Real Estate Law - Chapter 5

estate

legally anything someone owns minus liabilities

a large, grand residential property

freehold estate

an indefinite estate for life or in fee (when you decide to get rid of it)

exclusive right to enjoy the possession and use of a parcel of land or other asset for an indefinite period

nonfreehold/leasehold estates

an ownership interest in land generally or a fixed or determinable duration

a leasehold estate is for a fixed, definite period

ex. lease

types of freehold estates

fee simple absolute

fee simple defeasible

fee tail

life estate

fee simple absolute

an estate limited absolutely to its owners and their heirs that assigns forever without limitation or condition (unless given to someone else)

fee simple defeasible

has conditions

a fee estate that may end upon the happening of a specified event (something you do or don’t do)

restraint on alienation

a provision in an instrument of conveyance that prohibits the grantee from transferring the property that is the subject of restraint

ex. due on sale (clause that says mortgage is due when you sell the house)

life estate

an estate in which duration is measured by the life of a person

not inheritable

ex. to bob for life

pur autre vie

measure by life of other

ex. to bob for life of dan

reversion

a future interest left in the grantor (person granting estate) after the grantor conveys an estate smaller than her own

• returns to the original owner

remainder

a future interest created in favor of a party other than the grantor that generally follows a life estate

• can be vested or contingent

• remains for someone else after original owner’s interest ends

vested remainder

a future interest in which the remainderman has an absolute right to a possessory interest at the end of a prior interest

ex. to bob then sue

• know how is getting remainder

contingent remainder

a future interest that depends on the occurrence of an uncertain event

ex. to sue for life and then to don, but only if don marries before opel’s death

remainderman

the holder of a remainder interest

taxes and interest

the well-established rule states life tenant must pay all annual taxes and interest on debts on the land to the extent that the tenant has received profits, rents, or income from the property

• doesn’t have to pay special assessments

  • remainderman may pay

  • pro rate (proportionally)

life expectancy table

used to determine how much money you would’ve made based on life expectancy

insurance

neither the life tenant nor the future interest owner, such as the remainderman or the owner of the reversion, has a futy to insure; if either does insure, the distribution of the proceeds will depend on the facts of each case

• after life estate created - part that buys insurance gets full proceeds

• before life estate created - life estate tenant will get part of the policy

repairs

responsibility depends on if repairs are ordinary or extraordinary

life tenant - duty to make ordinary repairs (painting, fix windows)

• not responsible for extraordinary (replacing furniture), but may go beyond making ordinary repairs and make improvements to property

tenant’s use of property

a life tenant may act as the fee simple owner would if she were on the land; but she is limited in her ability to diminish the market value of the remainder or reversion

• use as intended

• life estate owner can sell interest for your life

fee simple

highest form of ownership

someone has full ownership rights to a property for an unlimited amount of time

right of estovers

a life tenant is generally entitled to cut timber as needed for repair of structures and fences or for fuel

waste

a destructive use of real property by one in rightful possession

• in general, a life tenant is not allowed to commit waste

estate planning

the creation of a life estate as an estate planning device often creates unforeseen complications

• who pays insurance, mortgage, and tax payments when granting life estate

trust

an arrangement in which one part, the settlor-trustor conveys legal title of property to a trust, a trustee-fiduciary, holds and manages property for the benefit of another, the beneficiary owns equitable interest

concurrent estate

ownership or possession of property by two or more people at the same time

concurrent forms of ownership

joint tenancy

tenancy by the entirety

tenancy in common

community property

joint tenancy

ownership of real or personal property by two or more people in which each owns an undivided interest in the whole and each has the right of survivorship

4 unities of joint tenancy

1. unity of time - interests must vest at the same time

2. unity of title - must acquire their interests in the same conveyance

3. unity of interest - equal interests in the land

4. unity of possession - equal, undivided interest in the possession of the land

terminating a joint tenancy

whenever one of the for unities is destroyed

ex. when there has been a voluntary of involuntary conveyance of the owner’s interest in the property

severance

a joint tenant’s transfer of her interest that terminates the joint tenancy and converts it into a tenancy in common

presumption against joint tenancy

courts attempt to find severance whenever possible because of judicial bias against joint tenancy. to overcome the presumption against a joint tenancy, deeds should emphasize that a joint tenancy is being conveyed with insertion of the words: rights of survivorship and joint tenancy (JTWROS)

tenancy by the entirety

a tenancy created between and husband and wife under which they hold title to the whole property with the right of survivorship

• identical to a joint tenancy plus can only be created between a husband and wife

terminating tenancy by entirety

only by a joint action - divorce or contract - of the husband and wife

tenancy in common

concurrent tenancy in which there is a unity of possession, but unities of time, title, and interest are not required

• two or more individuals hold separate, undivided shares in a property, with no right of survivorship

rights of concurrent owners

the rights of a cotenant stem from one unity common to the three types of concurrent ownership

ownership - the unity of possession = undivided

1. undivided vs divided interest

2. if one is using, the other has to “share”

