Ownership Restrictions: Public and Private Controls

Chapter 2: Ownership Restrictions: Public and Private Controls

Introduction:

Private ownership of real property rights is a cornerstone of the legal and economic systems in the United States. However, this ownership is not absolute. Statutory and common law provide for the private enjoyment of these rights, subject to certain limitations and restrictions. These restrictions arise from both public and private sources and are essential to understanding the full scope of real property rights.

2.1 Public Restrictions on Ownership:

Public restrictions are limitations imposed by governmental entities on the use and enjoyment of private property. These restrictions are primarily derived from the inherent powers of government, which are typically categorized into four main areas: taxation, eminent domain, police power, and escheat.

2.1.1 Taxation:

Taxation is the power of the government to levy assessments on goods, products, and rights to generate revenue for public services and infrastructure.

• Federal vs. State Taxation: The U.S. Constitution restricts the federal government from directly taxing real property. However, income and proceeds from the sale of real property are subject to federal income taxation. The power to directly tax real property is reserved for state and local governments.

• Property Tax Calculation: Property taxes are typically calculated based on the assessed value of the property. The assessed value is often a percentage of the market value, and a tax rate is applied to this assessed value.

  • Formula: Property Tax = Assessed Value x Tax Rate
  • Where:
    • Assessed Value = Market Value x Assessment Ratio
    • Tax Rate = (Total Budgeted Expenditures / Total Assessed Value of all properties in the jurisdiction)
  • Example: Suppose a property has a market value of $500,000, and the assessment ratio in the jurisdiction is 80%. The assessed value would be $400,000. If the tax rate is 2%, the annual property tax would be $8,000.

2.1.2 Eminent Domain:

Eminent domain is the right of the government to take private property for public use, even if the owner does not wish to sell it. This power is enshrined in the Fifth Amendment of the U.S. Constitution, which also mandates that “just compensation” be paid to the property owner. Condemnation is the legal process by which eminent domain is exercised.

• Just Compensation: Determining “just compensation” is a complex process. It typically includes the fair market value of the property, but may also include compensation for any damages to the remaining property (severance damages) if only part of the property is taken.
• The “Takings Clause”: The Fifth Amendment is often referred to as the “Takings Clause.” This clause ensures that private property is not taken for public use without just compensation.
• Mathematical Representation of Compensation:
  • Total Compensation (TC) = Fair Market Value (FMV) + Severance Damages (SD) - Benefits to Remaining Property (BRP)
  • Where:
    • FMV is determined by appraisal using comparable sales, income capitalization, or cost approaches.
    • SD are the damages to the remaining property due to the taking (e.g., reduced access, noise pollution).
    • BRP are benefits accruing to the remaining property due to the public project.
• Example: A highway expansion requires taking a portion of a commercial property. The FMV of the taken portion is appraised at $200,000. The remaining property suffers reduced parking, decreasing its value by $50,000 (SD). However, the new highway improves traffic flow, benefiting the remaining property by $10,000 (BRP). The total compensation would be $200,000 + $50,000 - $10,000 = $240,000.

2.1.3 Police Power:

Police power is the inherent authority of the government to regulate private property to protect public health, safety, morals, and general welfare. This power is broad and allows for a wide range of regulations.

• Examples of Police Power Regulations:

  1. Zoning ordinances: These regulations control land use, density, and building heights within specific areas.
  2. Building codes: These codes set standards for construction, ensuring structural integrity, fire safety, and accessibility.
  3. Environmental regulations: These regulations protect air and water quality, control hazardous waste, and preserve natural resources.
  4. Health codes: These codes regulate sanitation, food safety, and disease control.
  5. Land traffic regulations: Control the transportation.

• Zoning Regulations and Their Impact: Zoning regulations can significantly impact property value. For example, a property zoned for single-family residential use will likely have a lower value than a property zoned for commercial use in a high-demand area.

• Mathematical Modeling of Zoning Effects:
  • Potential Property Value (PPV) = Base Value (BV) + Zoning Impact (ZI) + Location Adjustment (LA)
  • Where:
    • BV is the inherent value of the land based on comparable sales of similar plots.
    • ZI reflects the increase or decrease in value due to the zoning designation.
    • LA is an adjustment for the specific location of the property within the zoned area.
• Example: Two identical plots of land have a base value of $100,000. One is zoned for residential use (ZI = $20,000), and the other for commercial use (ZI = $80,000). If the Location Adjustment (LA) is $5,000 for both, the Potential Property Value (PPV) would be $125,000 for the residential plot and $185,000 for the commercial plot.

2.1.4 Escheat:

Escheat is the right of the state to take ownership of property when an owner dies without❓❓ a will (intestate) and has no ascertainable heirs.

