Real Property Rights: Interests and Ownership Forms

Real Property Rights: Interests and Ownership Forms

This chapter delves into the intricate landscape of real property rights, exploring the various interests one can hold in real estate and the diverse forms of ownership that define who possesses those rights. Understanding these concepts is crucial for accurate real estate valuation and decision-making.

1. Interests in Real Property

An interest in real property represents a right or claim to benefit from or control a parcel of land. These interests are often less than the complete and unrestricted ownership known as fee simple. They can be broadly categorized as physical, financial, and development-related.

1.1 Physical Interests

Physical interests relate to the tangible aspects of the land and its use. These can be divided horizontally or vertically.

• 1.1.1 Horizontal Divisions:

  • Subdivision: The process of dividing a larger parcel of land into smaller, individual lots. This is a fundamental method of creating horizontal divisions, enabling individual ownership and development of distinct portions of the original tract.

  • Assemblage: The opposite of subdivision, assemblage involves combining two or more adjacent parcels of land into a single, larger parcel. This can create added value if the resulting parcel has greater utility than the sum of its parts.

    • Plottage Value: The incremental increase in value that occurs when two or more sites are combined to form a larger site. This value arises from the enhanced utility and development potential of the assembled parcel.
      • Equation: Plottage Value = Value of Assembled Parcel - (Value of Parcel 1 + Value of Parcel 2 + …)
      • Example: Two adjacent lots, each valued at $500,000, are assembled into a single lot valued at $1,200,000. The plottage value is $1,200,000 - ($500,000 + $500,000) = $200,000.
      • Experiment: Conduct a survey of real estate professionals to determine the average plottage value for different property types in various locations.

• 1.1.2 Vertical Divisions:

  • Subsurface Rights: The rights to use and extract resources from the underground portion of a property. This typically includes the right to extract minerals (oil, gas, coal, etc.) and to construct tunnels. These rights can be sold or leased separately from the surface rights. The determination of subsurface rights depends on geology and geological science.

    • Example: A landowner may sell the surface rights for agricultural use while retaining the subsurface rights for oil and gas exploration.

    • Related concepts: Mineral rights, Rule of Capture, Fracking.

  • Air Rights: The rights to use, control, and regulate the airspace above a parcel of real estate. These rights are increasingly valuable in dense urban areas where land is scarce. Air rights can be sold, leased, or transferred to allow for development above existing structures or adjacent properties.

    • Engineering Implications: The development of steel-framed buildings, passenger elevators, and advanced construction techniques have significantly increased the feasibility and value of air rights development.
      • Experiment: Compare the value of properties with air rights to similar properties without air rights in a major city.

1.2 Financial Interests

Financial interests represent the economic stakes in real property. These are crucial for investment analysis.

• 1.2.1 Equity Interests: The owner’s interest in real property after all claims and liens (e.g., mortgages) have been satisfied. Equity represents the “ownership” portion of the property’s value. It can be held individually, jointly, or through various legal entities.
  • Example: If a property is worth $500,000 and has a mortgage of $300,000, the equity interest is $200,000.
  • Equity is not always a pro-rata share of the whole.
• 1.2.2 Mortgage Interests: Represents the lender’s security interest in real property. A mortgage is a debt instrument secured by the property, giving the lender the right to foreclose if the borrower defaults on the loan. Mortgage values are highly sensitive to prevailing interest rates and market conditions.
  • Mortgage-Equity Analysis: A method for analyzing the relationship between mortgage financing and equity investment in real property.
  • Secondary Mortgage Market: Mortgages are often traded in the secondary market, allowing lenders to replenish their funds and investors to purchase mortgage-backed securities.

1.3 Development-Related Interests

These interests relate to the ability to develop or alter real property.

• 1.3.1 Transferable Development Rights (TDRs): A mechanism that allows landowners to transfer development potential from one property (the “sending” site) to another (the “receiving” site). This is often used to preserve historic landmarks, agricultural land, or environmentally sensitive areas.

