Chapter 2: Legal Foundations To Value PDF

Chapter 2: Legal Foundations To Value Florida State University – Real Estate Principles 1  The Real Property Bundle of Rights: A Few Questions What do we mean by rights? What are property rights? What is real property? What is personal property? What do we do when...

Chapter 2: Legal Foundations To Value Florida State University – Real Estate Principles 1  The Real Property Bundle of Rights: A Few Questions What do we mean by rights? What are property rights? What is real property? What is personal property? What do we do when the difference is unclear? Florida State University – Real Estate Principles  What Are Rights? Claims the government is obligated to enforce: Derived from the Constitution. Different from raw power. Non-revocable: But can be reduced in the interest of health, safety, and welfare of the citizenry. Enduring: Not limited to the memory of owners or others. Cannot be nullified by other citizens or by government. Florida State University – Real Estate Principles Personal Rights versus Property Rights Personal rights: Freedoms guaranteed by Constitution. Supreme Court interpretations of Constitution. Property rights: Exclusive possession. Enjoyment of the use or benefit: Use, collect rents, harvest. Freedom to dispose as one pleases (within the limits of safety): sell, convert, rebuild, etc. Florida State University – Real Estate Principles  Real versus Personal Property Real property: Rights in land and its permanent structures: Surface of the earth and improvements. Air, up to reserved air space or tallest structure. Beneath the earth as far as technology allows: Minerals, oil and gas, water. Personal property: All other property: Personal and household goods. Intellectual property. Music. Florida State University – Real Estate Principles  Rights in Our Society Access the text alternative for slide images. Florida State University – Real Estate Principles  Real Property: Rights in Three Dimensions Access the text alternative for slide images. Florida State University – Real Estate Principles  Built on Air Rights MetLife Building, New York New East Side, Chicago Access the text alternative for slide images. Florida State University – Real Estate Principles  Fixtures 1 Fixture: Real property that formerly was personal property. Rules for identifying a fixture: Manner of attachment. Character of the article and manner of adaptation. Custom screens or storm windows. Church pews. Custom designed furniture. Florida State University – Real Estate Principles  Fixtures 2 Intention of the parties: Dominant rule. Customary assumptions of the realm. Example: Kitchen appliances in a single-family residence versus appliances in an apartment. Relation of the parties: Variant of rule of intention. Trade fixtures of a commercial tenant (personal property). Fences and other agricultural improvements of a tenant farmer (personal property). Items installed by tenant in a residence (personal property). Florida State University – Real Estate Principles Which Are Fixtures? Access the text alternative for slide images. Florida State University – Real Estate Principles  Importance of Fixtures In every real estate transfer, fixtures lurk. Fixtures automatically go with the real property. You must be careful to identify possible fixtures. You should explicitly state whether they stay with the property or not. Florida State University – Real Estate Principles  Real Property Interests Interest: Any “bundle” of rights in real property. Estate: A real property interest that includes the right of exclusive possession. Nonpossessory interests: Easements. Restrictive covenants. Liens. Florida State University – Real Estate Principles  Estates Access the text alternative for slide images. Florida State University – Real Estate Principles  Ownership (Freehold) Estates Estates of indefinite length. Fee simple absolute - all possible rights. Fee simple conditional - all rights, but revocable if specific condition is violated. Life estate with remainder interest. Ordinary – created by the owner. Legal – imposed by law. Special problem in Florida with homestead: At death of spouse, surviving spouse gets life estate and any minor children get vested remainders. Florida State University – Real Estate Principles  Modern Leasehold Interests 1 Tenancy for years: For a specific period of time (few days to decades). Must be written if for more than one year. Written lease contract governs entirely. Periodic tenancy: No definite length of time. Often by oral agreement. State law governs notice of termination. Time required is usually half of the payment period. Florida State University – Real Estate Principles  Modern Leasehold Interests 2 Traditional leasehold law derived from rural society. Concepts and precedents were inadequate for a modern apartment setting. Florida and other states adopted residential landlord and tenant laws to solve the problem. Florida State University – Real Estate Principles Model Residential Landlord - Tenant Act Establishes a more equitable relationship between landlords and tenants Florida State University – Real Estate Principles Access the text alternative for slide images. Nonpossessory Interests in Land Easements. Liens. Restrictive Covenants. Florida State University – Real Estate Principles  Easements Easement: The right to use land for a specific and limited purpose. Florida State University – Real Estate Principles  Easement Appurtenant Right of use a (dominant) parcel of land “enjoys” over an adjacent (servient) parcel. Affirmative easements: Negative easements: Driveway or access Light and air easement. right-of-way. Scenic easement. Sewer line. Drainage. Common wall. “Runs with the land”: Rights and obligations are inseparable from the parcels involved. Florida State University – Real Estate Principles  An Easement Appurtenant Involves a Dominant Parcel and a Servient Parcel Access the text alternative for slide images. Florida State University – Real Estate Principles  Easements in Gross (“Commercial Easements”) Right to use land, unrelated to any other parcel: Extract minerals or oil and gas. Build a roadway or railway. Lay a pipeline, power line, 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 (Does not “run with the land.”). No dominant parcel – only servient parcels. Florida State University – Real Estate Principles  More Easement Concepts Exclusive & nonexclusive easement in gross: Exclusive: Conveys all rights of the easement. Recipient can extend access to others. Nonexclusive: Rights limited to one user only. Recipient cannot extend access to others. Owner can convey access to others. License: Similar to an easement in gross, but conveys permission rather than right: Revocable. Terminates at the death of the grantor or sale of the land. Florida State University – Real Estate Principles How Many Easements in This Scene? Access the text alternative for slide images. Florida State University – Real Estate Principles  Rights Included in Various Real Property Interests Access the text alternative for slide images. Florida State University – Real Estate Principles  Restrictive Covenants (Deed Restrictions) Covenants that impose restrictions on land use. Created at conveyance of land to a new owner. Examples: Setback lines, height restrictions for structures. Minimum floor area. No freestanding structures. No chain-link fences. No RVs or boats parked in view of the street. No cars regularly parked in the driveway. No garage door facing the street. Required architectural review. No external antenna, satellite dish, or clothesline. Required use of professional lawn service. Florida State University – Real Estate Principles  Restrictive Covenants Two methods of creation: Restriction in a deed conveying a single parcel of land. Restrictions placed on a subdivision at creation. A list of restrictions recorded as a separate document. Mutually binding on all purchasers in the subdivision. Florida State University – Real Estate Principles  Restrictive Covenants: Enforcement Enforcement by court injunction. Enforcement only by “parties at interest.” Isolated deed restriction: Grantor or grantor’s heirs. Subdivision restrictions: Owners. Mortgage loan holders. Renters. Courts reluctant to enforce in case of: Delayed enforcement (abandonment). Changed neighborhood. Changed public policy. Mandatory retirement in some states. Florida State University – Real Estate Principles  Liens Lien: An interest in property as security for an obligation. Usually a debt. General Liens: Arise from events unrelated to the property: Court awarded damages. Federal tax liens. Specific liens: Arise from ownership and use of the property: Mortgage. Mechanics’ lien. Property tax, assessment, or C DD lien. Florida State University – Real Estate Principles  Three Levels of Liens on a Personal Residence Access the text alternative for slide images. Florida State University – Real Estate Principles Forms of Co-Ownership Access the text alternative for slide images. Florida State University – Real Estate Principles  Indirect Co-Ownership Entity holds title. Ownership passes through the entity. Undivided interest. Access the text alternative for slide images. Florida State University – Real Estate Principles  Forms of Direct Co-Ownership Example: A house with multiple owners. All share the right of exclusive possession. Cannot obstruct each other’s use. May hold different sizes of shares. Tenancy in common. Joint Tenancy. Tenancy by the entirety. Condominium. Florida State University – Real Estate Principles  Direct Co-Ownership 1 Access the text alternative for slide images. Florida State University – Real Estate Principles  Forms of Direct Co-Ownership 1 Tenancy in common: Default form except in special cases. Multiple owners of same fee simple interest. Each owner can sell or mortgage their interest independently. Can be different size shares. Can be created in multiple transactions. Bad form for owning an operating business. Poor form for multiple investors. Florida State University – Real Estate Principles  Forms of Direct Co-Ownership 2 Joint tenancy: Defining feature: “right of survivorship” restricts inheritance to heirs of the last surviving owner. Difficult to create and easily disrupted. Prevented or restricted by law in some states. Tenancy by the entirety: Joint tenancy for husband and wife. Solves Florida problem of homestead life estate. Problem arises when household includes minor children. Protected against liens arising from either spouse alone, including judgments. Florida State