Real Estate (Ling Topics 12-23)

What do brokers do?

• bring buyers and sellers together

• collect commission for a successful transaction

What do knowledge do brokers offer?

• prices and terms

• marketing

• legal obligations

• procedures

law of agency

governs relationship between a principal (client) and someone charged to act on principal’s behalf

universal agent, general agent, special agent

• power to act for principal in all matters (guardian)

• power to act within limits of a business or employment relationship (property managers)

• power to act in a specific event (brokers)

Residential

• condo vs single family

• specific neighborhoods

• homes

non-residential

retail, office, industrial, apartments

Commercial Mortgages

• Not as standardized as home loans/ more complex

• No personal liability (legal borrower usually an LLC or LP)

When do we see recourse loans?

• Usually on construction loans

• unwilling to relieve personal liability if a “willful act” causes loss

• “carve out” or bad boy clause

Balloon Mortgage

• smaller payments and a huge payment at the end to cover the rest

• reduces interest rate risk and default risk

• default risk is generally greater for commercial loans

Permanent (long-term mortgage) loans

• term longer than 7+ years

• fixed interest rate

• often taken out on commercial real estate

2nd Mortgages & Mezzanine Loans

• if borrower defaults, mezz lender takes over borrower’s ownership position

• higher interest rate

• less expensive to raise capital

• private equity funds, investors, insurance companies, pension funds

General Partnership

• Avoid double taxation (individually taxed on capital gains)

• All partners make operating decisions

• Personally liable

Limited Partnership

• General and limited

• Flow through tax treatment

• Lp’s give up control of management

• GP’s have unlimited liability

Corporations

• double taxations

• shareholders have limited liability

Direct Investment

• gives individual and institutional investors complete control

• but investor must supply the expertise (no liquidity)

Pension Funds

• pool of money with retirement savings to grow overtime

what is a lease?

• legal contract between tenant (lessee) and owner (lessor) for use and possession of RE

A lease must have:

• a named lessor and lessee

• adequate description of premises

• conveyance of premises

• starting time & length

• rental rate

One year leases common in

residential

Leases 3 years- 20 years

• retail office and industrial properties

gross lease

• no expenses paid by

Triple net lease

• property taxes, insurance, CAM operating expenses

• expense reimbursements to landlord

functions of a property manager

• selecting tenants

• credit tenants

• tenant mix

• signing leases

• collecting rent

• repairing and maintaining property

• tenant-landlord laws

landlord may access unit for

repairs, inspections, show the unit

landlord does not need to leave notice for emergencies

• smoke/fire

• water leak

• security system

• storm damage

occasions for development

• a use in search of a site

• a site in search of a use

• resources in search of an opportunity

steps for development

1. site control

2. feasibility

3. obtaining permits

4. design

5. financing

6. construction

7. marketing and leasing

8. operation

joint venture

landowner puts land into development in return for share of profits

ground lease

• eliminates land cost; no land depreciation or appreciation; land more valuable than building

foreclosure

• default fails to make payments (technical: violation of terms & substantive: 3 missed payments)

• notice of default

• foreclosure sale: property is sold to recover loan amount

• legal process of terminating all claims of ownership all inferior liens (costly, time consuming, distressed sale, presence of superior liens)

Difference between 1st trustee and 2nd trustee

• 1st Trustee (Primary trustee): initially responsible for deed of trust (named in document and takes control: lawyer or spouse)

• 2nd Trustee (Successor trustee): takes over when the 1st trustee can’t take over the role (death, resigns, incapable)

• Loans: 1st Trustee: Priority repaid during foreclosure & 2nd Trustee: Have higher risk but paid after 1st trustee