REAL 4000: Real Estate
Chapter 2: Legal Foundations of Value
Chapter 1 Recap
Discussed general definitions of real estate – focus on bundle of rights concept
Discussed characteristics of real estate and why it is unique
Heterogeneity, durability, and immobility drive the uniqueness
Discussed the interaction of three markets that make up real estate
• User/space market is the market to occupy space
• Capital market is the supply and demand of financing both equity and debt
• Asset/property market is the market to buy and sell actual structures/land
Capital buys the property, users use the property, which drives the supply and
demand of property.
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Chapter 2
• What are rights and how do rights work in real estate?
• Basics of ownership and real property interests.
• Real estate law is unique.
Concept Checks
– 2.2, 2.3, 2.4, 2.5, 2.6, 2.8, 2.9
Test Problems
– 2.1, 2.2, 2.3, 2.4, 2.7, 2.8
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Chapter 2 – Legal Determinants of Value
Introduced the idea of real estate as a bundle of rights.
What are rights?
How are these rights enforced and how does enforcement affect value?
What is a possessory interest versus a non-possessory interest?
Real estate is often not owned by a single person/firm, so how do we address
co-ownership?
Two Dimensions: Physical and Legal. What does the government allow us to
legally do with our stuff?
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What are rights?
Rights are an inherent aspect personhood.
Rights are non-revocable, but can be reduced in the interest of health, safety, and welfare
Do you have a right to freedom? -> Life, liberty, and the pursuit of happiness?
Rights are enduring, they are not limited to the memory of owners/others.
Rights cannot be nullified by other persons or governments.
Some limitations: Eminent Domain.
Claims that the government is obligated to enforce.
Rights are a social issue
Rights are societal creations meant to determine between a privilege and an expectation.
Right to healthcare? Internet? Indoor plumbing?
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Social Contract Theory
• Social Contract: People surrender freedoms or rights in
exchange for protection of their remaining rights and/or the
maintenance of social order.
• Provides the basis for the legitimacy of government.
• Examines the human condition without government and notes
individual action would only be bound by personal power and
conscience
• “Might makes right”
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Attendance QR Code
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Social Contract Theory (Don’t need to write down)
•
Glaucon: People want to commit injustices against each other and people are afraid of injustices
being committed against them. People give up rights in order to protect themselves.
•
Socrates: Rejects this idea. A just person commits to the laws of society not because of fear, but
because they choose to participate in that society. They agree to the social contract of that
society which provided them the life they wish to live.
•
Hobbes: “In a State of Nature (no government), human life would be solitary, poor, nasty, brutish,
and short.” Argued for a monarchy (dumb).
•
Locke: The pure state of nature allows for complete liberty. People give up rights in accepting the
obligation to protect and care for others. (Smart)
•
JJ Rousseau: “Each of us puts his person and all his power in common under the supreme
direction of the general will; and in a body, we receive each member as an indivisible part of the
whole.”
• If the people as a whole decide the laws, then forcing people to abide by the
law isn’t a limitation of freedom, but an expression of it.
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Real Estate and the Law
Why is real estate unique?
• Heterogeneous products: Each piece of real estate is unique
• Immobile products: Generally difficult or impossible to move RE
• Localized markets: Location, location, location
• Segmented markets: An interested buyer/renter has a specific property type and setup in
mind. Each market is its own “segment”
• Private transactions: Most real estate is negotiated privately, so markets can be very opaque
• High transaction costs: After calculating in brokers, agents, appraisers, inspectors, costs of
just transacting can be very high
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Real Estate As A Bundle of Rights
Right of possession:
•
The person with the right to occupy and use the property
Right of control:
•
The right to control the use of the property, subject to covenants, HOAs, laws, etc.
Right of exclusion:
•
The right to keep whoever you want from using or entering your property
Right of enjoyment:
•
The right to use your property however you want within legal bounds
5th Right – Right of disposition. Right to sell.
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Real Property vs. Personal Property
Real Property
Personal Property
Surface of the earth and improvements
Personal and household goods
Air, up to reserved air space or tallest
structure
Intellectual property
Beneath the earth as far as technology
allows: Minerals, oil and gas, water
Music
Anything not affixed to land.
