Property Rights: Divisions, Transfers, and Ownership Forms

Property Rights: Divisions, Transfers, and Ownership Forms

Introduction

Real estate rights are complex bundles that can be divided, transferred, and held under various forms of ownership. This chapter delves into the intricacies of these divisions, transfers, and ownership structures, providing a comprehensive understanding of the legal and economic implications. A solid grasp of these concepts is crucial for accurately appraising real estate and making informed investment decisions.

Divisions of Property Rights

Property rights are not monolithic; they can be separated and allocated to different parties, creating diverse interests in a single property. These divisions can be categorized into physical and financial interests.

Physical Interests

Physical interests involve the right to tangible components of the real estate. These can be further divided into horizontal and vertical interests.

• Horizontal Divisions:

  • Subdivision: This process involves dividing a large parcel of land into smaller, distinct units, each with its own legal description and ownership. Subdivision is governed by local regulations and zoning ordinances, aiming to create manageable and marketable parcels.

  • Assemblage (Plottage): Assemblage refers to combining two or more adjacent parcels of land into a single, larger parcel. This can lead to an increase in value known as plottage value.

    • Plottage Value: This is the incremental value created when assembling separate parcels into a larger one. It arises when the combined parcel’s value exceeds the sum of the individual parcels’ values.

      • Equation: PV = V_assembled – ΣV_individual

        • Where:
          • PV = Plottage Value
          • V_assembled = Value of the assembled parcel
          • ΣV_individual = Sum of the values of individual parcels

      • Example: Two adjacent parcels are each valued at $500,000. When assembled, the combined parcel is valued at $1,200,000. The plottage value is $1,200,000 - ($500,000 + $500,000) = $200,000.

      • Practical Application: Developers often use assemblage to create larger development sites, enabling them to build bigger projects and potentially increase profits.
        • Transferable Development Rights (TDRs): TDRs allow the transfer of 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.

    • TDRs can be used to increase building density in the receiving zone.

    • When sold, TDRs become personal property, reverting to real property when applied to another tract.

    • Example: A landowner with a historic building on their property might sell TDRs to a developer who wants to build a taller building in a nearby area. This allows the developer to exceed the zoning restrictions on building height, while preserving the historic building.
    • Practical Application: TDR programs help balance development pressures with preservation goals.

• Vertical Divisions:

  • Subsurface Rights: These rights pertain to the use and profits derived from the underground portion of a property. This includes the right to extract minerals, construct tunnels, and utilize underground space.

    • Example: A mining company might purchase subsurface rights to extract coal from a property, while the surface owner retains the right to use the land for agriculture.

      • Air Rights: Air rights are the property rights associated with the use, control, and regulation of the airspace above a parcel of land. These rights can be sold, leased, or subdivided.

    • Factors affecting air rights: steel-framed building construction, passenger elevator, tunnel excavation techniques, and innovations in communications technology.

    • Example: A developer might purchase air rights above an existing building to construct a new building on top of it.

    • Practical Application: Air rights are crucial in dense urban areas where land is scarce.
    • Transferring air rights can affect density of land use.
    • Example: By combining two lots, a developer could use the increased area to calculate floor area ratio (FAR), allowing for the new building to be taller without violating building code.

Financial Interests

Financial interests relate to the economic benefits associated with property ownership. These interests are typically divided into mortgage and equity components.

• Equity Interests: Equity represents the owner’s interest in the property after all claims and liens have been satisfied. It’s the residual value of the property after deducting outstanding debts.

  • Equity can be legally accomplished by an individual owner, joint owner, partner, or shareholder in a corporation.

  • Example: If a property is worth $500,000 and has a mortgage of $300,000, the equity is $200,000.

  • Formula: Equity = Property Value – Total Liabilities
  • Practical Application: Equity is a key indicator of financial strength and is crucial in investment decisions.
  • Partial interests are often valued less than the pro rata share of ownership due to lack of control of management.

• Mortgage Interests: A mortgage creates a secured debt position, where the lender has a claim on the property as collateral for the loan. The mortgage interest represents the lender’s financial stake in the property.

  • Mortgage-equity analysis is important in appraisal literature.

  • Conditions in the mortgage market affect property value.

  • Example: A bank holds a mortgage on a property, giving it the right to foreclose if the borrower defaults on the loan.

  • Practical Application: Mortgage markets play a significant role in real estate investment and development, impacting property values and affordability.

