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Tax exemption is not automatic and must be applied for and approved by the taxing
authority.
Syndications
A syndication is a private or public partnership, corporation or any other ownership
form that pools funds for the acquisition and development of real estate projects.
Syndications are established when an individual or group purchases interests in real
estate for the purpose of transferring (syndicating) those interests to a larger number
of people, who will be the investors. The syndicators will be the managers. A syndicate
comes under the state and federal syndication laws. Many of the rules applying to
limited partnerships also apply to syndications.
Joint Ventures
A joint venture is a combination of two or more entities that join to undertake a specific
project. They often take the form of a general partnership or limited partnership. It
differs from a syndication or partnership in that it is usually intended to be temporary
and project specific. There usually is a separate agreement for each project.
Real Estate Investment Trusts (REITS)
In 1967 changes to the IRS code went into effect that permitted the formation of Real
Estate Investment Trusts (REITs), The purpose of this change was to permit the
formation of public trusts that could invest in real estate like a corporation, but pass
the profits and losses directly to its investors (without being double taxed). The stated
purpose of these special tax provisions was to allow and encourage small investors to
pool their money to participate in larger real estate transactions and thereby make a
new source of financing available to large real estate developments.
REITs generally invest their money in one of two ways:
1. They lend money for interest income generation. These REITs are called
mortgage REITs.
2. They buy, rent, sell and develop property. These REITs are called equity REITs.
The REIT is allowed to earn income from its real estate investment and pass the
income along to the shareholders (who are technically trust beneficiaries) of the REIT
without the REIT paying any federal income taxes. The REIT shareholders pay tax
on the income they receive at their own tax rates. To avoid paying taxes, a REIT must
distribute 90% of its income annually.
Fractional Ownership (Appurtenances)
A fractional ownership or interest is a division of the physical use of a property. A
leasehold and leased fee interest represent common examples of fractional interests.
Some are called appurtenances, and are automatic rights that go along with the
ownership of real estate. Air rights, water rights and subsurface rights are some
examples of appurtenances. These are most common types of fractional ownerships
and appurtenances:
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Horizontal Subdivision
A horizontal subdivision is the description of the surface area boundaries of a property.
It is used primarily to describe an individual ownership of a unit in a multi-story
condominium building.
Vertical Subdivision
A vertical subdivision refers to the division of air rights and subsurface rights.
Subsurface rights in the form of oil or mineral rights are commonly leased or
sold. Their exclusion may have little effect on surface land values, if the terms
of conveyance protect the surface from interference. Subsurface rights may also
involve accommodation of underground pipes and cable lines.
Air Rights
Within the distances normally encompassed above the land surface, real estate ownership
may be considered to be between vertical boundaries above the site. This means that
a 100-by-100 foot parcel of land is not a square surface but a cube. Accordingly this
cube maybe divided not only vertically but also horizontally as in the individual layers
of the cake. The useful height of the cube (number of stories) is limited only by the
practicalities of engineering, economics (highest and best use) and zoning. When air
rights are divided from a property and sold or leased (or an easement is granted) the
portion that is divided off is called an air lot.
With the advent of air travel, the right to total control of air space has been limited to
the space that the owner of the property could reasonably expect to use. Space above
that is shared by the public. The space where satellites fly is now considered to be
international space.
Water Rights (Riparian Rights)
Land bordering on flowing bodies of water such as rivers and streams enjoys the right
to use the water, along with owners of other contiguous portions of the same body of
water. Such water rights are referred to as riparian rights. Land bordering on large
bodies of water, such as a lake or a sea, carries with it littoral rights which allow the
owners use and enjoyment of an adjacent body of water.
Mineral Rights
Like air and other rights, mineral rights may be owned, sold, bought and transferred
to another party for profit. Within the distances normally encompassed below the land
surface, real estate ownership may be considered to be between vertical boundaries
below the site. This means that a 1OO-by-1OO foot parcel of land is not a square
surface but a cube. Accordingly, this cube may be divided not only vertically, but also
horizontally, as in the individual layers of a cake. The useful depth of this cube is limited
only by the practicalities of mining engineering. In areas where there are minerals
under the land, the ownership of the surface is often different than the ownership of
the subsurface.