“Cuius est olum, eius est usque ad coelom
et ad inferos” – 13th Century English
Common Law
Real property rights/laws don’t apply due
to the ability to move.
“Whoever’s is the soil, it is theirs all the
way to Heaven and all the way to Hell”
Separate laws related to rights to personal
property.
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Physical Dimension of Ownership
Surface
Subsurface
Air
Rights to the land and the
improvements that have
been made to the land.
Rights to everything
below the surface.
Rights to the air up to the point
that you can reasonably use.
Mineral Rights
Typically allowed up to 500
feet (translates to 35-50
stories, only applicable if
building is under 500 ft)
Air, surface, and subsurface rights can be separated from one another
and transferred to other parties.
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Real Property: Rights in Three Dimensions
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Hudson Yards – A City within the City
Hudson Yards is being built over a
working rail yard.
Largest private development in US history
- $25B
Phase 1 is done.
Phase 2 was supposed to start in 2020
with a residential, office, and school, but
COVID has complicated that.
A rooftop restaurant opened then closed
within 2 days.
Phase 2 delivery now expected in 2024.
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Hudson Yards, Manhattan
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Fixtures and Real Property Interests
Announcements
Opened a Dropbox on ELC for your projects, topics sound
great! Due this Friday
Created a 10 question “quiz” on ELC, count towards your
HW grade, unlimited attempts, due next Monday
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Fixtures – Very important
Fixture: Real property that was formerly personal property
• Basketball hoop installed on a garage
• Refrigerator physically installed into a wall
• PVC pipe that is installed into the wall.
•
Construction materials are personal while sitting on the property, real once installed.
Personal property leaves with the tenant/seller, real property and fixtures do
not.
Fixtures are often identified in sales contracts.
How do you determine what is a fixture?
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Fixture tests
Intention of the parties (dominant rule)
•
•
If it was installed to be permanent, then it is a fixture. Common sense reigns.
Example: Kitchen appliances in a Single-Family vs. Apartment
Relation of the parties (variant of intention rule)
•
Tenants and buyers typically take precedent over landlords and sellers
Manner of attachment (Permanently Attached?)
•
If the item is permanently attached, then it is going to be a fixture.
Manner of adaptation (Custom made or fitted?)
•
•
If the item was custom designed for the property, then it is going to be a fixture.
Custom vs. generic blinds.
Unwritten “5th rule” – put in the contract!
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Trade Fixtures
Trade fixtures are the personal property of a tenant that were installed to help the tenant
conduct business.
• Form of fixture that remains personal property.
When a tenant installs something exclusively for its own business, it remains the tenant’s
personal property, thus remaining with the tenant after a lease ends.
Examples:
• Fencing on land for a cattle farm
• Shelving in a retail store
• Machinery installed in an industrial factory to make widgets
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Attendance QR Code
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Real Property Interests
Two types of legal real property interests:
•
Possessory Interests (usually called an “estate”)
•
•
Includes full rights of exclusion and possession
Nonpossessory Interests
•
•
•
Does not include the right of exclusion and possession.
Includes limited rights of use and control
Examples:
•
•
Easements, liens, restrictive covenants.
Research on restrictive covenants.
Legal interests may be either:
•
•
Freehold: Exists for an unspecified period of time. (Fee simple)
Leasehold: Exists for a specified period of time. (Apartment lease)
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Ownership Estates (Freehold)
Fee Simple Absolute
Fee Simple
Conditional
Life Estate with
Remainder Interest
Receive all possible rights
Receive all possible
rights, but is revocable if a
condition is violated.
Owner retains all rights
except the right of
disposition.
The most complete estate
that you can possess.
What you typically think of
as ownership
Usually paired with a
“reverter” interest
https://www.insidehighere
d.com/news/2016/09/15/c
ritics-question-spendinglibrarians-donationscoreboard
A firm/individual purchases
all property rights that
transfer on death of
seller/owner.
Live on campus and agree
to donate property to the
university.
Legal life estate – life
estate created by law not
the owner. Florida
homestead law.
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Leasehold Estates
Ownership of a temporary right to hold land or property in which a lessee
(tenant) holds rights of real property by some form of title from a lessor
(landlord)
Key Differences from Freehold Estates:
• Exist for a limited period.
