Real Estate Interests and Forms of Ownership

Chapter: Real Estate Interests and Forms of Ownership

Introduction

Understanding the various interests and forms of ownership in real estate is crucial for accurate valuation and decision-making. This chapter delves into the intricacies of real estate interests, clarifying the bundle of rights associated with property ownership, and explores the different ways individuals and entities can hold title to real property. We will cover both physical and financial interests, as well as concurrent and legal entity ownership structures. We will also discuss specific forms of ownership such as condominium, cooperative, and timeshare ownership, emphasizing their unique characteristics and legal considerations.

1. Real Estate Interests

Real estate interest refers to the extent of a person’s or entity’s rights in a particular property. These rights, often described as a “bundle of rights,” encompass the ability to possess, use, enjoy, and dispose of the property.

1.1 The Bundle of Rights

The “bundle of rights” represents the complete set of legal entitlements associated with property ownership. These rights include:

• Possession: The right to physically occupy and control the property.
• Use (Control): The right to utilize the property for legal purposes, subject to zoning regulations and private restrictions.
• Enjoyment: The right to peaceful and quiet enjoyment of the property without interference from others.
• Exclusion: The right to prevent others from entering or using the property.
• Disposition (Alienation): The right to sell, lease, gift, or otherwise transfer ownership of the property.

The value of a real estate interest is directly related to the extent and duration of these rights. Different types of interests represent varying degrees of ownership and control.

1.2 Fee Simple Interest

Fee simple is the most comprehensive form of ownership, representing the full bundle of rights. It is of indefinite duration and freely transferable.

1.3 Partial Interests

Partial interests represent a division or limitation of the fee simple estate. Common examples include:

• Life Estate: Ownership is limited to the duration of a specific person’s life (the life tenant). Upon the life tenant’s death, the property reverts to the grantor (reversion) or a designated third party (remainder).

  • Mathematical Representation: If V is the value of the fee simple estate, L is the present value of the life estate, and R is the present value of the remainder interest, then:

    V = L + R
    * The value of L and R are calculated using actuarial tables and discount rates to account for the life tenant’s life expectancy and the time value of money.

• Leasehold Estate: The right to possess and use property for a specified period under a lease agreement. The landlord (lessor) retains the leased fee interest. The tenant (lessee) holds the leasehold interest.

  • Formula for Present Value of a Leasehold:

    PV = Σ (Rent / (1 + r)^t) , where:

    • PV = Present value of the leasehold
    • Rent = Periodic rental payment
    • r = Discount rate
    • t = Time period

• Easements: The right to use another person’s land for a specific purpose (e.g., right of way, utility easement).

  • Affirmative Easement (Dominant Tenement/Estate): Gives an individual the right to access a portion of another person’s real estate for a specific task.
  • Negative Easement (Servient Tenement/Estate): Describes real estate burdened by an easement.
  • The impact of an easement on the property value is determined by the diminution of utility of the property caused by the presence of the easement.
    • Example: An easement for a pipeline located in the building setback section of a lot is much different than the same easement running through the buildable portion of a residential site.

• Licenses: A temporary and revocable permission to use another person’s land (e.g., parking in a designated space).

• Transferable Development Rights (TDRs): Used in some areas to influence development by allowing property owners to sell off their development rights to others.

  • Example: A community limits each property owner to building only one house per acre of land. A farmer with 100 acres of land could sell off the rights to build 100 houses on this land to another person with a different 100 acres. The person buying the rights could build 200 houses on the land, and the seller would no longer have the right to build any houses on the other plot.

1.4 Physical Interests

Physical interests pertain to the tangible aspects of real estate, including the land, improvements, and resources associated with the property.

• Air Rights: The right to use and control the airspace above a specific parcel of land.

  • Example: Acquisition of the right to develop a building above train tracks.

• Subsurface Rights: The right to extract minerals, water, or other resources from beneath the surface of the land.

  • Mineral rights commonly change hands.

• Water Rights: The right to use water that flows across or underlies the land.

