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Chapter 2 Legal Foundations to Value Real Estate FIN 331 Fall 2013.
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Transcript of Chapter 2 Legal Foundations to Value Real Estate FIN 331 Fall 2013.
Chapter 2Legal Foundations to Value
Real EstateFIN 331
Fall 2013
Chart illustrates the inflation-adjusted median price of a single-family home in the United States over the past 44 years. More recently, the inflation-adjusted price of the median single-family home has declined and is now testing support of its two-year upward sloping trend channel.
The Nature of Property
A.Real Estate as a bundle of rightsB.What do we mean by Rights?C.How do property rights differ from
personal rights?D.How does personal property differ
from real property
REAL PROPERTY AS A BUNDLE OF RIGHTS
A. What do we mean by rights?1. Claims that the government is obligated to
enforce2. Derived from the Constitution & Bill of Rights3. Different from raw power4. Nonrevocable and Enduring5. Can be reduced in the interest of health,
safety, and welfare6. Not limited to the memory of owners or others7. Cannot be nullified by other persons or by
government
REAL PROPERTY AS A BUNDLE OF RIGHTS
B. How do personal rights differ from property rights?1. Personal rights
a. Freedoms guaranteed by Constitutionb. Supreme Court interpretations of Constitution
2. Property rightsa. Exclusive possession b. Enjoyment of the use or benefit: Use, collect
rents, harvest.c. Freedom to dispose as one pleases (within
limits of safety): sell, convert, rebuild, etc.
REAL PROPERTY AS A BUNDLE OF RIGHTS
C. How does real property differ from personal property?1 Real property: Rights in land and its
permanent structures (see Exhibit 2-2)a Surface of the earth and improvementsa Air, up to reserved air space or tallest structureb Beneath the earth as far as technology allows:
Minerals, oil and gas, water
2 Personal property: All other propertya Personal and household goodsb Intellectual propertyc Music
REAL PROPERTY AS A BUNDLE OF RIGHTS
A.How do we distinguish real from personal property?1. Fixtures (Real): typically something not
readily movable.Examples: custom screens & draperies, kitchen appliances such as radar ranges, garbage disposals (attached to property)
2. Personal: typically something moveableExamples: furniture, pictures, “customary assumptions of the realm”
REAL PROPERTY AS A BUNDLE OF RIGHTS
3. Special rule for “Fixtures”a. The manner of attachmentb.The character of the article and manner of
adaptationc. The intention of the partiesd.Relation of the parties: landlord and tenant
relationships1) Trade fixtures considered personal property
2) Agricultural fixtures at taxes are considered property of the tenant
3) Same rules apply for residential tenants
Real Property Bundle of Rights
A. Interest: Any set of rights in real property
B.Estates: A real property interest that includes the right of exclusive possession
C.Non possessory interests:1. Easements2. Restrictive covenants3. Liens
Possessory Interests [Estates]
A.Fee Simple Absolute - all possible rights
B.Fee Simple Conditional - all rights, but revocable if specific condition is violated
C.Ordinary Life Estate and Remainder1. Rights are unbundled2. Owner retains full rights until death
D.Legal Life Estate; created by act of law
Leasehold (Non-ownership or Non-freehold) Estates
A. Leasehold interest are possessory interests and are therefore Estates1. They are limited time2. The right of disposition is diminished3. They are not titled interests
B. Tenancy for years1. Leasehold interests are for a specific period of time (few days to
decades)2. Must be written if for more than one year3. Written lease contract governs landlord-tenant relationship
C. Periodic Tenancy1. No definite length of time2. Often by oral agreement3. State law governs notice of termination
Minimum time required for notice is usually half of the payment period
Leasehold (Non-ownership or Non-freehold) Estates
D.Tenancy at Will1. continue tenancy after the leases
expired2. Generally an oral agreement between
the tenant and the landlord
E. Tenancy at Sufferance1. When tenant is supposed to vacate but
does not2. This does not constitute trespassing
because of the previous leasehold interest
Nonpossessory Interests in Land
A. Easements: The right to use land for a specific and limited purpose1. Affirmative easements:
a. Driveway or access right-of-wayb. Sewer linec. Drainaged. Common wall
2. Easements Appurtenanta. Involves the relationship between 2 adjacent parcels of landb. The dominant parcel benefits from the easementc. The servient parcel is constrained or diminished by the
easementd. May be positive (some intrusion) or negative (no intrusions)
Nonpossessory Interests in Land
3. Easements in Gross (Commercial Easements): right to use land unrelated to other parcelsa. Extract natural resources, harvest
timber/cropsb.Add roadways, ditches, pipeline, etc.c. May be transferred separately from land
title or ownership
Nonpossessory Interests
Examples:On parcels A and C is a common driveway easement.On parcel C is an implied easement of access in favor of parcel B.Parcel E as an involuntary driveway easement known as an easement by prescription.Parcel F has an implied easement for access to extract oil.The power lines and the roadside electric lines are easements to permit installation and maintenance.The wildlife preserve on parcel G may be protected by a conservation easement.
