Chapter 7 Definitions
A partnership is defined as
"A business arrangement in which two or more persons jointly own a business and share in its profits and losses." Partnerships are commonly found in acquisitions of real estate. It affords an opportunity for pooling of funds. Partners can get together to share their investment funds to multiply their buying power, and also to share the risk. There are two types of partnerships - general and limited.
A real estate investment trust (REIT) is defined as:
"A corporation or trust that combines the capital of many investors to acquire or provide financing for all forms of real property. A REIT serves much like a mutual fund for real property. Its shares are freely traded, often on a major stock exchange. To qualify for the favorable tax treatment currently accorded such trusts, 90% of the taxable income of a REIT must be distributed among its shareholders, who must number at least 100 investors; no fewer than five investors can own more than 50% of the value of the REIT during the last half of each taxable year. The Federal Securities and Exchange Commission stipulates that REITs with over 300 investors have to make their financial statements public." The popularity of REITs waxes and wanes during economic cycles and with the changing tax laws.
The concept of condominium ownership is defined as:
"A form of fee ownership of separate units or portions of multiunit buildings that provides for formal filing and recording of a divided interest in real estate." A condominium produces a blend of two elements. You are fee simple owner of some described parcel, consisting of a three-dimensional space, plus you are an owner in common of other specified common areas. Condominium ownership entails an undivided interest in certain specified common areas which may include amenities such as swimming pools and clubhouses or may just be undeveloped land. The value of your share of ownership of the common areas varies from project to project. When making comparisons between condominium projects, it is extremely important to analyze the contributions of the common elements. For example, if the common area in a condominium project includes an 18-hole championship golf course, it may add substantial value to the value of each individual unit in the project.
Cooperative ownership is defined as:
"A form of property ownership in which each unit owner holds stock in a cooperative apartment building or housing corporation. Stockholders receive a proprietary lease on a specific apartment and are obligated to pay a monthly maintenance charge that represents the proportionate share of operating expenses and debt service on any underlying mortgage, which is paid by the corporation. This proportionate share is based on the proportion of the total stock owned." If you appraise a unit in a cooperative building, you would not report the results of the appraisal on the URAR appraisal report form. Fannie Mae has two appraisal report forms intended for the appraisal of co-ops (Forms 2090 and 2095), depending on whether you do an interior or exterior inspection. On the first page of these forms under "Property Rights Appraised," there is a box that you can check for "cooperative." At the conclusion of the report, you do not estimate the market value of a real property interest but instead the "market value, as defined, of the cooperative interest (the cooperative shares or other evidence of an ownership interest in the cooperative corporation and the accompanying occupancy rights) that is the subject of this report." It would generally be inappropriate to compare a cooperative ownership with another form of ownership such as a condominium or PUD; even with making an adjustment for property rights appraised.
A land trust is defined as:
"A legal vehicle for partial ownership interests in real estate in which independently owned properties are conveyed to a trustee; may be used to effect a profitable assemblage or in some cases to facilitate the assigning of property as collateral for a loan. " A trust agreement is established to define the duties of the trustee, who is typically an independent department of a banking institution. A trustee has limited duties and responsibilities. Perhaps it is only to manage a property and collect rents. In case of a judgment against a beneficiary of a trust, it does not constitute a lien against the real estate.
Nonfee timesharing is defined as:
"A limited interest in real estate in which the purchaser receives only those rights specifically granted by the developer, usually the right to use a timeshare unit and the related premises; does not impart legal title to the property." The fee timeshares in which legal title and a deed are conveyed are generally more valuable. It would be difficult and usually inappropriate to try to compare a fee with a nonfee timeshare - even with adjustments.
A condominium is defined as:
"A multiunit structure, or a unit within such a structure, with a condominium form of ownership."
A syndication is defined as:
"A private or public partnership that pools funds for the acquisition and development of real estate projects or other business ventures." Syndications can be used to purchase, develop, manage and dispose of real estate. Syndications are created when someone purchases real property with the intent to transfer the rights to a limited partnership which will then sell interests to investors.
Estate is defined as
"A right or interest in property. Defines an owner's degree, quantity, nature, and extent of interest in real property. There are many different types of estates, including freehold (fee simple, determinable fee, and life estate) and leasehold. To be an estate in land, an interest must allow possession (either now or in the future) and be differentiated primarily by its duration."