3. no right to exclude other cotenants

each owner has equal right to use each portion of house (unless decide otherwise)

undivided interest

the interest of a concurrent owner entitling her to a share or the whole property but not to a specific party of it

duties of concurrent tenants

in certain circumstances, the tenant in sole possession will owe duties to cotenants

probate

the court procedure by which a will is proved to be valid or invalid; the term has been expanded to refer to the legal procedure where the decedent’s estate is administered

EGTRRA of 2001

2010 - total exemption of property subject to the estate tax came into effect

2011 - the law was amended to provide for a $5 million exemption

2012 - $5 million, indexed for inflation, was made the permanent exemption

• some states don’t have an estate tax

community property

property acquired during a marriage through the efforts of either the husband or wife or both, with each having an undivided one-half interest in the property

• everything acquired before marriage is separate property

equitable distribution statute

allows courts to divide marital property fairly

• duration of marriage

• financial/non-financial contributors

• value of marital property

• custody of children

separate property

property acquired before the marriage or acquired by the husband or wife through gift from a 3rd party or inheritance during the marriage that is owned by a married person in his or her own right

• as long as you don’t transmutate (change into another form, ie marital property) it

community property with the right of survivorship

a hybrid form of concurrent ownership in which property is owned by the spouses as community property but that also provides a right of ownership

forms of ownership for investment purposes

joint tenancy and the tenancy by entirety are often inadequate for business and investment purposes for several reasons

tenancy in common (TIC)

owners can invest directly in commercial real estate

each investor owns an undivided interest that they should probably not be able to finance on their own, allowing them to reap a pro rata share of income through cash flows from tenants

due to the inherent risks in owning property as TIC, such as unlimited personal liability, brokers and sponsors require those wanting to buy these TICs to qualify as “accredited” investors - those who each a stated high annual income

accredited investor

• net worth exceeds 1,000,000

or

• 200k individual - each of last 2 years

• 300k joint with spouse - each of last 2 years

risks that lead to accredited investor requirements for TIC

• unlimited personal liability (must have corporate shield)

• complex governance and co-owner risks

• market and operational risks

partnerships

an association of two or more persons to carry on as co-owners of a business for profit

sole proprietorship

low risk, low reward

unlimited personal liability

joint and several liability

when the creditor may demand payment or sue one or more of the parties to such liability separately or all of them together at the creditors’s option

tenancy in partnership

the way partners co-own partnership property. incidents of tenancy in partnership:

• subject to an agreement to the contrary, each partner has an equal right to possession of partnership property

• the interest in specific partnership property is not assignable by an individual partner (no personal use)

• a partner’s right in specific property is not subject to attachment or execution for personal debts

• partners cannot claim a homestead or another exemption when partnership property is attached for partnership debts

• upon the death of a partner, her interest in specific partnership property passes to the surviving partner

• a partner’s right in specific property is not subject to dower, curtesy, or allowance provided by law to widows, heirs, or next of kin

• allows the partnership to continue business when one partner goes into debt or dies

limited partnerships

type of partnership comprised of one or more general partners who manage the business and who are personally liable for partnership debts and one or more limited partners (investor) who contribute capital and share in profits

limited partners

take no part in running the business and incur no liability with respect to partnership obligations beyond their contribution

• has to give a guarantee (collateral) to get security

differences between limited partnerships and partnerships

• to form a LP, two or more people must execute a certificate of limited partnership and file the certificate in the secretary of state (so clients can tell who is a limited partner)

• the LP includes one or more general partners and one or more limited partners

corporations

a type of business organization that is owned by shareholders (owners) but managed by a board of directors (broad vision) who elect the executive officers (managers)

• forming involves filing Articles of Incorporation with the secretary of state and obtaining a corporate charter

s corporation

a closely held corporation with no more than 100 shareholders who elect to be taxed like partners

• IRS election

piercing the corporate veil

when courts disregard the separation of the corporate entity from its stockholders, when the corporate form is used to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful purpose

limited liability companies (LLCs)

a hybrid form of business organization that provides the limited liability of a corporation and the tax advantages of a partnership

• need an operating agreement

real estate investment trusts (REITS)

an entity that invests in real estate ventures and allows average investors to participate in real estate investment in stocks and bonds through “mutual funds”

• became popular with 1960 passage of the Real Estate Investment Trust Act

REIT requirements

• investors must have transferable shares

• >100 shareholders/beneficiaries

• 5 or less shareholders can’t own more than 50% of value

• >75% of trust income must come from real estate source

• 90% of net income distributed to investors

securities for law purposes

defined extremely broadly, and including any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate, reorganization certificate of subscription, transferable share, etc.

security

an investment contract for purposes of the Securities Act means a contract, transaction of scheme (plan) whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party

federal securities regulation

the use of real estate investment vehicles under which the investor relies on another’s efforts to manage the property frequently causes the transaction to be characterized as a securities investment instead of a mere purchase of real estate