Real Estate Rights and Forms of Ownership

Chapter: Real Estate Rights and Forms of Ownership

Introduction

Understanding real estate rights and forms of ownership is fundamental to mastering real estate interests. This chapter provides a comprehensive overview of these concepts, delving into the intricacies of what constitutes real property, the various rights associated with it, and the different ways ownership can be structured. We will explore the legal and economic implications of each form, equipping you with the knowledge necessary to analyze and navigate the complexities of real estate transactions.

1. Physical Interests in Real Estate

1.1 The Bundle of Rights Theory

Real property ownership is best understood through the “bundle of rights” metaphor. This theory posits that owning real estate is not just about possessing land, but rather about holding a collection of distinct rights related to that land. These rights include:

• The Right to Possess: The right to occupy the property.
• The Right to Control: The right to determine how the property is used.
• The Right to Enjoy: The right to use the property without interference.
• The Right to Exclude: The right to prevent others from entering or using the property.
• The Right to Dispose: The right to sell, lease, or otherwise transfer the property.

The full bundle of rights represents fee simple absolute ownership, the highest form of ownership. However, these rights can be separated and distributed among different parties, creating various partial interests.

1.2 Surface, Subsurface, and Air Rights

Ownership of real estate typically extends from the center of the earth upwards to the heavens (though often practically limited by legal and physical constraints). This creates three distinct categories of physical interests:

• Surface Rights: The rights to use and enjoy the surface of the land. This includes the right to build, cultivate, and landscape.

• Subsurface Rights: The rights to extract minerals, oil, gas, and other resources from below the surface. These rights can be separated from surface rights.

  • Example: A landowner might sell mineral rights to a mining company while retaining the surface rights for farming.
  • Practical Application: Subsurface rights are often leased to companies that specialize in resource extraction. The landowner receives royalties based on the amount of resource extracted.
  • Experiment: Perform research on land plots to determine if surface and subsurface rights are held by the same person. Analyze the change in land value based on whether subsurface rights are leased or owned.

• Air Rights: The rights to use and control the airspace above the land. These rights can also be separated and sold.

  • Example: Building a structure above existing railway tracks.
  • Practical Application: Air rights are valuable in dense urban areas where land is scarce.
  • Experiment: Analyze the cost of construction of high rise buildings in city centers versus more rural areas. Compare the value of air rights based on location.

1.3 Water Rights

Water rights are particularly significant in areas with limited water resources. Two primary doctrines govern water rights:

• Riparian Rights: Apply to landowners whose property borders a river or stream. Riparian owners have the right to use the water that passes over or adjacent to their land, provided they do not unreasonably interfere with the rights of other riparian owners.

  • Formula: The reasonable use doctrine dictates that riparian owners can use water for beneficial purposes as long as it doesn’t substantially diminish the quantity or quality available to downstream users. Mathematically, this can be represented conceptually as:

    U_i ≤ Q_avail - ΣU_j

    Where:

    U_i = Use of water by riparian owner i
    Q_avail = Available water quantity
    ΣU_j = Sum of water uses by all other riparian owners j

• Littoral Rights: Apply to landowners whose property borders a large, navigable body of water such as a lake or ocean. These owners typically own the land up to the high-water mark.
  Accretion describes an increase in land due to deposits left by a river or stream, where reliction refers to the dry land created as a receding water line. Erosion is the loss of land due to the movement of water.

2. Easements and Rights of Way

An easement is a legal right granting someone the ability to use another person’s land for a specific purpose. It is a nonpossessory interest. Key concepts include:

• Affirmative Easement: Grants the right to do something on another’s land (e.g., access across a driveway).
  • Also known as the dominant tenement or dominant estate.

• Negative Easement: Restricts the owner of the servient estate from doing something on their land (e.g., preventing building that blocks sunlight).

  • Describes real estate burdened by an easement; also called the servient tenement or servient estate.

• Easement Appurtenant: Benefits a specific parcel of land (the dominant tenement) and runs with the land, meaning it automatically transfers to new owners.

• Easement in Gross: Benefits a specific individual or entity, not a particular parcel of land. It may or may not be transferable.

  • Example: Utility easement to run power lines across multiple properties.

A right of way is a specific type of easement that grants the right to pass over another’s land, often for transportation purposes (e.g., roads, pipelines).