A planned unit development (PUD) is another type of ownership that features individual ownership of a parcel combined with shared ownership of common areas. A PUD is defined as
"A type of building development designed as a grouping of complementary land uses, such as housing, schools, recreation, retail, office, and industrial parks, contained within a single master development; usually includes common area and common area maintenance obligations in the form of owners association dues." The minimum characteristics of a PUD include: A homeowner association that holds title to the common area Mandatory membership of all unit owners The right of unit owners to vote in the operation of the association Lien supported assessment of the members As with a condominium, the value attributable to the common elements varies from project to project. It requires a detailed breakdown and analysis of the common elements by the appraiser. When comparing sales from a different project than the one in which the subject property is located, adjustments may be required.
Fee simple estate is defined as
"Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat." Fee simple is the fullest and most complete type of estate; even though it is still subject to the common public limitations. It consists of the full bundle of rights. None have been exercised or given away. A fee simple estate is: Inheritable Transferable Perpetual In other words, if I have a fee simple estate and I die, my heirs will inherit it. Or, while I'm alive, I may sell or transfer my interest to another. This form of ownership is perpetual, in other words, I don't have to do anything to renew or continue my ownership. If I have a fee simple interest, my interest will continue on perpetually until I die or transfer the property.
A negative easement is defined as
"An easement preventing a property owner from certain, otherwise permitted, uses of his or her land, e.g., agreeing not to do something such as building a wall or fence blocking an adjoining property's view." Negative easements can be punitive in nature and create losses in value. Examples of negative easements would include: Conservation easements Drainage easements Historic preservation easements Subsurface rights Air rights All of these easements take away some of the basic rights inherent in fee simple ownership. You would no longer have full control of all aspects of the property. You would not have an unlimited right to develop the property in any manner you wished. For example, let's say you had a drainage easement through your rear yard. You decide to install an inground swimming pool, and after careful planning and consideration you come to the conclusion that the only area on your property that is large enough for the pool to fit is the rear yard. However, you are unable put the pool in the backyard because of the drainage easement. In this case, the negative easement for drainage has rendered you unable to do what you want to do with the property.
Easement in gross is defined as:
"An easement that benefits a legal person or entity (individual, corporation, partnership, LLC, government entity, etc.) and not a particular tract of land; an easement having a servient estate but no dominant estate." Examples of easements in gross would be easements for railroads, pipelines and utility companies. An easement in gross burdens one's property but does not benefit another parcel of land. Usually easements in gross are common in an area and affect a number of different properties. For example, every property in a neighborhood might have a utility easement along its front edge for local water and sewer lines. Therefore, there may be no need for an appraiser to make an adjustment for this easement, because the subject and all the properties that are used as comparable sales are affected by similar easements.
easement appurtenant. That is defined as
"An easement that is attached to, benefits, and passes with the transfer of the dominant estate; runs with the land for the benefit of the dominant estate and continues to burden the servient estate, although such an estate may be transferred to new owners." An easement appurtenant has both a dominant estate and a servient estate. This is contrasted with an easement in gross, which has a servient estate but no dominant estate. In the example above, my property in the rear is worth more because of the right-of-way access than if it had no access at all. A positive adjustment would have to be made when comparing my property to one with no recorded access. On the other hand, the property in the front, over which my right-of-way passes, may be worth less than another property that is not encumbered by a right-of-way. In that case an adjustment would have to be made when comparing that property to one that does not have a right-of-way over it.
Tenancy by the entirety is defined as:
"An estate held by a husband and wife in which neither has a disposable interest in the property during the lifetime of the other, except through joint action." Tenancy by the entirety has the same right of survivorship provisions as joint tenancy, but the survivor must be a spouse.
Tenancy in common is defined as:
"An estate held by two or more persons, each of whom has an undivided interest." This is the most basic example of concurrent ownership. There is no limit to the number of tenants in common a property can have. The ownership does not have to be in equal amounts. For example, one tenant may own a 50% interest, and five others may each own 10%. Each tenant in common may sell off their interest without the approval, or even the knowledge, of the other tenants in common. With tenancy in common, there is no right of survivorship. If one of the tenants in common dies, their interest goes to their heirs. It does not convey back to the other owner(s).
tenancy in severalty
"An estate in property held by one owner."