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Transferable Development Rights (TDRs)
Transferable Development Rights (TDRs) emerged in the real estate industry during
the 1970s. A transferable development right is a development right that cannot be used
by the landowner, but can be sold to landowners in another location. Some TDRs are
used to preserve property for agricultural production, open space or historic buildings.
Lesser Estates (Non-Freehold Estates)
Leasehold
A leasehold estate is known as a lessee’s estate or tenant’s estate.
Leasehold Interest
A lease between the fee simple property owner and a tenant usually is a contract that
transfers some of the fee simple property owners rights to the tenant in exchange for
the payment of rent by the tenant to the fee simple property owner. The interest that
the tenant acquires is called a leasehold interest.
Leased Fee Interest (Estate)
An owner may lease real estate, thereby relinquishing the right of occupancy but
retaining the title to the fee, subject to the lease, including the recovery of use at
the expiration of the lease, known as the reversionary rights. The value of a leased
fee estate interest is profoundly affected by its length and terms, which may cover a
wide range of provisions agreed upon between the parties. Generally, a long lease for
commercial or residential property will develop leasehold value, as other rentals in the
area increase, unless it has adequate rent adjustment provisions.
Other Interests
Leasehold Estate - Estate for Years (Fixed Termination)
A leasehold estate that exists for a specified period of time is called a leasehold estate
for years. The word years is not interpreted strictly and the period of time can be any
specified period of time. Unless otherwise specified in the lease, at the end of the specified
time the tenant is supposed to move out and surrender the property to the property
owner in the same condition, less normal wear and tear, to the property owner.
Normally, a lease is not terminated upon the death of the landlord or the tenant, and
the heirs of either party are bound by the terms of the lease.
The basic principle of a lease is that the owner of the property gives up the right to use
the property to a tenant, and in return, receives rent.
Not all states require that leases for over a year must be in writing. Many states do
require that they be recorded. When a property is sold, it is normally sold subject to
any existing lease.
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Sandwich Lease
A lease held by a lessee who sublets all or part of his or her interest, thereby becoming
a lessor. Typically, the sandwich leaseholder is neither the owner of the fee estate nor
the user of the property. The sandwich lessee tries to profit from the rent differential of
the other leases.
Leasehold Estate - Estate from Period to Period (Periodic Tenancy)
A leasehold estate from period to period (periodic tenancy) is a lease for a specified
period of time that automatically renews itself, without the landlord or the tenant having
to notify the other that they wish to continue. If either party wishes to terminate the lease,
they have to give notice to the other party, in a manner and at a time specified in the lease.
Failure to give timely, correct notice automatically extends the lease into the next period.
A week to week or month to month tenancy is generally created when the tenant takes
possession of a property and pays rent on a weekly or monthly basis. Normally the
amount of notice that is required by either the tenant or the landlord is the normal
period for which rent is paid.
Leasehold Estate - Estate at Will
A leasehold estate at will gives the tenant the right to occupy the property for an
unspecified amount of time.
A common type of “at will” arrangement is when a landlord lets a tenant stay in
possession until some event at an unspecified time in the future takes place. A common
example is the completion of a new building for the tenant to move into.
Leasehold Estate - Estate at Sufferance
A leasehold estate at sufferance is created when a tenant, who originally legally
occupied the property, continues to occupy the property after they are supposed to
move out according to their lease arrangements. They continue to hold possession of
the property without the consent of the landlord, i.e., at sufferance.
Life Estate
A life estate consists of the total rights of use, occupancy, and control of a property
that is limited to the lifetime of a designated party. The designated party is known as
the life tenant. Usually it is the obligation of a life tenant to maintain the property,
and to pay the taxes during the period of the life estate.
During the period of a life estate there are two separate interests in the property:
1. The interest of the life tenant; and
2. The interest of the owner of the fee who is called the remainderman during the period that the life estate is in effect.
There are a variety of way life estates can be created. The most common are:
• By operation of law
• By will
• By a deed of conveyance
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Types of Life Estates
--Life estate (not inheritable) -conventional life estate - ordinary with
remainder: A life estate (not inheritable) is ownership, possession and control
for the life of an individual. When they die, the ownership, possession and control
goes to someone else. When the life that controls the ownership is the life of the
grantee, it is called a life estate ordinary. If the estate then passes on to a third
party, it is called - a life estate ordinary with remainder.