• Diminished right of disposition (limits on if/when you can sell that interest)
• Title is not conveyed
Four types determined by the terms of occupancy.
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Leasehold Estate Types
Four Main Types:
• Tenancy for Years
• Stated beginning and ending dates
• Periodic Tenancy
• Daily, Monthly, Annual
• Automatically renews unless either party provides enough notice
• Tenancy at Will
• Can be terminated by either party without notice.
• Tenancy at Sufferance
• Tenants fails to vacate when they are supposed to.
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Non-Possessory Interests in Land
Non-Possessory Interest in Land
Easements
Liens
Restrictive Covenants
Right to use land for a
specific and limited
purpose
Interest granted on a
property as security for a
claim (mortgage)
A covenant imposing a
restriction on the use of
land to minimize spillover
effects.
Easement appurtenant –
Right to use neighbors
property that transfers
with land.
Liens are either:
Specific (claims against a
certain property) or
HOAs typically enforce
rules through restrictive
covenants.
Easement in gross –
Easement that attaches a
right to a person not land.
General (claims against
all a person’s assets)
Can be applied to a single
property or whole area.
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Easement Appurtenant
Right of use a (dominant) parcel of land “enjoys” over an adjacent (servient)
parcel. Dominant parcel gets the use, servient must allow use.
Affirmative easements: Easement allowing dominant parcel some use of
neighbor’s property. Ex: Driveway, sewer line, common wall.
Negative easement: Easement preventing servient parcel from doing
something that imposes on the dominant parcel. Ex: Light or sound easement.
“Runs with the land”: Rights and obligations are inseparable from the parcels
involved
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Dominant and Servient Parcel
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Dominant or servient?
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Creation of Easements
Express
Grant/Reservation
Easement by
Implication
Easement by
Prescription
Created when a property
sells.
Circumstances imply that
the owner of the parcel
intends for someone else
to have the right to use
their parcel in a certain
way.
An easement created from
open, adverse, and
continuously hostile use of
neighbors property.
Express grant: Easement
rights are given to
someone else by new
owner.
Express reservation:
Owner creates an
easement for themselves
included in the sale.
Example: Leasing mineral
rights implies that the
lessee have the right to
access the surface of the
parcel in order to extract
the minerals.
Allowing someone to use
your property may allow
them the acquire easement
rights.
Ex: Driveway spills into
neighbor’s property. You’ve
used it for years. Neighbor
builds a toll booth.
Created by a lawsuit
(typically)
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Easements in Gross “Commercial Easements”
Right to use land, unrelated to any other parcel for a specific and limited purpose.
Typically used for commercial purposes, i.e. an easement to access mineral rights owned by a
company. Can be exclusive or nonexclusive.
Transferable separately from land title or ownership – a company can sell their easement.
No dominant parcel – only servient parcels.
Noncommercial applications may be easements in gross for hunting/fishing.
Conservation utilizes these to give non-profits access to preserve wetlands/wells/rivers/etc.
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Restrictive Covenants
Easements create legally bound access to property.
Covenants are restrictions on the use of land so that the value and enjoyment of adjoining or
nearby land will be preserved.
Created at conveyance of land to a new owner (for HOA’s this occurs when the developer first
sells parcels)
Neighborhoods with more covenants have higher values. (Hughes and Turnbull 1996)
Examples: Setback lines, height restrictions, minimum floor area, no chain-link fences, no RVs
or Boats parked in view of a street, required architectural review, required professional lawn
service, limitations on coloration of houses.
Enforced through courts and fines.
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Creation
Enforcement
Two methods (kind of):
Enforcement by a court injunction
Restriction in a deed conveying a single
parcel to a new owner
Enforcement only by “parties at interest”
Isolated deed restrictions enforced
by grantor or grantor’s heirs
HOA enforcement
Restrictions imposed on an entire
subdivision at creation
HOA’s CC&R’s
Mutually binding on all purchasers
Courts are generally reluctant to enforce in
case of: delayed enforcement
(abandonment), changes to a
neighborhood, changed public policy.
“Common sense” application.
Mandatory retirement in some states
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Homeowner’s Associations
HOA’s are typically formed in richer and
more suburban areas of cities. (Chueng et.
al. 2014)
HOA’s sell at a premium. (Cheung et. al.
