Real Estate Exam 1

property

anything that can be owned, or possessed. Can be tangible or intangible

tangible assets

physical assets, such as real estate and automobiles, that can be held for either consumption or investment purposes

intangible assets

assets that do not have physical substance, mortgage and lease agreements

real estate

the land and its permanent improvements

improvements ON the land

any fixed structures such as buildings, fences, walls, and decks

Improvements to the land

The components necessary to make the land suitable for building construction or other uses and includes infrastructure, such as streets, walkways, utilities, storm water drainage systems, and other systems that may be required for land use.

land

a parcel that does not include any structures but may include some improvements to the land

raw land

land that does not include structures or any improvements

Real Property

rights associated with ownership of land and all permanent attachments to land

Personal Property

movable items such as automobiles or mobile homes

real estate typically generates

over 25% of U.S. GDP, 9 million jobs, source of nearly 20% local gov't revenues

housing sector

17 to 18% of GDP

US land area

6% of Earth, 2.3 billion acres (3.5 million square miles)

Size of an acre

about the size of a football field, 43,560

acres in a square mile

640

total market value of real estate

$38.5 trillion

publicly traded corporate equities total

$42.9 trillion

outstanding mortgage debt

$15.4 trillion

percent of US household wealth that real estate accounts for

21%

housing equity

Difference between current market value of property and outstanding mortgage loan

User Markets

characterized by competition among users for physical locations and space

capital markets

serve to allocate financial resources among households and firms requiring funds

US households that own their homes

2/3

Funds flow from

investors to the investment opportunities yielding the highest expected return on their investment

equity investors

expect to receive a return on their investment through the collection of rent and price appreciation

Debt investors (lenders)

hold claims to the interest on borrowed funds that are secured by individuals, businesses, and property

private equity (owners)

individuals, partnerships, limited liability corporations, private equity funds

private debt (lenders)

banks, insurance companies, finance companies, private lenders

public equity (owners)

public real estate investment trusts (REITs) and real estate operating companies

public debt (lenders)

commercial mortgage-backed securities (CMBS) and mortgage REITs

property markets

determine the required property-specific investment returns, property values, capitalization rates, and construction feasibility

Capitalization Rate

the ratio of a property's annual net income from rental operation to its value

Discounting

the process of finding present value; the inverse of compounding to find future value

continuous bidding process

determines market values and transaction prices in local property markets

when to build

if current property values are greater than the cost of new construction, including land costs and a fair developer profit

expansion of supply

causes rent in the space market to drop toward the level of current construction costs

new construction is profitable again

current property values below construction costs, combo of reduced construction, normal growth in demand for space, and steady obsolescence of the existing stock

interest rates rise

typically property value will fall, rendering construction less profitable

Can construction costs be volatile?

yes, very

2 primary characteristics of real estate assets

heterogeneity and immobility

heterogeneous

each property has unique features

Location Value Signature (LVS)

each parcel of land's is unique

immobile

sometimes possible to move a building, generally not financially feasible

localized

for example school districts for single-family homes or competing apartment complexes 15 minutes from each other

highly segmented

for example those searching for single-family units generally will not consider townhouses or condos

investment-grade real estate

large, relatively new and fully leased commercial properties located in major metropolitan areas, generally well over $10 million, targeted by institutional investors

factors that contribute to complexity of real estate

interest can't be standardized, claims of ownership must be confirmed by viewing past ownership records, property parcels are contiguous (so accurate descriptions are vital)

subprime mortgage

mortgage for a borrower with a not-so-good credit rating

3 aspects of nature of rights

1. rights are claims or demands that our government is obligated to enforce
2. rights are nonrevocable
3. rights are enduring

personal rights (personal freedoms)

derive primarily from the Bill of Rights and other amendments and clauses of the U.S. Constitution

property rights

the ability of an individual to own and exercise control over scarce resources

fixture

An item of personal property that has been converted to real property by being permanently affixed to the realty.

