Real Estate 4000 PDF

REAL 4000 01/07/25 Five Main Product-Types or “Food Groups” and others of CRE… CRE (Commercial Real Estate) – 5 big types 1. Retail 2. Office 3. Hospitality 4. Multifamily 5. Industrial 6. Self-storage (if there were a “big 6”) Others...

REAL 4000 01/07/25 Five Main Product-Types or “Food Groups” and others of CRE… CRE (Commercial Real Estate) – 5 big types 1. Retail 2. Office 3. Hospitality 4. Multifamily 5. Industrial 6. Self-storage (if there were a “big 6”) Others · Land leases · Event spaces · Recreational · Parking · Data Centers Agriculture/Minerals · Grain silos · Dairy facilities · Ranch land · Timber · Oil/gold/copper Resi (owner occupied) · Houses/condos · Realtors The Direct-Cap Value Equation · Vt = It+1/Rt Property Market = Space Market/Capital Market Real Estate is Property · Two types of property: · Tangible - Physical assets that can be owned - Can be real or personal property (examples of each?) · Intangible - Non-physical assets such as stocks, bonds, mortgages, leases The term “Real Estate” is Used in 3 ways. 1. Real estate as a tangible asset: · “Raw” Land · Improvements to the land - Excavation and fill - Sewers and other utilities - Roads and driveways · Structures (improvements on the land) 2. Real Estate as a bundle of rights · Exclusive possession of the real property · Use or enjoyment - Do whatever you want - Ex., can be used as a rental property to generate cash flow · Disposition (sale) - Selling rights of the land · It can be unbundled in many ways - Ex., Owner leases property to renter 3. Real Estate as a Career Real Estate in the Economy · Half of the world’s wealth - Some say it is higher, up to 80% · Generates nearly 70% of local government revenue (via property tax) - For example, funds: Schools, Roads, Water/Sewer Systems, Police/Fire Departments Space vs. Capital Markets vs. Property Markets · User market (Space Market): · The market for physical real estate · “Buyers” receive the right to use space  · Called the “Space” market or “Rental market.” · Where rental rates are determined · These markets are very “local” and usually highly competitive · Separate local markets for various properties: retail, office, industrial, etc. Segmentation of User Markets · Because of segmentation, retail prices for physically similar spaces can vary widely. · Across locations & property types Capital markets · RE competes for funds in the capital market with other asset classes, such as stocks and bonds · Investors select a mix of investments based on expected returns & risk · Bidding by investors determines the following: - Risk-free rates of various maturities (i.e., the Treasury “yield” curve) - Required risk premiums for risky investments. Public Capital Markets · Small homogeneous units (shares) of asset ownership trade in public exchanges. · Many buyers and sellers · Price quotes are available for all to see · Characterized by a high degree of liquidity · Informationally efficient Private Capital/Property Markets · Absence of centralized market (or even price lists) · Assets trade infrequently in private transactions (thus a lack of transparency) · It is common for “whole” assets to be traded in a single transaction (indivisibility) · There is less liquidity than in public markets · Higher transaction costs Property (Asset) Market · The market for ownership claims to RE assets · Buyers/owners receive rights to cash flows generated by leasing space to tenants · The demand (supply) side of the property market is made up of investors wanting to buy (sell) property · Property marker is integrated, not segmented like the space market · I.e., investment capital can come from anywhere The Four Quadrants of Real Estate Capital Markets 01/14/25 Equity = Ownership Debt = Loan to owners Public Vs. Private · Public Markets - Equity/Owners: Public real estate investment trusts (REITs) and real estate operating companies - Debt/Lenders: Commercial mortgage-backed securities (CMBS) and mortgage REITs · Private - Equity/Owners: Individuals, partnerships, limited liability corporations, private equity funds - Debt/Lenders: Banks, insurance companies, finance companies, private lenders Personal Rights vs. Property Rights · Personal rights - Freedoms guaranteed by the Constitution - Supreme Court interpretations of the Constitution · Property rights 1. Exclusive possession 2. Enjoyment of the use or benefit: Use, collect rents, harvest. 3. Freedom to dispose as one pleases (within safety limits): sell, convert, rebuild, etc. Real Vs. Personal Property · Real Property: Rights in land and its permanent structures 1. Surface of the Earth and improvements 2. Air, up to reserved air space or tallest structure 3. Beneath the earth, as far as technology allows: Minerals, oil, gas, water · Personal property: all other property. Examples: - Personal and household goods - Intellectual property - Music What Are Rights? · Claims that the government is obligated to enforce - Derived from the Constitution - Different from raw power · Non-revocable - Can be reduced in the interest of health, safety, and welfare · Enduring - Not limited to the memory of owners or others  - It cannot be nullified by other persons or by the government. Fixtures · Fixtures Definition: Real property that formerly was personal property · Four rules for determining when something becomes a fixture: 1. Manner of attachment - Does damage occur if swiftly removed? 