A conservation easement is defined as:
"An interest in real property restricting future land use to preservation, conservation, wildlife habitat, or some combination of those uses. A conservation easement may permit farming, timber harvesting, or other uses of a rural nature as well as some types of conservation-oriented development to continue, subject to the easement." These easements are generally granted by the property owner who wants tax benefits, but would like to reserve some use of his property. If no future use were required, the owner could grant the property rights in fee to the recipient agency. Conservation easements can only be granted to qualifying organizations. Examples are the Army Corps of Engineers, various state park systems, the Land Trust Alliance (www.lta.org), the Nature Conservancy (www.tnc.org), and local conservation groups. Suppose you had two similar large parcels of land that you were comparing. One had a fee simple interest and no restrictions on future development, and the other was completely encumbered by a conservation easement that stipulated the land must remain in its present undeveloped state. Common sense would dictate that the two properties would have different values and that, to compare them, an adjustment would have to be made for the property rights conveyed.
A limited partnership is defined as:
"An ownership arrangement consisting of general and limited partners. General partners manage the business and assume full liability for partnership debt, while limited partners are passive and liable only to the extent of their own capital contributions." Limited partnerships offer opportunities for investment without the hassle of day-to-day operations and have limited liability. Many investors do not have expertise in real estate, but have money they wish to invest. For example, professionals such as doctors or dentists may find this a good vehicle for investment. They can invest their money in an income-producing property such as an apartment building and share in the returns on the investment, but they are spared the obligation of having to manage the building, find tenants, collect rents, make property repairs, etc.
A general partnership is defined as:
"An ownership arrangement in which all partners share in investment gains and losses and each has personal and unlimited responsibility for all liabilities." This is the most common kind of partnership, particularly in smaller partnerships. Each partner has an individual designated percentage of the partnership. For example, with four partners, one might own 50%, one might own 30%, and the other two might each own 10%. Or, they could all be equal partners and each own 25%.
A partial interest is defined as
"Divided or undivided rights in real estate that represent less than the whole, i.e., a fractional interest such as a tenancy in common, easement, or life interest." If one or more of the bundle of rights is missing, it results in a partial interest or partial estate. There are many kinds of partial interests. Some are specific forms of ownership that are created by special situations. These would include: Life estates Leased fee estates Leasehold estates
A license is defined as:
"For real property, a personal, unassignable, and typically revocable privilege or permit to perform some activity on the land of another without obtaining an interest in the property." A license can be terminated at any time and is considered to be personal property, rather than real property. An example might be the purchase of hunting or fishing rights on private property.
A corporation is defined as
"In law, an organization that acts as a single legal entity in performing certain activities, usually business for profit; also includes charitable, educational, and religious organizations." A stock corporation is a legal entity that can be used by investors to pool their resources and purchase real estate. A corporation may be utilized to purchase a single property or a portfolio of multiple properties. Ownership of the corporation is divided into partial interests by selling shares of stock in the corporation. The owner of the real estate is the corporation. Shareholders own the stock, which is personal property.
Joint tenancy is defined as:
"Joint ownership by two or more persons with the right of survivorship." As with tenants in common, each tenant in a joint tenancy has a partial ownership interest in the property. The major difference between a joint tenant and a tenant in common is the right of survivorship. If one joint tenant dies, that person's interest in the property automatically passes to the other joint tenant(s). The person's interest does not convey to the person's heirs. Also, unlike tenants in common, joint tenants all must have an equal ownership interest. If there are four joint tenants, they all own a 25% interest. If there are five joint tenants, they all own a 20% interest. This is in contrast to tenants in common, in which unequal ownership interests are permitted. To create joint tenancy, all owners must go on title at the same time (unity of time). As stated above, all joint tenants have to have the same interest in the property (unity of interest). In some states, it is common for husbands and wives to take property as joint tenants. In other states, a special ownership interest, called tenancy by the entirety, exists for marital property. We will cover this on the next page.
Timesharing is defined as
"Limited ownership interests in, or the rights of use and occupancy of, residential apartments or hotel rooms. There are two forms of timesharing: fee timeshares and non-fee timeshares. Fee timeshares may be based on timeshare ownership or interval ownership. There are three types of non-fee timeshares: a prepaid lease arrangement, a vacation license, and a club membership." When appraising a timeshare, it is critical that the appraiser identify whether the subject and the comparables are fee timeshares or nonfee timeshares.
Tenancy, by the way, is defined as:
"The holding of property by any form of title."
Leased fee interest is defined as
"The ownership interest held by the lessor, which includes the right to receive the contract rent specified in the lease plus the reversionary right when the lease expires."
