Chapter 7: Forms of Real Estate
Ownership

7 Forms of Real Estate Ownership
• Learning objectives
– Identify the four basic forms of co-ownership
– Describe the ways in which various business organizations may own property
– Explain how a tenancy in common, joint tenancy, and tenancy by the entirety are created, and how they may be terminated
– Distinguish cooperative ownership from condominium ownership
– Define key terms
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7 Forms of Real Estate Ownership
• Forms of ownership
– Severalty
– Co-ownership
– In trust
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7 Forms of Real Estate Ownership
• Forms of co-ownership
– Tenancy in common
– Joint tenancy
• Four unities: possession, interest, time, title
• Partition
– Tenancy by the entirety
• Married couples only
– Community property
• Married couples only
• Community property versus separate property
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7 Forms of Real Estate Ownership
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7 Forms of Real Estate Ownership
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7 Forms of Real Estate Ownership
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7 Forms of Real Estate Ownership
• Co-ownership
– Title held by two or more persons
• Tenancy in common
• Joint tenancy
• Tenancy by the entireties
• Community property
• Characteristics do not affect use or occupation of the property
• Differences arise: alienation (disposition, or conveyance)
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7 Forms of Real Estate Ownership
• Tenancy in common
– Ownership by two or more
• Undivided fractional interest
• Owners have unity of possession, not interest
• Ownership interest, not property, is divided
– Can be equal or unequal interest
– Can sell, convey, mortgage, transfer without approval
– At death, ownership interest passes to devisee
• PA Reg — two or more owners, unless married, are tenants in common
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7 Forms of Real Estate Ownership
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Figure 7.1
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7 Forms of Real Estate Ownership
• In Pennsylvania
– Tenancy in common
• If deed does not stipulate tenancy, two or more owners become tenants in common
• Unless conveyance is made to husband and wife
(tenants by the entirety)
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7 Forms of Real Estate Ownership
• Joint tenancy
– Unity of Possession — undivided right to possession
– Unity of Interest — equal ownership interests
– Unity of Time — acquire interest at the same time
– Unity of Title — acquire interest by the same document
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7 Forms of Real Estate Ownership
• Creation
– Title acquired by one document or deed
– Deed executed and delivered at one time
• Deed conveys equal interests to all parties
• Parties hold undivided possession of property
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7 Forms of Real Estate Ownership
Figure 7.2
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7 Forms of Real Estate Ownership
• Joint tenancy with right of survivorship
– Surviving tenants acquire the interest of a deceased tenant.
– Joint tenancy continues until one owner remains in severalty.
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7 Forms of Real Estate Ownership
• In Pennsylvania
– Transfer is automatic at death (supersedes a will)
– Right of survivorship must be clearly stated
– A and B as joint tenants WROS, not as TIC
– Otherwise, treated as tenants in common
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Joint Tenancy - Survivorship
Figure 7.3
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7 Forms of Real Estate Ownership
• Terminating joint tenancy
– Can be terminated by operation of law
• Bankruptcy
• Foreclosure
– Creation of a mortgage by a participant
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7 Forms of Real Estate Ownership
• Termination of co-ownership
– Partition suit
• Legal way to dissolve partnership when parties do not dissolve voluntarily
• Will try to physically divide
• Otherwise, must be sold
• Used with JT-WROS and T-I-C
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7 Forms of Real Estate Ownership
• In Pennsylvania
– Tenancy by the entirety
• Special form of joint tenancy between spouses recognized in PA
• Automatically created when owners are husband and wife
• Inherent right of survivorship
• Both must sign documents to convey property
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7 Forms of Real Estate Ownership
• Termination of tenancy by the entirety
– Husband and wife control ownership, transfer, indebtedness as a unit
– Cannot encumber or convey individual interest
– Automatic ownership at death of spouse
• Also can be terminated by the following:
– Agreement (execution of a new deed)
– Divorce (creates a T-I-C)
– Court-ordered sale
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7 Forms of Real Estate Ownership
• Tenancy by the entirety
– May be terminated by J ’ s DAD:
– Judgment sale (tenancy dissolved)
– Death (survivor inherits in severalty)
– Agreement (execute a new deed)
– Divorce (parties become tenants in common)
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7 Forms of Real Estate Ownership
• In Practice: can combine interests
• One building can be as follows:
– Split as T-I-C
• A couple owns half as tenants in the entirety
• Two, unmarried people own as joint tenants on the other half
– Interests can vary
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7 Forms of Real Estate Ownership
• PA does not recognize community property
– Marriage composed of equal partners — community property states
– In PA, a marriage consists of one entity
• With community property
– Separate property: owned by one spouse before a marriage, includes gifts and inheritances during marriage
— only one signature required (PA)
– Community property is that which both spouses acquired during the marriage (both must sign)
• On death, half owned by other spouse
• Other half distributed according to will
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7 Forms of Real Estate Ownership
• In practice
– One form of ownership may be more advantageous than another.
