Chapter 2
Legal Foundations to Value
Real Estate
FIN 331
Fall 2013
Chart illustrates the inflation-adjusted median price of a single-family home in
the United States over the past 44 years. More recently, the inflation-adjusted
price of the median single-family home has declined and is now testing support
of its two-year upward sloping trend channel.
Are These Houses Really Alike?
A. City vs. County?
B. Implied easements?
C. Prescriptive
easements?
A. Easements in gross?
B. Homestead rights?
C. Restrictive covenants?
2-3
The Nature of Property
A. Real Estate as a bundle of rights
B. What do we mean by Rights?
C. How do property rights differ from
personal rights?
D. How does personal property differ from
real property
E. What do we do when the difference is not
clear?
REAL PROPERTY AS A BUNDLE OF
RIGHTS
A. What do we mean by rights?
1. Claims that the government is obligated to
enforce
2. Derived from the Constitution & Bill of Rights
3. Different from raw power
4. Nonrevocable and Enduring
5. Can be reduced in the interest of health, safety,
and welfare
6. Not limited to the memory of owners or others
7. Cannot be nullified by other persons or by
government
REAL PROPERTY AS A BUNDLE OF
RIGHTS
B. How do personal rights differ from property
rights?
1. Personal rights
a. Freedoms guaranteed by Constitution
b. Supreme Court interpretations of Constitution
2. Property rights
a. Exclusive possession
b. Enjoyment of the use or benefit: Use, collect rents,
harvest.
c. Freedom to dispose as one pleases (within limits of
safety): sell, convert, rebuild, etc.
REAL PROPERTY AS A BUNDLE OF
RIGHTS
C. How does real property differ from personal
property?
1 Real property: Rights in land and its permanent
structures (see Exhibit 2-2)
a Surface of the earth and improvements
a Air, up to reserved air space or tallest structure
b Beneath the earth as far as technology allows: Minerals, oil
and gas, water
2 Personal property: All other property
a Personal and household goods
b Intellectual property
c Music
REAL PROPERTY AS A BUNDLE OF
RIGHTS
A. How do we distinguish real from personal
property?
1. Fixtures (Real): typically something not
readily movable.
Examples: custom screens & draperies, kitchen
appliances such as radar ranges, garbage disposals
(attached to property)
2. Personal: typically something moveable
Examples: furniture, pictures, “customary
assumptions of the realm”
REAL PROPERTY AS A BUNDLE OF
RIGHTS
3. Special rule for “Fixtures”
a. The manner of attachment
b. The character of the article and manner of
adaptation
c. The intention of the parties
d. Relation of the parties: landlord and tenant
relationships
1) Trade fixtures considered personal property
2) Agricultural fixtures at taxes are considered property of
the tenant
3) Same rules apply for residential tenants
Real Property Bundle of Rights
A. Interest: Any set of rights in real property
B. Estates: A real property interest that
includes the right of exclusive possession
C. Non possessory interests:
1. Easements
2. Restrictive covenants
3. Liens
Possessory Interests [Estates]
A. Fee Simple Absolute - all possible rights
B. Fee Simple Conditional - all rights, but
revocable if specific condition is violated
C. Ordinary Life Estate and Remainder
1. Rights are unbundled
2. Owner retains full rights until death
D. Legal Life Estate; created by act of law
Leasehold (Non-ownership or Nonfreehold) Estates
A. Leasehold interest are possessory interests and are therefore Estates
1.
2.
3.
They are limited time
The right of disposition is diminished
They are not titled interests
B. Tenancy for years
1.
2.
3.
Leasehold interests are for a specific period of time (few days to
decades)
Must be written if for more than one year
Written lease contract governs landlord-tenant relationship
C. Periodic Tenancy
1.
2.
3.
No definite length of time
Often by oral agreement
State law governs notice of termination
Minimum time required for notice is usually half of the payment period
Leasehold (Non-ownership or Nonfreehold) Estates
D. Tenancy at Will
1. continue tenancy after the leases expired
2. Generally an oral agreement between the
tenant and the landlord
E. Tenancy at Sufferance
1. When tenant is supposed to vacate but does
not
2. This does not constitute trespassing because
of the previous leasehold interest
Nonpossessory Interests in Land
A. Easements: The right to use land for a specific and
limited purpose
1. Affirmative easements:
a.
b.
c.
d.
Driveway or access right-of-way
Sewer line
Drainage
Common wall
2. Easements Appurtenant
a. Involves the relationship between 2 adjacent parcels of land
b. The dominant parcel benefits from the easement
c. The servient parcel is constrained or diminished by the
easement
d. May be positive (some intrusion) or negative (no intrusions)
Nonpossessory Interests in Land
3. Easements in Gross (Commercial
Easements): right to use land unrelated to
other parcels
a. Extract natural resources, harvest timber/crops
b. Add roadways, ditches, pipeline, etc.
c. May be transferred separately from land title or
ownership
Nonpossessory Interests
Examples:
On parcels A and C is a common
driveway easement.