Leasehold interest is defined as
"The right held by the lessee to use and occupy real estate for a stated term and under the conditions specified in the lease." When a property is leased, it creates two separate estates or interests. One belongs to the owner of the property and the other belongs to the tenant. If a property is leased at the time of sale, the value of the leasehold may be calculated separately from the leased fee ownership of the property itself. The appraiser would account for the terms and also factor in the length of time remaining on the lease. Even though the owner of a leasehold interest has no real fee interest, a leasehold interest may have value if the contract rent stipulated in a lease is less than the property's market rent. A leasehold interest is considered a non-freehold estate. For example, let's say Owner A and Tenant B have signed a long-term lease on a commercial building. The lease calls for monthly rent payments of $1,000, and the lease is 10 years in duration. There is an undersupply of commercial space in the local market, and three years into the lease, the market rent for the property is $1,500 per month. Tenant B's leasehold estate now has value. The tenant has the right to occupy a space valued at $1,500 per month, and is only required to pay $1,000 per month to continue to occupy it. Tenant B might be able to move out, sublet the space to a new tenant and collect $1,500 per month, while continuing to pay $1,000 per month to Owner A. Tenant B, theoretically, could make $500 per month for the next seven years for doing nothing but subletting the space. Even if Tenant B chooses not to sublet, the fact that Tenant B is paying $1,000 for a space valued at $1,500 means that Tenant B's leasehold estate is valuable.
A drainage easement, or drainage right of way, is defined as:
"The right to drain surface water from one owner's land over the land of one or more adjacent owners." A drainage easement can have a significant impact on value as well. Normally it is stated that in the drainage right-of-way no structures or improvements can be erected. The land has to be kept free and clear for the water to flow across it. I appraised a 40-acre parcel that was encumbered by a drainage easement of approximately 10 acres in one corner. This was to allow water that flowed from a culvert under an interstate highway to run across the property towards a stream in the rear. I concluded there was a significant diminution in the utility of the property, being as approximately 25% of the total property area could never be developed.
An affirmative easement is defined as
"The right to perform a specific act on a property owned by another." This is the good kind of easement - it works in your favor. This is sometimes called a dominant estate.
An easement is defined as
"The right to use another's land for a stated purpose." Under the rights of an easement, someone else is allowed to enter a property and therefore the owner has relinquished the exclusive right to occupy and use the property. This creates a partial interest or diminished estate for the owner. The effect of an easement can vary from negligible to substantial. A simple underground electric easement or access right-of-way across the edge of a property may have little or no impact on value. Conversely, an access right-of-way or power line easement through the center of a property may have substantial impact on usability and value.
facade easement
"Traditionally considered a type of preservation easement that protected only the facade of a building, not the entire structure. More precisely, a facade easement is an interest in real property that has the effect of prohibiting alteration of the exterior of an existing improvement; generally imposed on historically significant structures to ensure their preservation. To qualify for tax benefits associated with the donation of a facade easement, the structure must be a "certified historic structure" as defined in Internal Revenue Code Section 170(h)(4)(C), or be located in a registered historic district and be certified by the Secretary of the Interior as being of historic significance to the district. The Pension Protection Act of 1996 added requirements to charitable contributions of facade easements, most significantly requiring that the entire exterior of the building, not just the front facade, be preserved." These types of easements can be a double-edged sword. In some instances they are very desirable and can add to the value of designated properties. Prospective purchasers may be intrigued by the historical charm and be attracted to living in an area that they know will be protected and cannot change over time. On the other hand, some historical districts are so protective that it can be difficult to sell a property subject to such intimate controls. In order to be able to make a change or, in some cases, replace defective or worn-out components, detailed plans have to be submitted to a district architectural review committee for permission. The red tape can be costly and overly restrictive.
