REAL 4000 UGA Dietz Exam 1 Study Review

Five Main Product-Types or "Food Groups" and Others of CRE... (Corporate Real Estate)

Industrial (e.g. offices, warehouses, garages, and distribution centers)

Multi-family (e.g. duplex, which has two dwellings within a single building, to homes or small apartments buildings with up to four units)

Office

Retail

Other (e.g. storage units, churches, stadium, hospitals, student housing)

Hotel/ Resorts

How much is this property worth at a 6.8% capitalization rate?

net operating income / capitalization rate = $1,948,608 / 6.8% = $28,656,000

"NOI" Net Operating Income

is one of the Golden numbers, represents how well the machine works

tangible property

Physical asset that can be owned

Can be real or personal property

EX: Real property, (land and other assets that are permanently attached to the land) buildings, canals, crops, fences, land, landscaping, machinery, minerals, ponds, roads.

EX: Personal property, (property that is moveable) vehicles, furniture, boats, and collectibles.

intangible property

Non-physical assets such as stocks, bonds, mortgages, leases

real estate as a tangible asset

"Raw" Land

Improvements to the land

Excavation and fill

Sewers and other utilities

Roads and driveways

Structures (improvements on the land)

real estate as a bundle of rights

Exclusive possession of the real property (no trespassing)

Use or enjoyment

Ex., can use as rental property to generate cash flow

Disposition (sale)

Can be unbundled in many ways

Ex., owner leases property to renter

term real estate used in 3 ways

1. Real Estate as a tangible asset

2. Real Estate as a bundle of rights

3. Real estate as an industry or profession

Real Estate makes up ___________ of the world's wealth

50%

real estate generates what percent of US GDP

25%

real estate generates what percent of local govt revenue

70%

real estate creates how many jobs for americans

9 million

developed land represents what percent of land in the US

6%

three markets in real estate

Local User Markets

Property Markets

Capital Markets

important distinction of property market

The property market is a function of the Space (User) Market and the Capital Market

It is helpful to think of the Property Market as a result, NOT as a

Third market equal to the other two; though in reality they are all

Three independent concepts and can influence one another via

Their relationship.

user market (space market)

Market for the physical real estate

"Buyers" receive right to use space

Called the "space" market or "rental market"

Where rental rates are determined

These markets are very "local" and usually highly competitive

Separate localmarkets for various property types: retail, office, industrial, etc.

demand side of user market

Individuals, households, & firms who require space either for consumption or production purposes

supply side of user market

Real estate owners/ operators who rent space to tenants

Segmentation of User (Space) Markets

Both demand and supply side of user markets are very specific to location & building type

User (space) markets are highly segmented!

(is the process of dividing a broad consumer or business market, normally consisting of existing and potential customers, into sub-groups of consumers (known as segments) based on some type of shared characteristic, e.g., geographic, demographic, psychographic, and behavioral.)

Compare to nationally integrated markets (gasoline, steel, financial capital; i.e., homogeneous commodities that can be moved from place to place)

capital markets

RE competes for funds in capital market with other asset classes, such as stocks and bonds

Investors select a mix of investments based on expected returns & risk

Bidding by investors determines:

Risk free rates of various maturities (i.e., the Treasury "yield" curve)

Required risk premiums(the investment return an asset is expected to yield in excess of the risk-free rate of return...It represents payment to investors for tolerating the extra risk in a given investment over that of a risk-free asset) for risky investments.

Public Capital Markets

Small homogeneous units (Shares) of ownership in assets trade in public exchanges

Many buyers and sellers

Price quotes available for all to see

Characterized by a high degree of liquidity

Informationally efficient

Private Capital/ Property Markets

Absence of centralized market (or even price lists)

Assets trade infrequently in private transactions (thus a lack of _transparency)

Common for "whole" assets to be traded in a single transaction (indivisibility)

Less liquidity than public markets

Higher transaction costs

property (asset) market

Market for ownership claims to RE assets

Buyers/ owners receive rights to cash flows generated by leasing space to tenants

Demand (and supply) side of property market is made up of investors wanting to buy (sell) property

Property market is integrated, NOT segmented like space market

i.e., investment capital can come from anywhere

Institutional-Grade Real Estate is generally

$10MM+

Price of Commercial Property equation

= NOI (Demand for space) / Capitalization Rate (Demand for Capital)

property market equation

space market / capital market

property value equation

Next Year's NOI / Capitalization Rate

capitalization rate equation

= net operating income / current market value

acre

43,560 square feet

90 yards of a football field

mile

one of these equals one section

640 acres

5,280 ft

section

a square mile

640 acres

36 of these in a township

rights

Claims that the government is obligated to enforce

- Derived from the Constitution

- Different from raw power

Non-revocable

- Can be reduced in the interest of health, safety, and welfare

Enduring

- Not limited to the memory of owners or others

- Cannot be nullified by other persons or by government

examples of personal rights

freedom of assembly

freedom of expression

no unreasonable search or seizure

no double jeopardy or self incrimination

protection of life liberty and property

no taking property without compensation

speedy, public, fair trial

examples of property rights

vehicles

household

stocks and bonds

patents

software

real property

commercial building

govt building

religious building

streets, railroads, bridges, etc

residence

airport

personal rights

Freedoms guaranteed by Constitution

Supreme Court interpretations of Constitution

property rights

Exclusive possession

Enjoyment of the use or benefit: Use, collect rents, harvest.