2013)
HOA’s are created (usually) by a developer
of a subdivision who creates the set of
rules for the subdivision through its
Covenants, Conditions, and Restrictions.
How do you think developers decide what
kind of CC&R’s to impose on subdivision?
Foreclosures create what we call a
“Contagion Effect”, which is a negative
spillover on nearby homes. Do you think
foreclosures in HOAs are more or less
impactful?
My research argues that HOAs are an
application of the Coase theorem.
In some states, HOA liens receive priority
over all other liens.
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Liens
Interest granted in a property as security for a claim (usually financial, i.e. mortgage)
Specific Lien: Claim against a particular property not a person (most real estate liens)
General Lien: Claim against all property someone owns (think child support)
Common RE Liens:
Property Tax
Mortgage
Mechanics and HOA liens
How do you think priority is determined?
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Lien Priority
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Co-ownership
Co-Ownership
What is it?
When the same bundle of rights is held/owned by more than one party.
Can be either direct or indirect:
Indirect: Real estate is owned by corporation or business that the individual owns shares in
Direct: Multiple parties hold a titled interest to the same set of property rights.
NOTE: Don’t worry about copying everything down for the next few slides. Maybe just a general
“here’s a co-ownership type and what it means”. I will post the full definitions you can use on an
exam.
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Tenancy-In-Common
(TIC)
Condos
Co-Ops
A shared tenancy in which
each holder has a distinct,
separately transferable
interest.
Combines single ownership
and tenancy in common
Corporation owns
property
Property is owned jointly but
everyone in the TIC has their
own individual interest.
May have unequal shares.
Everyone can transfer or
mortgage their share without
permission from other
members of the TIC.
Very difficult to change as all
TIC members get a vote.
Created by condominium
declaration
Bylaws define owner rights:
• Share of all obligations
• Restrictions on sale or
rental
• Methods of altering
bylaws
Creates additional level of
(private) government
History of owners not
understanding the restrictions
and obligations
Each owner holds shares
and a proprietary lease
(no term and no rent)
Cannot mortgage
individual interests
Owner’s mutually liable
for any specific liens
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Joint Tenancy
Key feature: Right of survivorship (dying
person’s interest transfers to other owners)
Must meet the following four conditions to
be valid:
• Unity of time
Other Features:
• Shares cannot be transferred without
ending the joint tenancy
• Non-inheritable
Tenancy by the Entirety
• Joint tenancy for married couples
• Considered socially constructive, it is
easier to create and less fragile.
• Each individual’s interest must begin
at the same time.
• Unity of title
• Each individual must possess the
same estate.
• Unity of interest
• Each individual must have the same
percentage share in the property.
• Unity of possession
• Each individual fully possesses the
entire property.
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Timeshares
Range in “quality” of ownership:
• Condominium share
• Leasehold
• License
Choice of floating time intervals (e.g. within three months) and choice of resorts
Industry with a questionable history
Never a financial investment
Note that the developer has all the market information and the buyer has none
Key is ability of organization to deliver enduring service
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Indirect Co-Ownership (Corporate)
One owner of RE that is some legal entity (Partnership, LLP, LLC, Corp., etc)
Multiple parties own the legal entity
Entity has a specific (and complicated) definition of who owns what rights and how
Typically used for commercial property
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Indirect Co-Ownership (Corporate)
Entity Holds Title
General
Partnership
Ownership passes through the entity
Limited
Partnership
Why?
Limited Liability
Co.
• Limited liability
• Undivided ownership
• Complicated command and control which
protects owner rights
Corporation
(Co-op)
Trust
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Summary
There is real property and personal property
….and the problem of fixtures
Real estate is a bundle of rights:
•
•
•
•
Exclusive possession
Control
Enjoyment
Disposition
This bundle has many variations
Estates – freehold or leasehold
Non-possessory interests – easements, restrictive covenants, liens
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Unit Review
Concept Checks
– 2.2, 2.3, 2.4, 2.5, 2.6, 2.8, 2.9
Test Problems
– 2.1, 2.2, 2.3, 2.4, 2.7, 2.8
Preparatory reading if you have the textbook:
Chapter 3 of the textbook
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Next Class: Conveying Real Property Interests