An encroachment is defined as:
"Trespassing on the domain of another." An encroachment is physical in nature. It occurs when someone builds something over the property line of another property. Typically this is unintentional and it sometimes happens when the property lines are unclear. An example might be a garage or a deck that is built a foot or two over the property line and physically encroaches on another property. In extreme cases a building is partly or wholly constructed over the line. When discovered, it warrants action of some sort. Perhaps the parties can agree to remove the building, or shift the property line a few feet, or put a jog in the line that will solve the problem. Sometimes the situation becomes acrimonious and winds up in court. FHA will insure a loan on a property that is subject to an encroachment if a perpetual encroachment easement is filed. This agreement recognizes the problem and absolves the mortgagee of any liability. The parties agree to just leave it alone. Appraisers are not surveyors, and are not usually responsible for discovering encroachments. Even so, some encroachments are readily apparent. For example, several years ago, I appraised a house that was situated on a lot that was 25 feet wide according to the deed. The house was 22 feet wide, but at some point in the recent past, the owner had constructed a small covered porch on the side of the house that was 5 feet square, meaning the total width of the improvements was 27 feet on a lot that was 25 feet wide. It's not difficult to see that this was an encroachment.
A historic preservation easement
A historic preservation easement generally includes various kinds of controls on historically designated properties. They may be imposed by municipalities such as cities, towns, or villages. They usually are composed of small districts of historically significant structures. The restrictions vary considerably, but generally include such items as controls for exterior details such as doors, windows and roof lines. In some instances, they may even dictate choices of materials and paint colors that are allowed and may not be changed. A historic preservation easement is defined as: "A type of easement in gross that protects historically or architecturally significant properties by prohibiting or requiring review of future alterations or additions to protected features. When only some or all of the exterior surfaces and not the interior are protected, such an easement is often called a façade easement. The Internal Revenue Code allows a charitable gift deduction for the voluntary grant of qualifying historic preservation easements on some types of historic buildings."
Life Interest
A life Interest is defined as "Life Interest (formerly Life Estate). Rights of use, occupancy, and control, limited to the lifetime of a designated party, sometimes referred to as the life tenant." This had always been known as a life estate. When the Sixth Edition of The Dictionary of Real Estate Appraisal was published they changed the terminology. You may still hear it called a Life Estate. A typical example would be where an elderly person transfers ownership of a property to another party (often a relative) but retains the right to live in the property for the rest of his or her life. Upon the elderly person's death, the property transfers to the person who was named when the life interest was created. This person is called the Remainderman. During the life of the holder of the life interest, the interest is called an Estate in Remainder. Life interests usually present a difficult appraisal problem. Normally, if you are purchasing property you could move in and occupy. Or you could at least rent it out to someone else if you didn't choose to occupy. However, with a life interest someone else will be occupying it for an indefinite period and you will receive no income. Obviously, a property under such a restriction should be worth less than one with a fee simple title. An adjustment to the value of a life interest property would involve some sort of discounting of the value based upon mortality tables and the expected remaining life of the person holding the life interest. It is a complex undertaking. Appraisal assignments on these types of properties are uncommon, but they can be done.
Other forms of Ownership
Besides the forms of individual ownership previously mentioned, real property can be owned by various legal entities, including: Land trusts Partnerships Corporations Syndications
Fee timesharing
Fee timesharing is where the purchaser receives a deed that conveys title to a unit for a specific part of a year.
Fee Simple
It is stated in most publications that fee simple is the most common form of ownership encountered in real property appraisals, particularly in the appraisal of residential properties that are not leased. The majority of properties appraised for residential purposes have mortgages. A mortgage constitutes a lien against the property and this means the property owner does not have true fee simple title. However, in the majority of appraisal assignments, the fee simple estate is what we are valuing; we do not take the existing mortgage into consideration when valuing the property. In fact, in most cases, the appraiser does not even know the amount of the current mortgage balance on the subject property. For example, let's say you are appraising a property that is being sold for $200,000, and let's assume your appraisal analysis indicates that the property has a market value of $200,000. Therefore, you would state in your appraisal report that the market value of the fee simple interest in the property is $200,000. It is not germane to the appraisal problem at hand that the current owner has a mortgage with an outstanding balance of $195,000 and he is only going to walk away from the sale with $5,000. The purpose of the appraisal assignment was not to value the property owner's equity position in the property. Instead, you were tasked with appraising the market value of the fee simple estate of the subject property, which you have opined is $200,000.
Concurrent Ownership
Property may also be concurrently owned by more than one individual. Concurrent ownership includes forms of ownership such as: Tenancy in common Joint tenancy Tenancy by the entirety
Specialized Forms of Ownership
The traditional model for a fee simple ownership of residential property includes the dwelling and the land on which it sits. All of the rights are included within the boundaries of the property. There are some specialized forms of ownership in which you may own something in fee simple along with shared rights of certain common properties. The most common types you may encounter are: Condominiums Cooperatives PUDs Timeshares