4 rules of fixtures

1. the manner of the attachment
2. the character of the article and the manner of adaptation
3. the intention of the parties
4. relation of the parties

rule of intention

if there is a conflict among the rules, this rule generally prevails

Bundle of Rights

The rights of an owner to possess, control, enjoy, sell, lease, mortgage, and dispose of the property.

interests

rent or a charge paid for the use of money. Interest may also refer to the bundle of rights held by owners of real property

Estates

interests in real property that include exclusive possession

Ownership Estates (Freeholds or Titled Interests)

more substantial or complete, indefinite in length, freeholds (unlimited duration, titled interests)

Fee Simple Absolute

most complete bundle of rights possible and has the greatest value

fee simple conditional

ownership that is subject to a condition or trigger event

reverter interest

uncertain interest held by the previous owner (or heirs) associated with a conditional fee

Ordinary Life Estate

the rights of disposition of the fee simple absolute are unbundled and separated completely

Remainder Estate

The ownership interest subsequent to a life estate which, upon the death of the life estate owner, becomes a fee simple absolute interest.

Legal Life Estate

a life estate created by the action of law

other life estates

can arise out of marriage

Leasehold (Nonownership or Non-freehold) Estates

the interest or rights of a lessee or tenant in a leased property, including the possessory interests that are temporary conveyance of the rights of exclusion, use, enjoyment, but not the right of disposition. Tenant receives these rights in exchange for rent

Tenancy for years

leasehold interest for a specific period of time (if lease is more than one year, it MUST be in writing to be enforceable)

Periodic Tenancy

any lease agreement that automatically renews each period until either party gives notice of termination

Tenancy at Will

a tenancy granted by landlords to tenants allowing them to remain in possession without written agreement

Tenancy at Sufferance

occurs when a tenant that is supposed to vacate does not

Easement

the right to use land for a specific and limited purpose

Easement Appurtenant

a right of use that continues from owner to owner that involves a relationship between two parcels of land: a dominant parcel that benefits from a servient parcel, runs with the land (becomes permanent to both parcels involved)

Dominant parcel

benefits from the easement

Servient Parcel

a parcel that is constrained or diminished by an easement appurtenant

Affirmative Easement Appurtenant

gives dominant parcel some intrusive use of servient parcel

examples of affirmative easement appurtenant

1. driveway easement across one parcel to another
2.drainage easement for storm water from one parcel across another
3. common wall easement requiring the wall of one townhouse to support the floors, roof, and structure of an adjacent one

Negative Easement Appurtenant

allow no intrusion onto the servient parcel

examples of negative easement appurtenant

1. sunlight easement that restricts the configuration of adjacent buildings so as to assure access to direct sunlight
2. scenic easement that has been used to restrict construction on adjacent parcels so as to preserve a valued view

Easement in gross (commercial easement)

the right to use land for a specific, limited purpose unrelated to any adjacent parcel

Examples of easement in gross

1. right-of-way for roads
2. railroads
3. irrigation water
4. communication and electric cables
5. gas lines
6. billboards
7. access to timber, crops, oil and mineral extraction

with an easement in appurtenant

all rights of disposition remain with the freehold estate

With an easement in gross

the right of disposition of the easement is claimed as part of the easement

license

The permission to use another's land for a specific and limited purpose.

Restrictive Covenants (Deed Restrictions)

impose limits on the uses of land

declaration of covenants

A document recorded in the public records together with the plat map of a subdivision. It lists the restrictive covenants for the subdivision.

Deed Restrictions

limitations imposed on the use of land and structures by clauses in a deed

lien

An interest in real property that serves as security for a loan obligation. In case of default the holder of the lien is entitled to have the property sold to satisfy the debt.

General Lien

arises out of actions unrelated to ownership of the property (court order suing property owner for damages)

Specific Lien

derives directly from events related to a property (property tax, mortgages, etc.)

attach

to place a lien on real property

Property Tax Lien

automatic lien placed by local governments to assure payment of property taxes

Assessment lien

lien assessment by local governments to ensure that those who receive the primary benefit of neighborhood improvements will be charged their "fair share"

community development district (CDD)

a special district empowered to levy assessments on property owners to fund infrastructure and other projects, like golf courses (not a gov't lien but enjoys same priority)

mortgage

an interest in property as security for a debt

Mechanic's Lien

Liens that arise from construction and other improvements to real estate.

Homeowner association and condo association liens

every HOA and CA imposes regular assessments on the owners

Priority of Liens

Property taxes and special assessments, then in order of time and date files (pure race), except mechanics lien, which dates to date labor began or materials were first provided.

direct co-ownership

tenancy in common, joint tenancy, tenancy by the entirety, condominium

indirect co-ownership

limited liability co, partnership, corporation, real estate investment trust

Tenancy in Common

the normal form of direct co-ownership and is as close to fee simple absolute estate as is possible