  • Riparian Rights: The owner of land next to a nonnavigable body of water may own to the center of that body of water. Ownership of land next to a navigable body of water stops at the banks of the river or stream.

  • Littoral Rights: The rights of adjacent owners to enjoy access to the shoreline of a body of water.

    • These property owners possess the land up to the high water mark, and the government owns all the land under the water

  • Accretion: The term used to describe additional dry land that is created when deposits are left by a river or stream, which increases the size of the owner’s land.

  • Reliction: Dry land created by the receding water line.
  • Erosion: The passage of water over the banks.

1.5 Financial Interests

Financial interests involve the financial divisions of ownership, such as mortgages, equity, and debt.

• Mortgage: A lien on the property that serves as security for a debt.
• Equity: The owner’s financial interest in the property, representing the difference between the property’s value and the outstanding debt.
• Senior and Subordinate Debt: The hierarchy of claims against the property in the event of default.
• Sale with Leaseback Provisions: A transaction where a property is sold and then leased back to the seller, allowing the seller to retain use of the property while raising capital.
• Equity Syndications: Investment partnerships formed to pool capital for real estate acquisitions.

2. Forms of Ownership

Forms of ownership describe how real estate is held. An important distinction should be made between partial interests and forms of ownership. Interests relate to what is owned, whereas forms of ownership relate to who owns the interest.

2.1 Individual Ownership

• Sole Ownership (Severalty): Ownership by one individual or entity.

2.2 Concurrent Ownership

Concurrent ownership involves two or more individuals or entities holding title to the same property.

• Tenancy in Common: Each owner holds an undivided interest in the property, with the right to possess the entire property. Interests can be unequal, and each owner can sell, gift, or devise their share without the consent of the other owners. There is no right of survivorship.
• Joint Tenancy: Owners hold equal interests in the property, with the right of survivorship. If one joint tenant dies, their interest automatically transfers to the surviving joint tenants. Four conditions must be met to create a joint tenancy: possession, interest, time, and title (PITT).
• Tenancy by the Entirety: A form of joint tenancy specifically for married couples. It includes the right of survivorship, and neither spouse can convey their interest without the consent of the other.
• Community Property: A system of property ownership recognized in some states where assets acquired during a marriage are jointly owned by both spouses.

2.3 Legal Entity Ownership

Real estate can be owned by various legal entities, each with its own characteristics and liability implications.

• Land Trusts: A vehicle to hold an interest in real estate on behalf of another party.

• Partnerships: An association of two or more individuals or entities to conduct business.

  • General Partnership: All parties are responsible for partnership issues and obligations.
  • Limited Partnership: The general partners are responsible for the debt. The limited partners are only responsible for an amount equal to their equity input.
  • Corporations: A legal entity separate from its owners (shareholders).
  • Stock Corporations: Stock is both a form of corporate ownership and a shareholder’s financial interest in a property.
  • Limited Liability Companies (LLCs): A hybrid entity that combines the limited liability of a corporation with the pass-through taxation of a partnership.
  • Syndications: Groups of investors who pool capital to purchase real estate.

2.4 Special Forms of Ownership

These ownership structures are modern forms of property ownership in which the rights to real estate are conveyed using a method other than standard vertical rights in realty.

• Condominium Ownership: Ownership of an individual unit within a multi-unit building or development, along with a shared interest in the common areas. Condominiums are legal entities in most states.
  • Example: Ownership of a condominium unit in a project with 50 units would typically be conveyed as “unit # and a 1/50th interest in the common elements.”
• Cooperative Ownership: Ownership of shares in a corporation that owns the entire property. Shareholders receive a proprietary lease granting them the right to occupy a specific unit.
  • A cooperative is created by a developer who purchases an apartment complex in a corporate name and then sells shares of stock in the corporation to prospective residents.
• Timesharing: Ownership of the right to use a property for a specific period each year.

Conclusion

A thorough understanding of real estate interests and forms of ownership is essential for property valuation, investment analysis, and real estate transactions. By grasping the nuances of the bundle of rights, different ownership structures, and the legal implications of each, professionals can make informed decisions and provide accurate assessments of property value.