Calculating Easement Value: The value of an easement can be calculated based on the diminished utility of the property caused by its presence. The location of the easement is also an important factor.
* Example: The formula for calculating the loss in land value based on the location of a pipeline easement:

*V<sub>loss</sub> = A<sub>easement</sub> * V<sub>land</sub> * F<sub>impact</sub>*

Where:

*V<sub>loss</sub>* = Loss in land value
*A<sub>easement</sub>* = Area of the easement
*V<sub>land</sub>* = Value per unit area of the land
*F<sub>impact</sub>* = Impact factor based on the easement's location and restrictions.

3. Other Partial Interests

3.1 Licenses

A license is a temporary and revocable permission to use another’s land for a specific purpose. It’s not a property right and can be terminated at any time by the landowner. This contrasts with an easement which is a property right.

3.2 Liens

A lien is a financial claim against a property, securing a debt or obligation. Common types include mortgages, tax liens, and mechanic’s liens.

3.3 Leases

A lease conveys the right of occupancy of a property from the landlord (lessor) to the tenant (lessee) for a specified period. This creates a leasehold interest for the tenant and a leased fee interest for the landlord.

3.4 Life Estates

A life estate grants ownership of a property for the duration of a person’s life (the life tenant). Upon the life tenant’s death, the property reverts to the original owner (reversion) or passes to a designated third party (remainder).
* The value of a life estate depends on the age of the life tenant.

3.5 Transferable Development Rights (TDRs)

TDRs allow landowners in designated areas (e.g., historic districts, agricultural zones) to sell their unused development potential to developers in other areas, encouraging development in desired locations while preserving valuable resources.

4. Forms of Ownership

Forms of ownership relate to who owns the interest, not what is owned.

4.1 Individual Ownership

• Sole Ownership: Property is owned by one individual.

4.2 Concurrent Ownership

Property is owned by two or more individuals simultaneously. Different forms exist, each with distinct legal implications:

• Tenancy in Common: Each owner has an undivided interest in the entire property. Interests can be unequal, and each owner can sell or transfer their interest independently. If one tenant in common dies, their share goes to their heirs.

• Joint Tenancy: Each owner has an equal, undivided interest in the entire property. The key feature is the right of survivorship: if one joint tenant dies, their interest automatically passes to the surviving joint tenants. Requires four unities: possession, interest, time, and title.

• Tenancy by the Entirety: A special form of joint tenancy available only to married couples. It includes the right of survivorship and protects the property from the debts of one spouse.

• Community Property: A system of property ownership recognized in some states, where assets acquired during a marriage are jointly owned by both spouses.

4.3 Legal Entity Ownership

Real estate can be owned by various legal entities, offering different levels of liability protection and tax benefits:

• Partnerships:

  • General Partnership: All partners share in the profits and losses of the business, and all are liable for the partnership’s debts.
  • Limited Partnership: Includes general partners who manage the business and have unlimited liability, and limited partners who have limited liability and do not participate in management.

• Corporations:

  • S Corporation
  • C Corporation

• Limited Liability Companies (LLCs): Combines the benefits of partnerships and corporations, offering limited liability to its members and pass-through taxation.

• Land Trusts: A trust that holds ownership of real property. The identity of the beneficiary is often kept private.

4.4 Special Forms of Ownership

• Condominium Ownership: Owners hold title to their individual unit, plus a shared interest in the common areas (e.g., hallways, elevators, grounds). Each unit owner pays their own property taxes and mortgage.

• Cooperative Ownership: Residents own shares in a corporation that owns the entire building. They have a proprietary lease granting them the right to occupy a specific unit.

• Timesharing: Purchasers acquire the right to use a property for a specific period each year.

5. Valuation Considerations

Different ownership structures and the existence of partial interests significantly impact property valuation. Appraisers must carefully consider:

• Impact of easements and restrictions on property value.
• Discounting minority interests in closely held corporations.
• Accounting for financing terms in cooperative apartments.
• Understanding the legal framework governing each form of ownership.

Conclusion

This chapter has provided a comprehensive overview of real estate rights and forms of ownership. Mastering these concepts is essential for anyone involved in real estate, from appraisers to investors to developers. By understanding the bundle of rights, different types of partial interests, and the various forms of ownership, you can make informed decisions and navigate the complexities of the real estate market effectively.