– Type of ownership has significant legal and estate planning implications.
– Only an attorney should give legal advice on these matters.
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7 Forms of Real Estate Ownership
• Ahem . . . a poem:
– Tenants in common are left to heirs,
And only they can have unequal shares.
– Thalia DeLong, 10/05
• Joint tenants: usually an emotional tie
• Tenants in common: usually a business or friendship relationship
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7 Forms of Real Estate Ownership
• Trusts: One person transfers ownership to someone else for the benefit of a third person.
– Trustor (known as settlor in Pennsylvania): the person who creates the trust
– Trustee: the owner and manager of the property for the beneficiary; has a fiduciary responsibility
– Beneficiary: the person who receives the benefits of the trust
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7 Forms of Real Estate Ownership
• Purposes of trusts:
– College education
– Prevent unanticipated use of funds
– Preserve anonymity of real estate purchasers
• Settlor (trustor) can be the following:
– Person or entity
– Trust company
– REIT (real estate investment trust)
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7 Forms of Real Estate Ownership
• Types of trusts
– Living Trusts — agreement during property owner ’ s lifetime
– Testamentary Trusts — agreement by will after property owner ’ s death
– Settlor (trustor) conveys property to trustee to care for asset(s)
• Trustee is compensated
• Beneficiary is cared for by trustee
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7 Forms of Real Estate Ownership
• Land trusts
– PA permits the creation of land trusts
– Real estate is only asset
– Title conveyed to trustee, benefits to beneficiary
– Public records do not usually name the beneficiary (used for secrecy)
– Beneficial interest can be transferred by assignment
– Property pledged as security without mortgage
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7 Forms of Real Estate Ownership
• Trust deeds
– Deed in trust — creation of a living, testamentary, or land trust
– Deed of trust — financing document similar to a mortgage
– Terms are not interchangeable
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7 Forms of Real Estate Ownership
• Ownership of real estate by business organizations
– Partnerships
– Corporations
– Limited liability companies (LLC)
– Syndications
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7 Forms of Real Estate Ownership
• Concept of ownership
– Different forms of ownership for business purposes:
• Ownership by the entity itself
• Ownership directly by its members
• Legal implications for taxes and securities
• Legal, tax, and securities advisors play an important role on developing effective methods of ownership
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7 Forms of Real Estate Ownership
• Partnerships
– Association of two or more business co-owners who share in the business ’ s profits and losses
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7 Forms of Real Estate Ownership
• General partnership
– All partners participate in management
– May be held personally liable for losses
– Even beyond their initial investment
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7 Forms of Real Estate Ownership
• Limited partnership
– Includes general and limited partners
– General partner runs the business
– Limited partners do not manage the business
• Each liable for only to the extent of individual investment
• Allows investment with smaller amounts of capital
• Popular method of organizing investors in real estate projects
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7 Forms of Real Estate Ownership
• In Pennsylvania
– Common law says that partnerships can ’ t own real estate
– In PA, under the Uniform Partnership Act, partnerships can own real estate
– Likewise, under the Uniform Limited Partnership
Act, limited partnerships can own real estate
– Creates different tax situations for each partner
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7 Forms of Real Estate Ownership
• Dissolution of general partnership
– Unless the partnership agreement makes provisions for the following:
• Death of partner
• Withdrawal of partner
• Bankruptcy of partner
• Organization continues in most limited partnerships
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7 Forms of Real Estate Ownership
• Corporation
– A corporation is a legal entity — a non-natural person
• Managed by a board of directors
• Can own real estate
• Chartered under state law
• Exists in perpetuity
• Charter allows or limits purchases of real estate
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7 Forms of Real Estate Ownership
• Corporate activities
– Individuals invest by purchasing stock
– Stock is personal property
– Shareholders have no direct ownership in real estate
– Shareholder liability limited to amount of investment
• Corporate profits usually subject to double taxation unless an S corporation
– S corporation
• Legal entity created to avoid double taxation
• Profits to shareholders are taxed
• Profits of S corporation are not
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7 Forms of Real Estate Ownership
• Limited liability company (LLC)
– Combines features of a corporation and a partnership, created by the Limited Liability
Company Act
– Owners are members rather than partners or stockholders
– Minimizes the personal liability of a partnership
– Offers tax advantages over a corporation for federal taxes
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7 Forms of Real Estate Ownership
• Condos, coops, and time-shares
– Ownership alternative to apartment living
– Efficient use of scarce building land
• Lower cost for lot development
• Less outlay for construction per living unit
• Savings in maintenance and heating bills
• Traditional rental system does not satisfy the need to own
• The terms condominium and cooperative refer to forms of ownership
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7 Forms of Real Estate Ownership
• Condominiums
– Condominium ownership
– Creation of a condominium
– Owning a condominium
– Operation and administration
– Condominium conversions
– Condominium sales
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7 Forms of Real Estate Ownership
• Condominium ownership
– Fee simple ownership
– Unique ownership characteristics
– Created under Horizontal Property Acts
– Full ownership of the layer of airspace
– TIC ownership of the common areas
• Can be for any type of real estate, not just residential
• Town house: distinguish between the architectural style and ownership form
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Condominium Ownership
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Figure 7.5
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7 Forms of Real Estate Ownership
• Condominium ownership
– Common area
• Common elements: land, courtyards, hallways, lobbies, elevators, etc.