Freedom todispose as one pleases (within the limits of safety): sell, convert, rebuild, etc.

real property

Rights in land and its permanent structures

1. Surface of the earth and improvements

2. Air, up to reserved air space or tallest structure

3. Beneath the earth as far as technology allows: Minerals, oil and gas, water

personal property

All other property.

Examples:

Personal and household goods

Intellectual property

Music

buildings built on air rights

MetLife Building, New York

fixture

Real property that formerly was personal property

Four Rules for determining when something becomes a fixture:

All you need is ONE rule to work

manner of attachment

characters of the article and manner of adaptation

intention of the parties

relation of the parties

manner of attachment

can it be removed quickly, or does it cause damage?)

Character of the article and manner of adaption

Examples: custom screens or storm windows, church pews, custom designed furniture

intention of the parties

The dominant rule (most common fighting topic is a refrigerator)

Based on customary assumptions of the realm

Examples: kitchen appliances in a single-family residence vs. appliances in an apartment

Relation of the parties (rule always applies to those items determined to be trade fixtures of tenants in commercial real estate)

Variant of rule of intention

Trade fixtures (personal property)

Fences and other agricultural improvements

Items installed by tenant in a residence

tips regarding fixtures

In nearly every real estate transfer, fixtures are an issue

Fixtures automatically go with the real property

You must be careful to identify possible fixtures (take your time)

You should explicitly state in writing whether they stay with the property or not.

real property interest

Any set of rights in real property

estate

A real property interest that includes the right to exclusive possession

nonpossessory interest

Easements

Restrictive covenants

Liens

two categories of estate

1. Ownership estate (freehold estate)

2. Leasehold estate

which estate category is stronger

ownership estates are stronger than leasehold estates

Ownership (Freehold) Estates

Estate with indefinite length

1. Fee simple absolute- all possible rights

2. Fee simple conditional-all rights, but revocable if specific condition is violated

AND

Life estate with remainder interest

1. Ordinary Life Estate- created by the owner (give up your right to disposition)

2. Legal Life Estate-Imposed by law (defaults to statutes) e.g. in Florida, as soon as you buy a house your kids are automatically added

Leasehold Estate

- Tenancy for years

For a specific period of time (few days to decades)

Must be written if for more than one year

Written lease contract governs entirely

- Periodic tenancy

No define length of time

Often by oral agreement

State law governs notice of termination

Time required is usually half of the payment period

Tenancy at Will

-Leasehold Estate

prior lease is over, and tenant has not left;

under agreement, tenant stays, and prior lease terms stand until further notice

Tenancy at Sufferance

prior lease is over, and tenant has not left;

under disagreement, tenant told to leave, but stays anyway.

Legally, tenant is not trespassing

Modern Leasehold Interests

Traditional leasehold law evolved from an agricultural society

Concepts and precedents were inadequate for a modern apartment setting

Many states adopted residential landlord and tenant laws to solve this problem

Multifamily has more rights

Three main Non-Possessory Interests in Land

1. Easements

2. Liens

3. Restrictive Covenants

easement

The right to use land for a specific and limited purpose (e.g. Driveway, shared driveway)

Negative easements appurtenant

light and air easement

Scenic easement

Preventing someone from building so high that they block someone's view

Affirmative easements appurtenant

driveway or access right-of-way

sewer line

drainage

common wall

easements in gross

Right to use land, unrelated to any other parcel. Ex:

Extract minerals or oil and gas

Build a roadway or railway

Lay a pipeline, power line, or cable

Run an irrigation ditch

Place and maintain a billboard or communications tower

Harvest timber or crops

Conservation easement for wetlands preservation

Hunt, fish, snowmobile

Transferable separately from land title or ownership

No dominant parcel- only servient parcels

exclusive easement in gross

Conveys all rights of the easement

Recipient can convey across to others

Nonexclusive Easement in gross

Rights limited to one user only

Recipient cannot extend access to others

Owner an convey access to others

License

Similar to an easement in gross, but conveys permission rather than right

Revocable

Automatically terminated at the death of the grantor or sale of the land

Baseball ticket/ Private Parking in NYC

restrictive covenants

Covenants that impose restrictions on land use

Created at conveyance of land to a new owner

Examples:

setback lines, height restrictions for structure

minimum floor area

no freestanding structures

no chain-link fences

no RV'S or boats parked in view of the street

no cars regularly parked in the driveway

no garage door facing the street

required architectural review

no external antenna, satellite dish or clothesline

required use of professional lawn service

lien

An interest in property as security for an obligation

Usually a debt

general liens

Arise from events unrelated to the property

Court-awarded damages

IRS (tax) liens

specific liens

Mortgage

Mechanic's lien

Property tax, assessment lien

forms of co ownership

direct co ownership

tenancy in common

joint tenancy

tenancy by entirety

condominium

cooperative

forms of co ownership

indirect co ownership

LLC

partnership

corporation

real estate

In Direct Co-Ownership, a property with multiple owners

All share the right of exclusive possession

Cannot obstruct each other's use

May hold different sizes of shares

tenancy in common

Default co-ownership form

Multiple owners of same fee simple interest

Each owner can see or mortgage their interest independently

Can have different size shares

Note: this is a bad structure for business, or any property with many investors

joint tenancy

Defining characteristic: "right of survivorship" restricts inheritance to heirs of the last surviving owner

difficult to create and easily disrupted

prevented or restricted by law in some states

tenancy by the entirety

Joint tenancy for husband and wife

Protected against liens arising from either spouse alone, including judgements

Condominium

Combines single ownership and tenancy in common (by default) (for the whole building)

Created by condominium declaration

Bylaws define owner rights:

share of all obligations

restrictions on sale or rental

methods of altering bylaws

Air box-they own the air between the walls, floor, and ceiling between each unit

Tips regarding buying a condo

Condo documents You Want to Examine (more baggage than you think)

Declaration

By-laws

Minutes from recent board meetings

Any pending legal actions

Association budget

Cooperative (Co-op)

Corporation owns property

Each owner holds shares in the corporation and a proprietary lease (with no term and no rent)

Cannot mortgage individual interests

Owners mutually liable for any specific liens

Shares only sold to people they want to have share, comes with an infinite lease for an "air box", why not condo? because they can kick people out.

Extremely sophisticated

All private

Conveyance of Real Estate (RE) complicated for three unique reasons

RE is a complex bundle of rights

Rights to land are enduring

- rights available today depend on transactions long ago

Land is a continuous surface

- boundaries not obvious or natural

- boundary errors always hurt someone

So, with no Title certificates, how do we convey real property?

Deed, backed up with:

Title search

Chain of title

Evidence of title

May still not work

Title insurance

Need for adequate property descriptions

deed

A special, written contract (instrument) for conveying a permanent interest in real property

deed must be what

Must be in writing to be upheld by a court (Statue of Frauds, 1677)

-Everything in Real estate needs to be in writing

Requirements of a Deed

1. Grantor (with signature) and grantee

2. Recital of consideration

3. Words of conveyance

4. Covenants

5. Habendum clause

6. Exceptions and reservations clause

7. Description of land

8. Acknowledgement

9. Delivery

estate types

Fee simple absolute

Life estate

Conditional fee

grantor

Person or entity conveying real property

1. Must be of legal age

2. Must be legally competent

3. Must sign deed

grantee

Recipient of real property

No need to be of legal of age

No need to be competent

Only needs to be identifiable

Recital of consideration:

A minimal statement suffices: "For 10 dollars and other good and valuable consideration..."

Words of conveyance

Typically: "Does herby grant, bargain, sell and convey..."

Functions:

1. Affirms intention to convey real property

2. Determines type of deed

is purchase price on the deed or not

IT IS NOT

covenants

Legally binding promises

Covenant of seizin

Grantor has good title and right to convey it

Covenant against encumbrances

No encumbrances except as noted in deed (liens, easements)

Covenant of quiet enjoyment

No one with a better claim to title

Habendum clause

Defines interest being conveyed

"for use as" implies easement

"so long as" implies conditional

"and his/her heirs and assigns forever" implies fee simple absolute (full on ownership, marriage)

Requires drafting by a knowledgeable legal professional

"Don't try this at home!"

In Georgia, a real estate closing MUSTbe conducted by a Georgia real estate attorney.

Exceptions and reservations clause

Deed restrictions

Clauses withholding mineral or oil rights

Creation of an easement

Describing Real Property

Property descriptions

Must be unambiguous and enduring

Three methods acceptable for public records:

Metes and bounds

Plat lot and block number

Government rectangular survey

Unacceptable descriptions include street address and tax parcel number

-CAN PUT TAX ID ON DEED but (NOT REQUIRED)

Acknowledgment

Confirmation that grantor acted voluntarily

Notarized or equivalent (some states require witness)

delivery

Observable, verifiable intent that deed is to be given to grantee

Examples of failure of delivery:

Deed found in desk/ safety deposit box and handled to named grantee

Grantor's attorney hands deed to named grantee without explicit instructions to do so

T or F: No deed conveys rights that grantor does not have

TRUE

Four main types of deeds:

general

special warranty

deed of bargain and sale

quitclaim

General warranty deed

All three covenants; seizing, no encumbrances, and quiet enjoyment (title problems a problem in Athens cause age of town, so they won't give general warranty deeds out)