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Real Estate Test 1 Study GuideModule 1: Introduction to Real Estate- Real Estate and Real Property- real property: rights in land and its permanent structures- the bundles concept: bundles of rights and services- combination of the right of exclusive possession, use, and disposition- interests- the earth- to sky concept of ownership- what you own- immovable (fixed) property and the rights associated- Personal Property (chattels)- movable property/ anything that is not real estate- Deeds, Titles and a simple comparison of real property and personal- proof of ownership- nonpayment of debts- fixtures: once movable (personal property) but now considered fixed (real estate)- when do building materials cease to be the property of the contractor and become part of the land and its permanent structures- matters for buyers, taxers, lenders- legal tests for fixture status:1. intention of the parties: facts of the situation and the intention that an observer would reasonably conclude2. manner of attachment: whether the removal of the object results in damage to the property3. test of adaptability (adaption): items that have been custom designed or fitted tend to be regarded as fixtures exception: trade fixtures: items installed by a commercial tenant to conduct its business and are ALWAYS personal property unless abandoned at lease end- Physical Characteristics of Real estate1. immobility: fixed location- ex: accessibility2. uniqueness: real estate is a heterogeneous product -> distinctive characteristics- ex: legal concept of specific performance3. durability (long life)- Market and Transferability Characteristics1. location- economic location (situs)- physical location2. market characteristics- segmented markets: many submarkets- localized markets: localized competition (many exceptions such as high-end ocean front estates and corporate headquarters location)3. interdependence of real estate uses- highlighting the importance of zoning laws and other regulations4. poor information flow- negotiated deals: info is asymmetric and valuable- seller has more info than the buyer5. transactions- large, complicated, infrequent, and expensive (high transaction costs)6. inelasticity of supply- long gestation period- new real estate product is slow to develop- supply inelasticity is a major contributor to market cycles. The market progresses from a shortage to too much of a good thing- Residential Real Estate: Density dependent- as land gets more expensive, developmental density must be increased to achieve desired returns- low density residential development: single family housing- units for occupancy by one family- single family detached housing- attached housing: examples includes plexes, townhouses- multifamily housing:- moderate density: garden apartments- high density: apartment towers- condominiums- Retail Real Estate: Key Terms- anchor tenant: the primary draw to a shopping center- trade radius: the market area for a shopping center- primary trade radius: generates about 60-70% of business- secondary trade radius: the next 20-30%- gross leasable area (GLA): the size in square feet- construction styles- strip shopping center- open or enclosed mall- Types of Shopping Centers- neighborhood centers: aka convenience centers- GLA: averaging approx. 50,000 sq ft- acreage required: 3-5 acres- primary trade radius: 1-3 miles- anchor: usually a grocery store- community centers: one size larger, usually a strip center- GLA: averaging approx. 150,000 sq ft- acreage required: 10-20 acres- primary trade radius: 2-5 miles- anchors: usually two, typically a grocery and department store- largest shopping center owner (pre-structuring) was General Growth Properties (GGP)- regional and super regional malls- GLA: averaging approx. 400,000 to 1.5 mil sq ft- acreage required: 40-100 acres- primary trade radius: 7-12 miles- anchors: usually 4-6; full-line department stores- because these malls are capital intensive, ownership is relatively consolidated- power centers- GLA: approx. 250,000 to 600,000 sq ft- primary trade radius: 5-10 miles- anchors: usually 2 big box stores- specialty centers- anchors not apparent, yet high-end retail- outlet centers: Tanger, Belz, Horizon- lifestyle/destination centers: usually have a theme for products and architecture, often tourist-based- Offices- lower density: office parks- higher density: office towers- Industrial- industrial parks, business parks, commerce parks- warehouse and distribution facilities- special purpose (single-use): manufacturing, data storage facilities, etc- Hospitality real estate (hotels and motels)- highway, airport, overnight motels (convenience)- business, vacationers- commercial hotels- business, conventions- destination hotels (resorts)- vacationers, conventions- Real Estate Development: the creation of the new “product”- the development process1. establish the site- secure and finance the land- use of options and due diligence2. feasibility analysis and refinement- legal feasibility: compatibility with regulations- physical feasibility: engineering studies- financial