• Can include: pool, recreation area, golf course, tennis court
• Owned in form of tenants in common (no right to partition)
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7 Forms of Real Estate Ownership
• Condominium is a form of ownership
• Architecture can be as follows:
– Highrises
– Town houses
– Patio homes
– Garden apartments
– Single detached houses
• Be sure to recognize if the property is a town house
(separately-owned lots) or a condominium
• Not limited to residential dwellings: commercial, office, parking condos
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7 Forms of Real Estate Ownership
Creation of a Condominium in Pennsylvania
• Uniform Condominium Act (federal)
• Owner must execute and record a declaration of condominium:
– Legal description of units and common elements
– Bylaws governing operation of owner ’ s association
– Survey
– Drawings and legal descriptions of each unit
– Restrictive covenants controlling ownership
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7 Forms of Real Estate Ownership
• Condominium ownership
– Deed conveys fee simple ownership of the living unit and proportionate undivided interest in the common areas
– Title held by one or more in severalty, by the entirety, as
joint tenants, or as tenants in common
– Owners can sell (association may reserve right of first refusal), lease, give it away, or leave it to heirs
• Each unit is a financial entity
– Receives an individual tax bill
– Foreclosure of adjoining unit has no impact on other units
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7 Forms of Real Estate Ownership
• Condo operation and administration
– By-laws create an association (of unit owners) to manage the condominium:
– Maintain, repair, and clean common elements
– Enforce by-laws (aka, covenants, conditions, and restrictions — CC&Rs)
– Maintain insurance (fire, extended coverage, liability)
• Governed by board of directors (elected)
– Administers bylaws following Uniform Condominium Act)
– Manages finances
– Can hire professional management company
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7 Forms of Real Estate Ownership
• Condominium fees
– Unit owners responsible for common elements
– Association collects funds for maintenance and special assessments
– Fees may be collected monthly, quarterly, or annually
– Fees may vary based on size of unit
– Unpaid fees may become a lien against a unit or can even be enforced by foreclosure
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7 Forms of Real Estate Ownership
• Condominium assessments
– Special assessments may be required for repairs or maintenance:
• Major repair
• Capital improvement
• New roof or recreational facilities
– Larger units pay larger assessments
– Unpaid assessments can become a lien
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7 Forms of Real Estate Ownership
• Uniform Condominium Act of PA
– Changes made in January 2005
– Affected:
• Governance by boards of directors
• Management and operation
• Collection of fees and assessments
• Buyers must be aware of HOA CC&Rs
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7 Forms of Real Estate Ownership
• In Pennsylvania Condominium Conversions
– Rental property can be transferred to condos
– Existing tenants have some protection:
• Must be properly informed
• Given ample time to consider purchase
• Allowed to remain as tenants for a period of time
(protects leases and rents)
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7 Forms of Real Estate Ownership
• In Pennsylvania: Condominium Sales
– PA Uniform Condominium Act requires that buyers be informed about fees and restrictions
– Must receive public offering statement 15 days before sales contract is signed (or receive 15 days to review after receipt)
– Fines up to $2,000 (5 percent)
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7 Forms of Real Estate Ownership
• Condo conversion
– New owners must get two-year warranty against structural defects
– Must receive report from independent architect or engineer detailing age and condition of property
• Unit sales: existing condominiums
– Owner must provide prospective purchaser with a resale certificate and condominium documents.
– Buyer can void AOS within five days after receiving certificate.
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7 Forms of Real Estate Ownership
• Cooperative ownership
– Title is held by a corporation
– Corporation offers shares of stocks for sale
(pieces of paper granting access to a unit)
– Create proprietary lease (personal property)
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7 Forms of Real Estate Ownership
• Cooperative management
– Determined by corporation ’ s bylaws
– Ownership requires
– Commitment to abide to bylaws
– Transfer of shares
– Board of directors may reserve right to approve a shareholder
• Tenant-owner may be required to sell shares back at original price (corporation benefits from profits)
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7 Forms of Real Estate Ownership
• Cooperative operation
– Tenant responsible for paying the mortgage on the cooperative
– Payment to maintenance and repair of common areas
– Insurance policies (liability, fire, etc.)
• Collected through monthly fees
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7 Forms of Real Estate Ownership
• Time-share interests
– Fee simple interest in time-share estate (real)
– Right to use a time-share use (personal)
• Purchaser receives the right to occupy a certain unit for a specified time frame each year (one week being the most common)
• Timeshares have special PA license (30 hours,
30 days, no test)
• Campgrounds have special PA license
(15 hours, 30 days, no test)
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