An example of a life estate ordinary with remainder is when a property passes on
to the children of the owner upon the owner’s death.
--Life estate (not inheritable) - conventional life estate - ordinary with
reversion: The same as a life estate - ordinary with remainder except if the
estate passes back to the grantor or their heirs, it is called a life estate ordinary
with reversion.
An example of this type of estate is when a property is deeded to a grantor’s wife
and when she dies the property passes back to the grantor if he is still alive, or
on to his heirs rather than to his wife’s heirs if he is deceased.
--Life estate (not inheritable) - conventional life estate - pur autre vie
with remainder: A life estate (not inheritable) where ownership, possession and
control is for the life of someone other than the person who has the ownership,
possession and control. When the third person dies, the ownership, possession
and control goes to someone else. When the life that controls the ownership
is not the life of the grantee, it is called pur autre vie. If the estate passes on
to someone other than the grantor, it is called a life estate pur autre vie with
remainder.
--Life estate (not inheritable) - conventional life estate - pur autre vie with
reversion: A life estate (not inheritable) where ownership, possession and
control is for the life of someone other than the person who has the ownership,
possession and control. When the third person dies, the ownership, possession
and control goes to someone else. When the life that controls the ownership is
not the life of the grantee, it is called pur autre vie. If the estate passes on to the
grantor it is called a life estate pur autre vie with reversion.
--Life estate (not inheritable) - legal life estate - dower: Dower is the life
estate a wife has in the estate of her deceased husband. It still exists in a few
states. The applicable state statutes provide that the surviving wife has from a
one-third to a one-half interest in the property owned by her husband, even if
her name does not appear in the title to the property.
In states where dower rights exist, it is important to have the wife of a property
owner
also sign the deed in order to prevent a dower claim in the future.
-- Life estate (not inheritable) - legal life estate - curtesy: Curtesy is the life
estate a husband, has in the estate of his deceased wife. It exists only in a few
states. The applicable state statutes provide that the surviving husband has
from a one-third to a one-half interest in the property owned by his wife, even if
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his name does not appear in the title to the property.
In states where curtesy rights exist it is, important to have the husband of a property
owner also sign the deed in order to prevent a curtesy claim in the future.
-- Life estate (not Inheritable) - legal life estate - homestead:
A homestead is a property that is used as a family home. In some states with homestead
laws all or art of the property is shielded from the claims of creditors. This exemption
applies only for unsecured loans. It does not apply to mortgages, tax liens or mechanic’s
liens. Homestead laws differ widely, especially as to how much is protected, which
ranges from the whole value of the homestead to some specified dollar amount.
Other Legal Interests
Other legal interests include easements, encroachments and adverse possession. They
are covered in detail separately in Chapter 5 of “Basic Appraisal Procedures”.
SUMMARY
What gives real property its value is its ability to satisfy the needs and desires of
human beings. In order to estimate the value of property it is necessary to understand
some value theory.
The terms real estate, real property, chattels and fixtures have different meanings
which must be understood by an appraiser in order to use them correctly.
Most appraisals made by real estate appraisers include an estimate of value only of the
real estate even when some non real estate items may be included in the sale. When
business assets or items of personal property are included in the estimated value, this
must be clearly explained in the appraisal report.
The characteristics of immobility, indestructibility, and uniqueness make land different
from most other commodities that are bought and sold in a market.
The four concepts that relate to land are geographic, legal, social and economic.
The bundle of rights theory illustrates the rights of real estate ownership which are the
right to sell, occupy, lease, mortgage, donate and do nothing with your property.
The government has rights and powers that effect real estate. They are the right to take
the property for the benefit of the public, exercise police powers to promote the safety,
health, morals and general welfare of the community. Property without an identifiable
private owner reverts to the government through the power of escheat.
There are two forms of private ownership in the United States called freehold estates
and non freehold estates. There are many forms of joint ownership including corporate,
condominium and cooperative ownership. Corporations are “artificial beings” which
can own real estate.
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Syndications are formed so that many investors can pool their resources to buy real
estate they could not afford to own as individuals. A popular form of syndication is
a Real Estate Investment Trust (R.E.I.T.) many of which issue stock that is publicly
traded.