Transferable Rights and Forms of Ownership

Chapter: Transferable Rights and Forms of Ownership

Introduction

This chapter delves into the intricacies of transferable rights and various forms of ownership in real estate. Understanding these concepts is crucial for mastering real estate rights, ownership, interests, and valuation. We will explore the legal and economic aspects of these rights and ownership structures, providing a comprehensive foundation for real estate professionals.

1. Transferable Rights

Transferable rights represent the ability to convey certain entitlements associated with real property to another party. These rights can be separated from the underlying land and traded independently, creating value and flexibility in land use.

1.1 Transferable Development Rights (TDRs)

TDRs are a mechanism used to redirect development potential from areas deemed unsuitable for intense development (sending zones) to areas more appropriate for growth (receiving zones).

• Concept: TDRs sever the right to develop property from the land itself. Landowners in sending zones, often areas with environmental or historical significance, can sell their unused development rights. Developers in receiving zones can purchase these rights to increase the density or intensity of their projects beyond what is normally permitted by zoning regulations.
• Mechanism:
  1. A municipality establishes sending and receiving zones.
  2. Sending zone landowners are allocated TDRs based on the difference between their existing development and the maximum allowable development under zoning.
  3. Receiving zone developers purchase TDRs from sending zone landowners.
  4. The municipality allows the developer to build at a higher density or intensity than would otherwise be allowed.

• Mathematical Representation: Let’s define the following:

  • D_max: Maximum allowable development intensity in the receiving zone without TDRs.
  • D_TDR: Development intensity increase allowed per TDR purchased.
  • N: Number of TDRs purchased by the developer.
  • D_total: Total development intensity allowed with TDRs.

  Then, the total development intensity is calculated as:

  D_total = D_max + (N * D_TDR)

• Practical Application: Imagine a rural county seeking to preserve farmland. Landowners in designated agricultural zones can sell TDRs to developers in a nearby urban growth area, allowing the developers to build denser housing projects while preserving agricultural land.

• Utility Capacity Example: As described in the PDF, another example involves rights to connect to a utility, such as a sewage treatment plant. If landowner A has the right to connect 100 residential units, and landowner B wants to connect 50 units but lacks the right due to a moratorium, landowner B can purchase those connection rights from landowner A, who may not be using them. This allows for immediate development.

1.2 Air Rights

Air rights are the rights to use and control the airspace above a property.

• Concept: Air rights can be separated from the surface land and sold or leased to another party. This allows for development above existing structures or uses.
• Engineering and Urban Planning: Advances in engineering, particularly steel-framed construction and elevators, have made air rights development more feasible. Increasing land values in urban areas drive demand for air rights development.

• Practical Application: A developer might purchase the air rights above a train station to construct an office building without disrupting rail operations. New York City’s zoning codes are examples where developers can merge adjacent lots and transfer the Floor Area Ratio (FAR). The FAR is calculated as:

  FAR = Total Building Floor Area / Lot Area

  A developer can buy adjacent lots and calculate FAR based on the combined area, allowing a taller building on one lot than would be permissible without merging.

• Subdivision of Air Rights: Air rights can be further subdivided. The owner of the fee simple interest may sell or lease only the air space to be occupied by a specific improvement.

1.3 Subsurface Rights

Subsurface rights are the rights to use and profit from the underground portion of a property.

• Concept: Subsurface rights typically involve the extraction of minerals or the construction of tunnels.
• Practical Application: A mining company might purchase the subsurface rights to a property to extract coal or other minerals, while the surface owner retains ownership of the land above.

2. Financial Interests

Financial interests represent the economic rights associated with real property.

