bru7735x_PPT_CH01

Chapter 01: Real Estate Investment: Basic Legal Concepts

Real Estate in the U.S. Economy

• Residential Investment: Spending in 2023 was $4.45 trillion, ~4% of GDP.

• Nonresidential Structures: Spending totaled $3.54 trillion, about 3.2% of GDP.

• Owner-Occupied Real Estate Value: In Q3 2024, the market value was $48.2 trillion, including vacant land and mobile homes.

• Local Government Revenue: Real estate generates nearly 70% of local revenue via property taxes.

Composition of Wealth in the United States by Asset Type

• Overall layout of wealth distribution across different forms of assets within the U.S.

Global Real Estate Universe in Comparison (2022)

• Comparative overview of global real estate markets and their dynamics.

Global Value Growth by Asset

• Analysis of how global real estate values have changed over various periods.

Distribution of Global Real Estate Value

• Examination of how real estate values are distributed around the globe.

Performance: S&P 500 Index vs. House Prices

• S&P 500 Index: Reflects U.S. equities and performance of large cap universe.

  • Source Reference: Investopedia.

Capital Markets

• Function of Capital Markets: Allocate financial resources among households and firms needing funds.

• Competition for Funds: Real estate competes with asset classes like stocks and bonds.

• Categories:

  1. Equity Interests: Ownership in real estate; investors expect returns through rent and price appreciation.

  2. Debt Interests: Claims held by lenders on borrowed funds secured by entities and assets.

The Four Quadrants of Real Estate Capital Markets

• Overview of how real estate markets are categorized and interact.

Public Capital Markets

• Trade in small, homogeneous units (shares of ownership) on public exchanges.

• Characteristics:

  • Many buyers and sellers.

  • High price transparency.

  • High liquidity and informational efficiency.

Private Capital/Property Markets

• Characteristics:

  • No centralized market, leading to infrequent trades and lack of transparency.

  • Transactions often involve whole assets.

  • Lower liquidity and higher transaction costs than public markets.

Property (Asset) Market

• Definition: Market for ownership claims to real estate assets.

• Buyers receive rights to cash flows from leasing.

• Market Demand: Composed of investors looking to buy/sell properties.

• Integration of Property Market: Investment capital can come from varied sources, making it integrated.

Real Estate Capital Markets

• Scope: Involves buying, selling, and financing of real estate.

• Includes: Public markets (REITs) and private markets (direct real estate investments).

• Key Players:

  • Institutional investors (e.g., pension funds, insurance companies).

  • Individual investors.

  • Real estate developers and financial institutions (banks, mortgage lenders).

  • Government regulatory bodies.

Real Estate as Property

• Definition of Property: Anything that can be owned or possessed.

• Types of Property:

  1. Tangible Property: Physical assets (real or personal).

  2. Intangible Property: Non-physical assets (e.g., stocks, bonds).

The Term 'Real Estate' Used in 3 Ways

1. Tangible Asset: Land and improvements (infrastructure, utilities, fixed structures).

2. Bundle of Intangible Rights:

   • Rights derived from the Constitution, which are enduring and can be limited by government for health and safety (eminent domain).

3. Industry and Profession:

   • Involves brokerage, development, leasing, property management, investment management, etc.

Estates in Real Estate

• Definition: Represents all that a person owns, encompassing real property ownership.

• Classifications:

  • Based on Rights:

    • Estates in Possession: Current ownership.

    • Estates Not in Possession: Future interests in property.

  • Based on Use:

    • Freehold Estates: Indefinite ownership, encompasses complete ownership.

    • Leasehold Estates: Possession for a specified duration.

Examples of Estates

• Freehold Estates:

  • Fee Simple Estate: Most complete form of ownership.

  • Life Estate: Ownership lasts as long as a specified person's life.

• Estates Not Yet in Possession:

  • Reversion: Future ownership after a specified period.

  • Remainder: Third party occupies for a specified term, then ownership reverts.

Examples of Leasehold Estates

• Estate for Years: Defined duration lease.

• Estate from Year to Year: Continues indefinitely until terminated by notice.

Interests, Encumbrances, and Easements

• Interest: Rights/claims on real property; e.g., secured interest with mortgages.

• Encumbrance: Pledging property as security for obligations.

• Easement: Nonpossessory interest allowing use of land for specific purposes, e.g., utility lines.

Assurance of Title

• Definition: Ensures rightful ownership transfer and title quality.

• Methods of Title Assurance:

  1. Warranty Deed: Comprehensive assurances about title quality.

  2. Abstract and Opinion: Title search followed by a lawyer’s assessment.

  3. Title Insurance: Protects against financial loss due to title defects.

     • Types: Owner’s policy and lender’s policy.

Recording Acts

• Provides a public record that secures ownership interests.

• Constructive Notice: Obligation to be aware of public records.

• Mechanic's Liens: Can be recorded after work completion (seller’s affidavit, lien waiver).

Limitations on Property Rights

• Government Restrictions:

  • Police Power: Includes zoning, building codes.

  • Eminent Domain: Power of the government to take private property for public use.

• Private Restrictions: Limitations imposed on property use based on personal/business objectives (e.g., deed restrictions).