• Purpose of Escheat: Escheat prevents property from becoming abandoned or ownerless. The state holds the property in trust, and if heirs are later discovered, they can claim the property.
• Process of Escheat: The process typically involves a legal determination that no heirs exist, followed by a formal transfer of ownership to the state. The state may then sell the property and use the proceeds for public purposes.
• Escheat as a Last Resort: Escheat is considered a last resort. The state makes diligent efforts to locate potential heirs before taking possession of the property.

2.2 Private Restrictions on Ownership:

Private restrictions are limitations on the use or development of property imposed by private individuals or entities. These restrictions are typically created through covenants, conditions, and restrictions (CC&Rs), easements, and other agreements.

2.2.1 Covenants, Conditions, and Restrictions (CC&Rs):

CC&Rs are private agreements that restrict the use of land within a subdivision or other development. These restrictions are typically recorded in the county land records and bind all subsequent owners of the property.

• Types of CC&Rs: CC&Rs can cover a wide range of topics, including:

  1. Architectural standards: These standards control the design and appearance of buildings, ensuring uniformity and aesthetic appeal.
  2. Use restrictions: These restrictions limit the types of activities that can be conducted on the property (e.g., prohibiting commercial use in a residential area).
  3. Maintenance obligations: These obligations require property owners to maintain their properties in good condition.

• Enforcement of CC&Rs: CC&Rs are typically enforced by a homeowner’s association (HOA). The HOA can impose fines, seek court injunctions, or even place liens on properties for violations of the CC&Rs.

• Mathematical Model of CC&R Impact on Property Value:
  • Adjusted Property Value (APV) = Initial Market Value (IMV) + CC&R Benefits (CCB) - CC&R Restrictions (CCR)
  • Where:
    • IMV is the market value of the property without considering CC&Rs.
    • CCB represents the benefits derived from the CC&Rs (e.g., enhanced aesthetics, community amenities).
    • CCR reflects the negative impact of the CC&Rs (e.g., restrictions on building design, limitations on use).
• Example: A property has an initial market value of $300,000. The CC&Rs provide for well-maintained common areas and architectural harmony (CCB = $20,000). However, the CC&Rs also restrict the size of additions and limit the types of landscaping allowed (CCR = $5,000). The Adjusted Property Value (APV) would be $300,000 + $20,000 - $5,000 = $315,000.

2.2.2 Easements:

An easement is a right granted to one party to use the land of another party for a specific purpose. Easements can be created expressly, by implication, or by prescription.

• Types of Easements:

  1. Easement appurtenant: Benefits a specific parcel of land (the dominant estate) and burdens another parcel of land (the servient estate).
  2. Easement in gross: Benefits an individual or entity, rather than a specific parcel of land (e.g., utility easement).
  3. Easement by necessity: Created when a property is landlocked and requires access over another property.
  4. Prescriptive easement: Acquired through continuous, open, and notorious use of another’s land for a statutory period (similar to adverse possession).

• Impact of Easements on Property Value: Easements can either increase or decrease property value, depending on the type of easement and its impact on the property’s use and enjoyment.

• Quantifying Easement Value:
  • Easement Value (EV) = Before Value (BV) - After Value (AV)
  • Where:
    • BV is the value of the property before the easement is granted or imposed.
    • AV is the value of the property after the easement is in place.
• Example: A property owner grants an easement for a utility company to run power lines across their property. The property is appraised at $400,000 before the easement. After the easement is granted, an appraiser determines that the property value has decreased to $380,000 due to the presence of the power lines. The easement value (EV) would be $400,000 - $380,000 = $20,000.

2.2.3 Other Private Agreements:

Other private agreements, such as party-wall agreements (agreements concerning shared walls between buildings) or agreements relative to water rights, can also restrict property ownership. These agreements are typically binding on subsequent owners of the property if they are properly recorded.

2.3 Discovery of Restrictions:

Discovering restrictions on property ownership requires a thorough search of public records, title reports, and other sources of information.

• Sources of Information:
  1. Deeds recorded at the county courthouse: These records contain the legal description of the property and any recorded restrictions, such as CC&Rs or easements.
  2. Title reports: These reports provide a summary of the property’s ownership history and any encumbrances on the title.
  3. Property owners, clients, brokers, and neighbors: These individuals may have knowledge of unrecorded restrictions or agreements.

2.4 Conclusion:

Understanding ownership restrictions, both public and private, is essential for real estate professionals. These restrictions can significantly impact property value, use, and development. A thorough understanding of these concepts is crucial for accurate property appraisal and informed real estate decision-making.