2. The character of the article and manner of adaption: - Was the space designed for it to be there? 3. The intention of the parties - The dominant rule - Based on customary assumptions of the realm - Examples: Kitchen appliances in a single-family residence vs. appliances in an apartment 4. Relation of the parties (CRE and Ag) - Special rules for CRE and Agriculture. - Trade fixtures (CRE personal property) - Fences and other agricultural improvements - Item installed by the tenant in a residence - The intention of party rule is still dominant Tips Regarding Fixtures · In nearly every real estate transfer, fixtures are an issue · Fixtures automatically go with the real property · You must be careful to identify possible fixtures (take your time) · Contracts should explicitly state whether they can stay with the property or not. 01/16/25 Part III – Possessory Interests (Estates) Real Property Interests · Interest: Any set of rights in real property … two main types: · Estate: A real property interest that includes the right of exclusive possession · Nonpossessory interest: - Easements - Restrictive covenants - Liens Estate · Estate: A real property interest that includes the right of exclusive possession. Two categories 1. Ownership estate (freehold estate) - Fee Simple (absolute) - Fee Simple conditional (Fee Conditional 2. Leasehold estate - Ordinary Life Estate (by choice) - Legal Life Estate (by automatic function of law) · Estates range from strong to weak (top to bottom of the chart, respectively) · 5 Tendency for Years - Start and end date · 6 Periodic Tendency · 7 Tendency at Will · Tendency at sufferance Modern Leasehold Interests · Do Residential tenants have more or less protection than other CRE asset types? - Yes, they do have more protection due to landlord-tenant law. Part IV – Non-Possessory Interests (Easement, Liens, and Covenants) Non-Possessory Interests in Land · Three Main Non-Possessory Interests in Land 1. Easement  2. Liens 3. Restrictive Covenants · Easement: The right to use land for a specific and limited purpose Easement Appurtenant · Right of use a (dominant) parcel of land “enjoys” over an adjacent (servient) parcel · “Runs with the land”: Rights and obligations are inseparable from the parcels involved 1. Appurtenant – Run with the land A. Affirmative - Driveway or access right of way - Sewer line - Drainage - Common Wall B. Negative - Light and air easement - Scenic easement 2. Gross · Right to use land, unrelated to any other parcel - Extract minerals or oil and gas - Build a roadway or railway - Lay a pipeline, powerline, or cable - Run an irrigation ditch - Place and maintain a billboard or communications tower - Harvest timber or crops - Conservation easement for wetlands preservation - Hunt, fish, snowmobile · Transferable separately from land title or ownership/ sold · No dominant parcel – only servient parcels Other Easement Concepts · Exclusive & nonexclusive easement in gross: · Exclusive: Conveys all rights of the easement - The recipient can convey access to others · Nonexclusive: Rights limited to one user only - The recipient cannot extend access to others - The owner can convey access to others · License: Similar to an easement in gross, but conveys permission rather than right - Revocable - Automatically terminated at the death of the grantor or sale of the land Restrictive Covenants (Deed Restrictions) · Restrictive Covenants (Deed Restrictions)  · Covenants that impose restrictions on land use · Created at the conveyance of land to a new owner · Examples - Setback lines, height restrictions - Minimum floor area - No freestanding structures - No chain link fences - No RVs or boats parked in the driveway - No garage door facing the street · Two methods of creation: 1. Restriction in a deed conveying a single parcel of land to a new owner 2. Restrictions imposed on an entire subdivision at its creation. - Ex. A list of restrictions is recorded as a separate document and becomes mutually binding on all purchasers in the subdivision Liens · Liens: An interest in property as security for an obligation · Usually debt 1. General Liens: Arise from events unrelated to the property - Court awarded damages - IRS (tax) liens 2. Specific liens: Arise from ownership and use of the property - Mortgage - Mechanics’ lien - Property tax, assessment lien. 01/23/25 Government Control ON ALL 5 EXAMS 1. Section = 1 sq mile 2. 