Nonpossessory Interests in Land
A. License1. An easement is the right to use another’s land for a specific and limited
purpose2. A license is permission to do so and is revocable by the grantor
B. Restrictive Covenants1. In a deed for a single parcel of land OR an entire subdivision2. Enforceable in court of law or by “parties at interest” ~ HOA3. Type of building and materials, minimum square footage, fences, etc.4. Can only be enforced by those who hold a legal interest in the property
C. Liens: An interest in property as security for an obligation1. General Liens: Arise from events unrelated to the property
a. Court awarded damagesb. Federal tax liens
2. Specific liens: Arise from ownership and use of the propertya. Mortgageb. Mechanics’ lienc. Property tax, assessment or Community Development District (CDD) lien
Liens
A. An interest in property that serves as security for an obligation1. General Liens: Arise from events unrelated to the
propertya. Court awarded damagesb. The lien is security for the payment of the judgment
2. Property Tax and Assessment Liensa. Enjoy top priority among liensb. Assessment liens can last for several years
3. Community Development District (CDD) lien4. Specific liens: Arise from ownership and use of the
propertya. Mortgageb. Mechanics’ lien
Liens
FORMS OF CO-OWNERSHIP
A. Indirect: Through business organizations or trusts1. General Partnerships2. Limited Partnerships3. Limited Liability Companies4. Corporation (Co-op)5. TrustEntity holds title. Ownership passes through the entity. Interest may not be divided.
FORMS OF CO-OWNERSHIP
B. Direct: 1. Tenancy in Common; each owner retains full rights
a. All have fee simple interest – can be divided (sell, mortgage)
2. Joint Tenancy with right of survivorship; most common in USa. Restricts inheritance to heirs of last owner, unlawful in some states
3. Tenancy by the Entirety: similar to 2 abovea. Typ. Husband and wife. Protection against liens & judgments if
against one spouse
4. Condominium; single ownership (fee simple) with tenancy in common (of communal elements)a. Bylaws define owner rights
5. Cooperative; a proprietary corporation – each owner has a proprietary lease (in effect ownership of a specific portion) and can be sold, transferred, or bequeathed.
FORMS OF CO-OWNERSHIP
6. Ownership interests from marriagea. Dower/Curtesy: common law granting of one third life estate to
survivor in the real property of the decedentb. Dower covers the widow’s claim, curtesy the widowerc. Life estate is not marketable
7. Elective Sharea. In law, grants the surviving spouse a share of most of the wealth
of the decedentb. Elective share applies to both real and personal propertyc. Elective share law may not encompass all of the decedent’s
wealth
8. Community Propertya. Gives a spouse a one-half claim at all property acquired “from
the fruits of the marriage”b. Excluded from claims are any property acquired before the
marriage (a motive for prenuptial agreements?)
Two Main Forms of Marital Property Rights
TIMESHARE
A. Multiple individuals having use of property but not simultaneous interests
B. the estate is divided into separate time intervals
C. Timeshare rights1. any contract that may convey any level of real
property interest2. Buyer often acquires a leasehold interest rate
fixed number of years3. A buyer may also acquire a license for partial
use
SPECIAL ISSUES REGARDING LAND
A.Rights to Water1. Who owns the land under a body of
water?2. Who controls use of land under a body
of water?3. Who has the right to use the surface?4. Who has the right to use the water
itself?5. Who has the right to use groundwater?
SPECIAL ISSUES REGARDING LAND
B. Rights to Oil, Gas, and Minerals1. Rights to the subsurface include rights to
minerals2. Mineral rights can be separated from land
ownership3. In some states, mineral rights imply ownership
of the space minerals occupy4. Oil rights
a. Ownership states: Oil is simply another mineralb. Traditional “rule of capture” (If you can remove it,
it’s yours) is being limited due to extensive secondary recovery methods.
HOMEWORK ASSIGNMENT
A.Key terms: Dominant vs. Servient parcel, Types of Liens, Property rights, Restrictive Covenants, Forms of Tenancy, Fee Simple types, Easements, Mineral Rights – Rule of Capture
B.Study Questions: 1, 3, 5, 7