200M it claims it cost to build this facility.

All-in-all, it's not clear that the seniors read their contracts, or understood what they were reading/signing.

Comments above about VI "greed" need to be revisited in light of building/managing retirement homes. So far, it doesn't look like they have done anything illegal, and possibly not even anything wrong.

1 person likes this
Posted by neighbor
a resident of another community
on Sep 13, 2014 at 5:16 pm

I don't know where you got the idea that VI has free rent. The monthly fee ranges between $4110 - 9320 for a SINGLE person, with a $1990 "second-person fee." Fees increase annually.

And the "entrance fee" ranges from $5.5K -- 5.5 MILLION depending on whether you turn over 100% of the fee, or contract to get 70% back when you leave/die.

The residents' lawyers at this facility and Burton Richter (the Nobel Prize physicist who is part of the lawsuit) read the contracts and have document VI's actions --- and they see significant problems and are entitled to pursue a legal judgement concerning the use of their money. Suggesting that they didn't understand their contracts is ridiculous.

Web Link

Web Link

1 person likes this
Posted by Member
a resident of Old Palo Alto
on Sep 13, 2014 at 5:35 pm

And further, there are three separate class action suits in three separate locations against Hyatt and the Pritzkers on this, covering matters from facility repairs to health care to financial issues such as deposits.

It is kind of like bank management telling the depositors - 'we have taken all the gold in the vault, but trust us, when you want to get your money out, we are sure something will be there'. It is public knowledge they are trying to sell this chain of properties, and, like a typically highly leveraged buyout, they want to strip all the assets out before they move on.....

You need to ask yourself: "Why were they in such a mad rush to strip the Hyatt name from these properties after they built and marketed and sold them?"

Like this comment
Posted by Sparty
a resident of another community
on Sep 23, 2014 at 8:10 am

Sparty is a registered user.

The Pritzker family broke everything up because the grandkids (of which Penny is one) all decided they couldn't get along and started chopping things up. Hyatt was the largest family owned Hotel conglomerate. Then the grandkids all started squabbling and broke things apart. That's why you saw the changes.

Not mentioned in the article..but the comments are wrong, even though the facts are readily available.

Sorry, but further commenting on this topic has been closed.

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