feasibility: market and financial analysis3. permitting and entitlement- value is added as property is entitled- value is lost when permissions are downsized or denied4. assemble the “team”5. financing- acquisition: land purchase- development: preconstruction activity (improvements to the land)- construction: building (improvements on the land)6. construction7. marketing and lease-up- to be successful in real estate, you must sell or lease whatever you build/make8. operating phase- a stable, operating property is a solid real estate investment- an underperforming building, no-Real Estate Development Special Topics1. build-to-suit development- custom building for a tenant who agrees to a long term lease- reduced risk because tenant is secured prior to development- remember, a builder/developer will always build what you want if you are willing to buy it 2. speculative development (NIB)- building without pre-sales or pre-leasing- very risky; high carrying costs (including debt service) but no tenants or pre-sales (guaranteed income)- many high-end homebuilders were caught holding millions of dollars worth of speculative houses when the housing market collapsed. The builder carries the financing and other costs on empty houses- short term selling that people watch- “phantom demand” – build when demand is anticipated but isn’t there- pre-buying = downpayment- tenants guarantee income- Careers with low barriers to entry:- these real estate career paths typically require state licensing and continuing education. No college degree is required, but studies have shown that those with college degrees tend to do better financially- residential and commercial brokerage- residential and commercial appraisal- industry tends to be cyclical- residential and commercial property management- mortgage brokerage- commercial real estate is more lucrative in the long run and requires more specialized knowledge to succeed- Careers with higher barriers to entry- a college education is much more likely, but still not necessary- investments and syndication:- investment analysis- structuring deals- raising equity capital- real estate finance- raising both debt and equity capital- underwriting debt- consulting- asset management and corporate real estate- development and construction and public sector real estateModule 2: Property Rights- Transferability of Real Assets/ Conveying Title- statue of frauds- voluntary conveyance- by deed: by sale or gift, alienable transfer – while living- by will: testate transfer or devisable transfer- voluntarily determining where property will go next- involuntary transfer: - intestate succession: death without a will- descendible: no will- if there is no spouse, then children, then parents, then siblings- state’s duty to find an owner: if they can’t then escheat (they take ownership)- public sale loss of property because of nonpayment of debt or taxes- forfeiture- eminent domain: the state takes the property but they pay for it- adverse possession someone passes your property long enough for courts to order it transferred- squatters’ rights- parties to the transfer: grantee, grantor- grantee = buyer, receives the deed- Land Descriptions- when you own real estate you own everything located within the boundaries of the land, deed states the owner/grantee is entitled to “the rights and use of the land and all improvements within”- the survey:- purpose: put property description visually on the ground so you can see it- necessary elements:- starting point: lock geometric shape into surface of the earth- closure: close geometric shape- starting and ending point must be the same- metes and bounds descriptions:- distances (metes) and directions (bounds)- often relying upon permanent markers (ex: eron stake)- chain = 66 ft (form of measurement)- link = 1/100 of a chain- mile = 80 chains- acre = 43,560 sq ft 208.5 by 208.5 ft- government, congressional or rectangular survey- township lines, range lines- township lines run east to west (described as north and south)- 6 miles apart- range lines run north and south (described as east and west)- X = t1n (one township is six miles by six miles)- section = 640 acres- length * width / 43,560 = acres- lot and block system – Plat: a recorded survey- condominiums- you share all the common spaces- Ownership Interests- estate: an interest in real estate that includes possession1. freehold estates (ownership interests) vs. leasehold estates (possession)2. present interests (current or possessory estate) vs. future interests (nonpossessory estates)- these two features exist at the same time3. inheritable interests vs. noninheritable interest- inheritable are alienable, devisable, and descendible- noninheritable are not devisable or descendible- Freehold Estates – Ownership Interests- Fee Simple Estates- fee simple absolute estate: the most common and complete form of ownership- qualified estates (fee simple conditional estates)- conditional: ownership “as long as”, “until” death- current interest: qualified estate – this is the possessory/current estate which has possession rights and is subject to the specified condition- future (nonpossessory) interest: the beneficiary of the violation of the condition, often called a reverter, ownership reverts to the grantor, heirs, or a third party upon violation of the condition- joint ownership – concurrent estates- unity of possession: 1 or 4 legal unities, undivided ownership by more than one, shared rights of possession, each owns all- critical component: shared rights- tenancy-in-common (TIC)- percentage ownership shares need not be equal- the percentages of individual ownership diffuse over time- used in condominiums and investments- joint tenancy- unit of time: all interests must be created at the same time- multiple tenants at the same time- unity of interest: equal ownership percentages- the right of survivorship: specifics by state- if sold, becomes a TIC- Marital Estates- only exist between husband and wife- tenancy by entirety- a marital joint tenancy- legal in 25 states; avoids probate- death of a spouse – survivor gets it all- right of survivorship- divorce – becomes a tenancy in common- community property- tenancy by entirety only to martial property (acquired after marriage)- life estates- legal life estate is a marital estate- current interest: life estate or life tenancy (noninheritable)- future interest: remainder (inheritable and can be sold)- elective share: contemporary version- if marital property is not joint owned and a spouse dies, then state law protects the surviving spouse- Condominium- fee simple interest to individual unit- tenancy in common (TIC) interest in common areas- governance by a condominium board; a pure democracy in that the majority rules. As an owner, you are responsible for the monthly maintenance fee that covers the costs of the common areas- Cooperatives- the cooperative owns the property- shares in the co-op entitle the owner/shareholder to use a unit- the entire building is under one mortgage; the cooperative is responsible for the mortgage, property taxes, and insurance- when a coop member sells their sales, the new coop member picks up the responsibilities for the mortgage, property taxes, and insurance- financial issues arise when the co-op share has appreciated in value- Time Shares (interval ownership)- Interests in Waterfront Property- who owns the land beneath the water?- littoral rights: littoral water is navigable water; the owner of the shoreline owns to the “average” high water line; the state owns the land beneath the water- government has much power- riparian rights: riparian water is non-navigable water; the owner of the shoreline owns a proportional share of the land beneath the water- the landowner has more power- EPA and Clean Water Act: government now has incredible power over all- what rights does a landowner have to the water itself?- reasonable use theory: landowner is entitled to a “reasonable” use of the water, prevails in the eastern US- prior appropriation theory: whoever owns the source of the water controls the water; water companies; prevails in western US- landowner’s rights to underground water- landowner’s rights to surface waterModule 3: Restrictions to Property Rights- The 3 Most Important Things in Real Estate1. location2. the “real” three most important things1. the location of the property (physical v economic)2. the cost and the availability of financing3. the timing of the decision- The 3 Benefits of Real Estate Ownership1. cash flow- all owners receive the benefits of changes in property value (capital return)- a investor trades the use of the property for cash flow (income return)2. use (of the property)/possession3. appreciation- Real Estate Risk- variability of future outcomes- uncertainty- sources of risk in real estate- marlet/business risk: price and rent/income fluctuations- liquidity risk: inability to sell the asset quickly at full price- interest rate risk: fluctuation in the availability and costs of financing; in the recession may commercial loans matured with a large balance and could not be refinanced- financial risk: no leverage, no risk- information risk: information can be difficult to obtain- legislative risk: the government both “givith” and “takith”- management risk: if you hire a property manager- property and liability risk (insurable risk)- Private Restrictions to Ownership- a restriction on the use of a property usually makes the property less valuable. A property restriction can be private (best done by contract) or public (mandated by regulation or statute)- encumbrances: nonpossessory interests in real estate- liens: or security interests (the real estate is being used as collateral/security for a debt; the lien is on the property and not with the owner; prior to purchase, the buyer insists that all old liens be removed)- mortgage: property is collateral for a loan- mechanics lien – a mechanic is anyone involved in adding value/working on the property; when the mechanics are paid, the property is released from the lien- judgment lien (a public restriction) – property is used as security for a legal judgment- Easements- an easement gives one the right to use another’s property- dominant estate – this estate has the right to use