Transfers of Property Rights

Property rights can be transferred through various legal mechanisms, including:

• Sale: The most common method, involving the transfer of ownership in exchange for consideration (usually money).
• Lease: Grants the right to possess and use the property for a specified period in exchange for rent.
• Gift: A voluntary transfer of ownership without consideration.
• Inheritance: Transfer of ownership through a will or by intestate succession laws.
• Foreclosure: Transfer of ownership to a lender due to the borrower’s default on a mortgage.
• Eminent Domain: Government’s power to take private property for public use, with just compensation paid to the owner.
• Adverse Possession: Acquiring ownership through continuous, open, and notorious possession of property for a statutory period.
• Transferable Development Rights (TDRs): As mentioned previously, this is the sale of development rights.

Forms of Ownership

The form of ownership determines how property rights are held and exercised. Different ownership forms offer varying levels of liability, tax implications, and control. The form of ownership determines who owns the interests discussed previously.

Individual Ownership (Severalty)

• Ownership by a single individual or entity. The owner has complete control and responsibility for the property.

Concurrent Ownership

• Ownership by two or more individuals or entities simultaneously. There are three main types:
  • Joint Tenancy: Joint ownership with the right of survivorship. Upon the death of one joint tenant, their interest automatically passes to the surviving joint tenant(s). Requires the four unities: possession, interest, time, and title.
  • Tenancy by the Entirety: A special form of joint tenancy available only to married couples in some states. It also includes the right of survivorship, and neither spouse can transfer their interest without the other’s consent.
  • Tenancy in Common: Ownership by two or more individuals with no right of survivorship. Each tenant in common can sell, lease, or bequeath their interest independently. Undivided interests may or may not be equal.

Legal Entity Ownership

• Ownership by a legal entity, such as a corporation, partnership, or trust. This structure separates the ownership of the property from the personal assets of the individuals involved.

  • Land Trusts: Properties are conveyed to a trustee, who holds legal title while the beneficiaries retain beneficial ownership. Judgements against a beneficiary is not a lien against the real estate.

    • Trust agreement outlines duties and functions of the trustee.

    • Example: Land trusts can be used for privacy, estate planning, or asset protection.

      • Partnerships: A business arrangement where 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 responsible for liabilities.

    • Limited Partnership: General partners manage and assume full liability, while limited partners are passive and their liability is limited to their capital contribution.

    • Practical Application: Partnerships are often used for real estate acquisition, pooling funds for property ownership and operation.

      • Corporations: Legal entities separate from their owners (shareholders). Corporations can own property, enter into contracts, and be held liable for their actions.

    • Stock corporations may hold title to a single asset or multiple assets.

    • Shareholders own stock and not the real estate.

    • Practical Application: Corporations provide limited liability for their shareholders.

      • 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. Must pay dividends of at least 90% of its taxable income.

    • Shares are easily transferable.

    • Provides freedom from personal liability and benefit of expert management.

  • Real Estate Operating Companies (REOCs): Similar to REITs except an REOC can reinvest its earnings rather than distribute them to the unit holders.

    • REOCs are more flexible in types of real estate investments they can make.

      • Limited Liability Companies (LLCs): Hybrid entities combining features of corporations and partnerships. LLCs offer limited liability to their members and pass-through taxation.

    • Members risk no personal assets.

    • Transfer of ownership is simple.

    • Practical Application: LLCs are popular for real estate investment due to their flexibility and liability protection.

      • Syndications: A private or public partnership to pool funds for the acquisition, development, holding, management, or disposition of real estate.

    • Complex arrangements since they purchase more than real estate.

Special Forms of Ownership

• These forms combine individual and joint property rights:

  • Condominium Ownership: Ownership of individual units within a multi-unit building, with shared ownership of common elements.

    • Unit is a separate ownership interest.

    • Condominium interests can be found in most property types.

      • Cooperative Ownership: Ownership of shares in a corporation that owns the building. Shareholders have the right to occupy a specific unit through a proprietary lease.
      • Timesharing: Ownership of the right to use a property for a specified period each year.

Conclusion

Understanding the divisions, transfers, and ownership forms of property rights is essential for anyone involved in real estate. These concepts impact property valuation, investment decisions, and legal compliance. By mastering these principles, professionals can navigate the complex world of real estate rights with confidence and expertise.