2.1 Equity Interests

• Concept: Equity is the owner’s interest in real property after all claims and liens have been satisfied.
• Legal Forms: Equity ownership can take various legal forms, including individual ownership, joint ownership, partnership, or ownership through a corporation. The legal form does not typically affect the appraised value.
• Valuation: Appraisers may be asked to value a specific equity interest for purposes such as estate taxes or sale/purchase decisions.
• Partial Interests: The analysis of partial interests in real property is a complex topic. The value of a partial interest is not necessarily a pro-rata share of the value of the whole. Factors such as control of the asset, management, and voting rights influence value.

2.2 Mortgage Interests

• Concept: A mortgage represents a secured debt position against real property.
• Mortgage-Equity Analysis: Mortgage-equity analysis is a crucial component of real estate appraisal, as discussed in Chapter 25. Various techniques compare mortgages with different terms.
• Secondary Market: Mortgage interests are regularly traded in the secondary market. Conditions in the mortgage market directly influence property values, as seen during the 2007 economic downturn.

3. Forms of Ownership

The form of ownership defines who owns the various interests and rights in real property. The choice of ownership structure significantly impacts liability, taxation, and management of the asset.

3.1 Individual Ownership

• Severalty: Individual ownership is legally known as ownership in severalty.
• Indirect Individual Ownership: Individuals can hold 100% ownership through legal entities like land trusts or corporations.

3.2 Concurrent Ownership

Concurrent ownership involves two or more individuals sharing ownership of a property.

• Tenancy: Tenancy refers to the holding of property by any form of title.
• Joint Tenancy: Joint ownership by two or more individuals with the right of survivorship. Each party has an identical interest and right of possession. Upon death, ownership automatically vests in the remaining joint tenant(s).
• Tenancy by the Entirety: Ownership held by spouses, where neither spouse can dispose of their interest without the other’s consent. It includes the right of survivorship and is only available to married couples.
• Tenancy in Common: Ownership held by two or more individuals, each having an undivided interest. Interests may or may not be equal, and there is no right of survivorship. One tenant in common can sell their interest without approval.

3.3 Legal Entity Ownership

Real property can be owned by various legal entities, including:

• Land Trusts: A land trust is a legal agreement where a trustee holds title to property for the benefit of another party. The trustee’s actions are limited to those outlined in the trust agreement. Judgments against a beneficiary do not become liens against the real estate.
• Partnerships: A business arrangement in which two or more people jointly own a business.
  • General Partnership: All partners share in business gains and are personally liable for all partnership debts.
  • Limited Partnership: Consists of general partners (active management, full liability) and limited partners (passive investment, limited liability up to their capital contribution).
• Corporations: Legal entities separate from their owners (shareholders). Shareholders own stock, not the underlying real estate. The corporation holds title to the property.
• Real Estate Investment Trusts (REITs): Companies that own or finance income-producing real estate. To qualify for tax pass-through, REITs must pay dividends of at least 90% of their taxable income. Offer shareholders freedom from personal liability, expert management, and readily transferable shares.
• Real Estate Operating Companies (REOCs): Similar to REITs but can reinvest earnings into the business rather than distributing them to unit holders. REOCs have greater flexibility in their investment types.
• Limited Liability Companies (LLCs): Combines features of corporations and partnerships. Members have limited liability (similar to a corporation) but can be taxed as a pass-through entity (similar to a partnership).
• Syndications: Private or public partnerships to pool funds for real estate activities (acquisition, development, management, etc.). Involves transferring interests to a limited partnership, which then sells the interests to investors.

3.4 Special Forms of Ownership

• Condominium Ownership: Ownership of separate units in a multi-unit building, with undivided ownership of common elements. Used for residential, retail, office, and even land subdivisions. Floor area ratio (FAR) limits may apply to the undivided parcel rather than individual lots in land condominiums.
• 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 or the right to use a property for a specified period each year.

Conclusion

Understanding transferable rights and various forms of ownership is crucial for effective real estate valuation and decision-making. These concepts shape the legal and economic landscape of real estate, influencing development potential, investment strategies, and risk management. Mastery of these topics is fundamental to a comprehensive understanding of real estate rights, ownership, interests, and valuation.