University – Real Estate Principles  Direct Co-Ownership 2 Condominium: Combines single ownership and tenancy in common. Created by condominium declaration. Bylaws define owner rights: Share of all obligations. Restrictions on sale or rental. Methods of altering bylaws. Creates additional level of (private) government. History of owners not understanding the restrictions. Florida State University – Real Estate Principles Direct Co-Ownership: Condominiums Access the text alternative for slide images. Florida State University – Real Estate Principles  Why would you want a condo? Price. Amenities. Security, both when you are in residence, or away. Others do the maintenance and upkeep. Interesting social context and/or location. Florida State University – Real Estate Principles  What special risks do you buy into? Design and construction: Noise issues. Privacy. Parking and storage limits. Rules that may be frustrating: Exterior decoration and use of patio or balcony. Guest policies. Right to rent out. Quality of management? (professional or not?). Property reputation. Florida State University – Real Estate Principles  Condo Documents You Want to Examine Declaration. By-laws. Minutes from recent board meetings. Any pending legal actions. Association budget. Florida State University – Real Estate Principles  Cooperative 1 Corporation owns property. Each owner holds shares and a proprietary lease (no term and no rent). Cannot mortgage individual interests. Owner’s mutually liable for any specific liens. Florida State University – Real Estate Principles  Cooperative 2 Access the text alternative for slide images. Florida State University – Real Estate Principles  Automatic Ownership from Marriage: Early Forms Dower/curtesy: Automatic one-third life estate for a surviving spouse in real property of a decedent spouse. Common law roots (traditional English). Dower is widow’s claim; curtesy is widower’s. Covers all real property ever owned during the marriage. Problems with dower (widow’s interest): Life estate unmarketable. Much of modern wealth not in real property. Real property may be in multiple states. Florida State University – Real Estate Principles  Automatic Ownership from Marriage: Modern Forms 1 Elective share: Modern substitute for dower. Surviving spouse receives up to one-third of all decedent’s personal property and in-state real property. Must chose by explicit “election” within specified time. Adopted in some form by 25 states. Florida State University – Real Estate Principles  Automatic Ownership from Marriage: Modern Forms 2 Community property: One-half interest in all property acquired “out of the fruits of the marriage.” Not property owned before the marriage. Not gifts or inheritances to one spouse. May include income generated from “separate” property. Found in states of Spanish tradition, plus Louisiana, Wisconsin, and Alaska. Growing in acceptance as a superior arrangement to elective share. Florida State University – Real Estate Principles  Exhibit 2-10 Two Main Forms of Marital Property Rights Elective Share Community Property Mainly Spanish/French Mainly used in: English heritage states heritage states Spousal share: One-third One-half How triggered: Explicit declaration Automatic All wealth created in the Wealth coverage Varies up to all wealth marriage Ten states, with influence Number of States About 25 in more Florida State University – Real Estate Principles  Timeshare Range in “quality” of ownership: Condominium share. Leasehold. License. Choice of floating time intervals (for example, within three months) and choice of resorts. Industry with a questionable history. Never a financial investment. Note that the developer has all the market information and the buyer has none. Key is ability of developer to sustain services promised. Florida State University – Real Estate Principles  Issues in Rights to Water Who owns the land under a body of water? Who controls use of land under a body of water? Who has the right to use the surface? Who has the right to use the water itself? Who has the right to use groundwater? For answers, see on-line appendix to text Florida State University – Real Estate Principles  Rights to Oil, Gas, and Minerals Rights carry implied easement for removal. In some states, mineral rights imply ownership of the space minerals occupy. Oil rights have two forms. Ownership states: Oil is simply another mineral. Law of capture states: Oil flows, and is not owned until removed. Traditional “rule of capture” (If you could remove it, it was yours) is being limited due to extensive secondary recovery methods. Florida State University – Real Estate Principles  Summing Up There is real property and personal property. ….and the problem of fixtures. Real estate is a bundle of rights: Exclusive possession. Enjoyment. Disposition. This bundle has many variations: Estates – freehold or leasehold. Non-possessory interests – easements, restrictive covenants, liens. Florida State University – Real Estate Principles  More Summing Up There can be more than one direct owner: Tenancy in common, joint tenancy, tenancy by the entirety. Condominium, cooperative. There can be automatic marital co-ownership: Community property. Dower, elective share. Florida State University – Real Estate Principles