On parcel C is an implied
easement of access in favor of
parcel B.
Parcel E as an involuntary
driveway easement known as an
easement by prescription.
Parcel F has an implied easement
for access to extract oil.
The power lines and the roadside
electric lines are easements to
permit installation and
maintenance.
The wildlife preserve on parcel G
may be protected by a conservation
easement.
Nonpossessory Interests in Land
A.
B.
C.
License
1.
2.
An easement is the right to use another’s land for a specific and limited purpose
A license is permission to do so and is revocable by the grantor
Restrictive Covenants
1.
2.
3.
4.
In a deed for a single parcel of land OR an entire subdivision
Enforceable in court of law or by “parties at interest” ~ HOA
Type of building and materials, minimum square footage, fences, etc.
Can only be enforced by those who hold a legal interest in the property
Liens: An interest in property as security for an obligation
1.
General Liens: Arise from events unrelated to the property
a.
b.
2.
Court awarded damages
Federal tax liens
Specific liens: Arise from ownership and use of the property
a.
b.
c.
Mortgage
Mechanics’ lien
Property tax, assessment or Community Development District (CDD) lien
Liens
A. An interest in property that serves as security for an
obligation
1. General Liens: Arise from events unrelated to the
property
a. Court awarded damages
b. The lien is security for the payment of the judgment
2. Property Tax and Assessment Liens
a. Enjoy top priority among liens
b. Assessment liens can last for several years
3. Community Development District (CDD) lien
4. Specific liens: Arise from ownership and use of the
property
a. Mortgage
b. Mechanics’ lien
Liens
FORMS OF CO-OWNERSHIP
A. Indirect: Through business organizations
or trusts
1.
2.
3.
4.
5.
General Partnerships
Limited Partnerships
Limited Liability Companies
Corporation (Co-op)
Trust
Entity holds title. Ownership passes through the entity.
Interest may not be divided.
Indirect Ownership – Pros/Cons
A. https://www.reit.com/investing/investingtools/reit-directory/reits-by-ticker-symbol
B. http://www.investingdaily.com/11132/nonenergy-mlps-just-say-no/
C. http://www.vanguard.com/pdf/ISGPMLP.pd
f
FORMS OF CO-OWNERSHIP
B. Direct:
1.
Tenancy in Common; each owner retains full rights
a. All have fee simple interest – can be divided (sell, mortgage)
2.
Joint Tenancy with right of survivorship; most common in US
a. Restricts inheritance to heirs of last owner, unlawful in some states
3.
Tenancy by the Entirety: similar to 2 above
a. Typ. Husband and wife. Protection against liens & judgments if against
one spouse
4.
Condominium; single ownership (fee simple) with tenancy in
common (of communal elements)
a. Bylaws define owner rights
5.
Cooperative; a proprietary corporation – each owner has a
proprietary lease (in effect ownership of a specific portion) and
can be sold, transferred, or bequeathed.
FORMS OF CO-OWNERSHIP
6.
Ownership interests from marriage
a. Dower/Curtesy: common law granting of one third life estate to
survivor in the real property of the decedent
b. Dower covers the widow’s claim, curtesy the widower
c. Life estate is not marketable
7.
Elective Share
a. In law, grants the surviving spouse a share of most of the wealth of the
decedent
b. Elective share applies to both real and personal property
c. Elective share law may not encompass all of the decedent’s wealth
8.
Community Property
a. Gives a spouse a one-half claim at all property acquired “from the fruits
of the marriage”
b. Excluded from claims are any property acquired before the marriage (a
motive for prenuptial agreements?)
Two Main Forms of Marital Property Rights
TIMESHARE
A. Multiple individuals having use of property
but not simultaneous interests
B. the estate is divided into separate time
intervals
C. Timeshare rights
1. any contract that may convey any level of real
property interest
2. Buyer often acquires a leasehold interest rate
fixed number of years
3. A buyer may also acquire a license for partial
use
SPECIAL ISSUES REGARDING LAND
A. Rights to Water
1. Who owns the land under a body of water?
2. Who controls use of land under a body of
water?
3. Who has the right to use the surface?
4. Who has the right to use the water itself?
5. Who has the right to use groundwater?
SPECIAL ISSUES REGARDING LAND
B. Rights to Oil, Gas, and Minerals
1. Rights to the subsurface include rights to
minerals
2. Mineral rights can be separated from land
ownership
3. In some states, mineral rights imply ownership
of the space minerals occupy
4. Oil rights
a. Ownership states: Oil is simply another mineral
b. Traditional “rule of capture” (If you can remove it, it’s
yours) is being limited due to extensive secondary
recovery methods.
HOMEWORK ASSIGNMENT
A. Key terms: Dominant vs. Servient parcel,
Types of Liens, Property rights, Restrictive
Covenants, Forms of Tenancy, Fee Simple
types, Easements, Mineral Rights – Rule of
Capture
B. Study Questions: 1, 3, 5, 7