  • Zoning Regulations: TDR programs are typically governed by local zoning ordinances, which specify the criteria for sending and receiving sites.
  • Example: A historic building owner in a restricted zone can sell their unused development rights to a developer who wants to build a taller building in a designated development district.
  • Environmental applications: Transferring rights from locations with vulnerable species to more suitable development areas.

2. Forms of Ownership

The form of ownership dictates how title to real property is held and who has the right to control and benefit from the property.

2.1 Individual vs. Concurrent Ownership

• 2.1.1 Ownership in Severalty: Ownership by one individual or entity. This provides the owner with complete control and rights to the property.

• 2.1.2 Concurrent Ownership: Ownership by two or more individuals or entities. There are several types of concurrent ownership:

  • Joint Tenancy: Ownership by two or more persons with the right of survivorship. This means that when one joint tenant dies, their interest automatically transfers to the surviving joint tenant(s). This requires the “four unities”: time, title, interest, and possession.
    • Mathematical implication: Probability calculations related to survivorship. For example, the probability of one joint tenant outliving another.
  • Tenancy by the Entirety: A form of joint tenancy available only to married couples in some states. It also includes the right of survivorship, and neither spouse can convey their interest without the consent of the other.
  • Tenancy in Common: Ownership by two or more persons, each with an undivided interest in the property. Unlike joint tenancy, there is no right of survivorship; each tenant in common can sell, lease, or will their interest to another party.

2.2 Legal Entity Ownership

Real property can also be owned by various legal entities, each with its own advantages and disadvantages in terms of liability, taxation, and management.

• 2.2.1 Land Trusts: A trust arrangement in which a trustee holds title to real property for the benefit of one or more beneficiaries. Land trusts can provide privacy, ease of transfer, and protection from certain liabilities.

• 2.2.2 Partnerships: A business arrangement in which two or more persons jointly own a business and share in its profits and losses.

  • General Partnership: All partners share in business gains and are personally liable for all liabilities of the partnership.
  • Limited Partnership: Consists of general partners (who manage the business and have unlimited liability) and limited partners (who are passive investors with limited liability).

• 2.2.3 Stock Corporations: A legal entity separate from its owners (shareholders). The corporation owns the real property, and the shareholders own shares of stock in the corporation. This provides limited liability for shareholders.

• 2.2.4 Real Estate Investment Trusts (REITs): Companies that own or finance income-producing real estate. REITs allow small investors to participate in large-scale real estate investments. To maintain tax-exempt status, a REIT must pay out at least 90% of its taxable income as dividends.

• 2.2.5 Real Estate Operating Companies (REOCs): Similar to REITs, but REOCs can reinvest their earnings back into the business instead of distributing them to unit holders.

• 2.2.6 Limited Liability Companies (LLCs): A hybrid entity that combines the limited liability of a corporation with the pass-through taxation of a partnership. LLCs offer flexibility in management and ownership structure.

2.3 Special Forms of Ownership

These forms combine individual and joint rights in unique ways.

• 2.3.1 Condominium Ownership: Ownership of a separate unit within a multi-unit building, along with an undivided interest in the common areas. Each condominium unit owner has fee simple ownership of their unit and is responsible for its individual upkeep. The condominium association manages the common areas.

  • Variations in international markets.
  • Examples of types of real estate held in condominium ownership: hotels, offices, industrial buildings, retail structures, and even garden plots, marina slips, and undeveloped land.

• 2.3.2 Cooperative Ownership: Ownership of shares in a corporation that owns a building. The shareholders receive a proprietary lease, which gives them the right to occupy a specific unit. Unlike condominium owners, cooperative shareholders do not own their individual units directly.

• 2.3.3 Timesharing: A form of ownership in which multiple purchasers have the right to use a property (typically a vacation property) for a specified period each year. Timeshares can be structured as fee simple ownership, leasehold interests, or right-to-use arrangements.

3. Conclusion

Understanding the various interests in real property and the diverse forms of ownership is essential for real estate professionals. These concepts underpin property valuation, investment analysis, and legal considerations. The principles outlined in this chapter provide a foundation for further exploration of real estate rights and their impact on the real estate market.