another’s property; benefits from the easement- dominant is worth more, servient estate reduces property values- servient estate: this estate is the property burdened by the easement; the property can be used by another; as a result, the property is worth less- easement appurtenant: both the dominant and servient estates are identifiable (as real estate); one property benefits, one is burdened- ex: driveway through one property: dominant is the one further away- easement in gross: the dominant estate is not identifiable- ex: power lines – dominant estate is whoever benefits from power lines, easement (power line) is identifiable- general public is often the dominant estate- we don’t know who benefits, but we know who is burdened- creation of easements- by deed or contract- express grant: in writing, grant the easement- express reservation: in writing, reserve the easement- through the courts (dispute resolution)- easement by implication: easement by necessity (perhaps access was cut off); the courts determine the necessity and the placement; by grant or by reservation- if easement was properly granted in past, where would it go?- go through past owner records to see what lot originally was- assemblage: make a bigger lot out of buying smaller ones- easement by prescription: if property has been used continuously and for a specified minimal time, as if it was an easement, the courts will declare a prescribed easement- encroachments: crossing over into someone else’s property - ex: tree branches- surveyors should prevent this- restrictive covenants, deed (or title) restrictions, subdivision regulations- government (federal, state, local) limitations on real estate ownership. Value can be gained or lost- real estate is more heavily regulated in northeast and west coast- issues: what is the government trying to resolve?- externalities (positive or negative): something outside the property that affects the value and/or use of the property- nuisances- one person’s use of the property reduces the neighbors value- incompatibilities of use- congestion and urban sprawl (density issues)- “American dream” clashes with urban sprawl planners- incomplete information- government forces one side to give up more info- uncertainty and value stability- Public Powers over Real Estate1. eminent domain: the power to “take” (a taking) of some or all of one’s property rights (condemnation)- public use or public purpose required- just compensation to the owner required- inverse condemnation: force the government to pay YOU for property- eminent domain for private profit or questionable purpose is not okay- Kelo v. New London 2. police powers (regulatory powers)- zoning, building codes, growth laws, etc- public purpose is required but NOT compensation- the “takings issue”: the gray area between eminent domain and police powers- when does a regulation go so far that it effectively results in a taking, which requires compensation to the landowner?- Lucas v. South Carolina- SC Coastal Zone Management Act (1977)3. property taxation (third public power)- Urban Planning/ Land Use Tools- you’re not entitled to the maximum profit on your property, but reasonable- zoning: prevents nuisances and promotes conformity- original law: NYC 1916- 1926: Euclid v. Ambler Realty CO.- residential zoning- density zoning: developmental density- minimum lot size: probably most common- criticism: waste- setbacks- commercial zoning (maximum volume – 3D)- bulk regulations: footprint- specifies the percentage of the lot that can be covered by the building- don’t mix up with FAR- height limits: historical perspective: DC, Philly, Charleston- buildings have to fit inside the invisible box- floor area ratios: gives developer more flexibility- FAR 6 = allows a 6 story building covering 100% of the site or a 12 story building covering half etc- Applications of the Law of Unintended Consequences- height limits: inhibit urban growth- growth management laws: developers bypass managed areas- rent controls: housing shortage, abandoned buildings, entrenched tenants- building codes – housing becomes less affordable- Innovations, Issues, Trends (mostly post 1970’s)- the planning and approval process – “negotiated zoning”- performance zoning: performance standards; traffic control, water control- PUD – planned unit development- MUD – mixed use development- TDR- transfer of development rights- exactions: for example, mandatory dedication- impact fees – fee on new development- Current Topics and Issues- concurrency: civic improvements (roads, schools) will occur by law at the same time as new development- downzoning: upzoning is good (ex: residential to commercial); downzoning is bad for property owners (ex 1 house per acre to 5 acres per house)- new urbanism/smart growth- new urbanism is “retro” (back to the 1950’s)- small front yards, porches, driveways in back, smart growth is pretty self defining after all who wants dumb growth- sustainable development – environmentally conscious real estate development; very vogue with the planners; somewhat of a fad ................
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