1 sq mile = 640 acres 3. Acre = 43,560 sq ft 4. Linear mile = 5,280 ft 5. Area of Rectangle = L xW Part 1: Overview of Limitations on Ownership Real Estate Factors that Cause Market Distortions · Real Estate Market Distorting Factors 1. “Spillover” effects from nearby land uses - Parking full on campus… spills over in nearby neighborhood 2. Uniqueness of location (absolute monopoly) - Blocking access for a needed roadway, perhaps 3. Unknown quality or condition of existing structures - How do you know it was built well? 4. Instability of land uses around residential neighborhoods - If a nuclear powerplant is built in a residential district, who loses value? Resulting Market Failures in Real Estate · Monopoly - Utilities as “natural” monopolies - “Holdouts” in land assembly efforts (roads, other public uses) · Incomplete information - Construction quality hidden - Buyers unable to judge natural risks - Hurricanes - Earthquakes - Fires · Buyers unable to judge adequacy of structure quality  - Wind tolerance - Resilience against shocks - Fire safety and resistance · Externalities - “Spillover” effects of land use for which initiator is not held accountable - Traffic congestion - Storm runoff - Emissions (smoke, gases, particles, noise, light) · Uncertainty of residential values - Effect of non-conventional structures - Effect of non-conventional population -e.g., students What is Required? · First, project future: - Population growth - Requirements for water and waste disposal - Needs for public services (utilities, streets, schools, parks and recreation, safety) - Demand for various land uses (public, residential, non-residential) · Then, design compatible arrangement of needed land uses (land use map) Traditional Planning vs. New Urban Planning · Traditional - Separate uses - Automobile oriented - Priority placed on easy ingress and egress - Uniform density - Cul-de-sac hierarchy in neighborhoods · New Urban - Mixed use - Public transportation - Pedestrian oriented - Sidewalks - Houses close to street - Rear alley - Grid streets with restricted traffic flows Building codes · Older than zoning (circa 1900) · Issues of safety - Fire: materials, alarms, electrical and gas systems · Sanitation: plumbing, water, and HVAC requirements · Injury: Design and strength · Always evolving - Chicago fire  - Effect of Hurricane Andrew - New tech - Changing perceptions of needs (bathroom windows must be large enough to step through) Zoning · Features of traditional zoning 1. Use classifications: - Residential, commercial, industrial, etc. 2. Use Districts (zoning map) - Residential, commercial, industrial, etc. - Special use districts: Service stations, hospitals, churches, private schools, cemeteries 3. Setback requirements (side, front and back) 4. “Bulk” or “Density” limits [APP DAY] - Minimum lot size, height limits, maximum floor-area ratios (F.A.R.s) Zoning Issue and Concepts · Nonconforming use: - Use conflicting with zoning map, but existing prior to its enactment - Cannot be substantially changed - Must be continuous - Can be “amortized” away, (e.g. billboards) · Variance - Exception to requirements granted due to hardship - Common example: wavier of setback requirement · Exclusionary Zoning (illegal): - E.g., large minimum house size may prevent low- and moderate-income housing Subdivision Regulations · Features - Standards for: - Streets  - Sewers - Water systems - Fire safety - Water drainage - Open spaces - Lot layout - Easement for utilities - Traffic and pedestrian safety Planning and Zoning Administration · Planning and Zoning Commission - Created in the Zoning ordinance - Appointed by elected officials - Ultimately is advisory to elected officials - Oversees implementation of the ordinance - Considers request for specific changes Board of Adjustment · Required in zoning ordinance · Appointed by elected officials · Reviews petitions for variances · Decisions are final rather than advisory to the elected officials · Only appeal is through the court Site Plan Review Planned Unit Development (PUD) · Detailed development plan negotiated with authorities - Mixed use  - Mixed density - No standard setback requirements - Open community spaces - Community recreation and other facilities Restrictions and Fees · Performance Standards - Placing limits on: - Stormwater runoff - Noise and emission - Traffic impact - Tree removal · Impact fees - Fees to (supposedly) fund public projects related to growth - Despised by real estate developers - Appear to be used more as revenue source than tool to guide and land use · Growth restrictions - Temporary moratoriums Government Taking Property Eminent Domain · Eminent domain: Right of government to acquire private land, without the owner’s consent, for public use, with due process and just compensation · Condemnation: Legal procedure for exercising the right of eminent domain - Inverse condemnation: - Government takes private property, but fails to pay the just compensation required by the 5th Amendment of the U.S. Constitution - Owner must file suit for compensation - Typical with overly restrictive zoning and environmental-regulation cases Property Taxes The effect of Property Taxes on Real Estate · Can Property taxes reduce property value and property wealth? · Can an efficient property tax enhance property value and property wealth by the services it funds? Property Taxes  · A primary source of local government revenue - Reliable and countercyclical · Many taxing authorities - City - Improvement districts - County - Transportation authorities - Schools - Water management districts Property Exempt from Taxes · Religious organizations · State property · Nonprofit organizations · Homestead · Educational institutions Determination of Tax Rate