Ch. 1
Equity REITs
invest in and operate commercial properties
RE market distortions
is any event or condition that causes the actual, observed price of an asset to be different from the price would be observed under perfect market conditions - the "unique" characteristics of real estate also cause these market distortions
After a plat is approved, ___
it is filed and becomes a public record (that affects title) ***A filed plat is typically a pre-requisite for a building permit - If you want to build anything, you need to go through this process first as well
_____ in commercial real estate tend to make direct investments, including:
large institutional investors - pension funds, life insurance companies, foreign investors, and financial institutions
Advantages of Pooling Equity: - Allows investors to purchase an interest in _____ properties - ____ of portfolios (holdings and individual investors) - ____ in acquisitions, management and disposition - Access to cheaper ____ - Expertise of management team hired by ___
larger Diversification Economies of scale debt capital syndicator/organizer
Real Estate Debt Markets
largest?: resedential apartments commercial farm
adverse possession
legal circumstances by which an occupant may lawfully claim to ownership of property that it did not originally own
Limited liability
liability that does not exceed the amount invested - The assets of the entity are subject to its liabilities, but the pockets of its individual investors are not - Often referred to as a "corporate veil"
Private limitations on ownership include:
liens, restrictive covenant, easements and leases
What Drives Choice of Ownership Form? - Desire of investors for ____ - Taxation - _____ issues - Ability to access ____ and ___ - Ability to share ____ with other investors - Ability of investors to ____
limited liability Management control debt and equity capital risk dispose of their interests
The Liquidity of direct investments reflects the __________
liquidity of the underlying property market - investor bears full risk of the investment
Causes for concern about mortgage brokerage:
"Front-loaded" compensation Few repeat customers Low competency requirements
Natural Rights
"Natural rights" include the right acquire, have and use the means necessary to pursue happiness, including the ownership of property, which others may be denied the use of
Non-Natural Rights
"Non-natural rights" include the right to enter into contracts and acquire contractual rights
Mortgage Brokers: ____ borrower's loan application with ____ - Receives _____ - Receives part of lender's ____ Never owns and never services loan - Rapidly ____ aspect of industry
"Places"; lender application fee origination fee growing
Market "distortions" create market _____ , which is not an economically ideal situation
"failures" Failures= when prices don't reflect market value
Recording statute
"first in time, first in right" concept applies to real property ownership documents "Recording statutes" establish a method of keeping track of the ownership of real property (usually by recording in the public records) Recording statutes generally set out: what documents may be recorded in the public records, where they should be recorded, and the result if they are not recorded --> The purpose of recording documents in public records is to provide notice of conveyances, easements, liens, and other matters affecting title to real property
If a person dies without leaving a will, he is said to have died _____
"intestate" and he has "heirs at law" - State law directs how the deceased's assets shall be distributed - This is known as "title by descent" or "intestate succession"
We do this through ____ Takes the form of both ______ restrictions
"land use" planning; public (government) and private (contract)
A person who dies and leaves a valid will is said to have died ___
"testate" and those who receive property under the will are "beneficiaries" - Transfers by will are not permanent until death (a will can be changed) - The will must be filed with a court of competent jurisdiction (called a "probate court" in Texas)
In 2011, the estimated market of "investable" commercial real estate is ____ - Does not include non-investment real estate owned by corporations and other businesses - Excludes real estate owned by federal, state, and local governments - This was estimated to exceed $10 trillion In 2011, owner-occupied housing had a market value of ____
$6.5 trillion; $16.1 trillion
Local ordinances may require dedication and construction of streets, alleys and utilities as part of orderly development and may be enforced through the platting approval process ("exactions") Exactions are paid for by the developer, but must be _______
(1) related to the health, safety, and general welfare of the public and (2) reasonable Common exactions: Drainage easements and facilities Street and alley rights of way and paving with curb and gutter Street lighting Fire hydrants Sidewalks Street signage Traffic control devices
Depending on the type of lien, if the debt is not satisfied within the time specified the creditor can either:
(1) take possession of the property or (2) to force the sale of the property ("foreclosure") - Depending on their type, liens can be foreclosed: Privately (without court intervention) Judicially (a lawsuit is necessary)
Possession
(or use) - interest under which an individual is able to exercise power over real property to the exclusion of others (not always 100% exclusive) - You can own property without possessing it (a landlord under a lease) - You can possess property without owning it (a tenant under a lease)
Rights related to water
-
In addition to the listed characteristics of real estate:
- "Spillover" effects from nearby land uses (externalities) - Unknown quality or condition of structures - Instability of land uses
Deed #1 GRANT, SELL AND CONVEY unto Bob, Ed, Lee and Sid Each has right to enjoy ___% However, equal ____% ownership is presumed Each gets ____% of income and pays ____% of bills Deed #2 GRANT, SELL AND CONVEY unto Bob (40%), Ed (20%), Lee (20%) and Sid (20%) Each has right to enjoy ___% However, ownership not equal Bob gets ____% of income and pays ____% of bills Others each get ____% of income and pay ____% of bills
- #1: multiple people, 100% right to enjoy ○ 25% ○ Each gets 25% of income and pays 25% of bills - #2: this example is different because its modified how much ○ Each has right to enjoy 100% ○ 40%, 40% ○ Other get 20%, and 20%
durability
- A building can last for decades or even centuries - Land is practically indestructible - Market adjustments tend to be mitigated by the relatively large stock of existing buildings
Fee Simple
- An estate in real property - The highest ownership interest possible that can be had in real property - Full possessory rights and obligations now and in the future - The maximum amount of "sticks in the bundle" - Right to use it, exclusively possess it, commit waste upon it, dispose of it by deed or will - Even fee simple absolute ownership is not "pure ownership," as it is still subject to governmental rights
Rights are ___
- Claims that the government is obligated to enforce - Derived from law - Nonrevocable: cant be canceled, ignored, or lessened by any other private citizen Enduring: dont fade away with time
Choice of Entity to Own Real Estate? It is no longer as simple as choosing tax benefits of limited liability
- Complicated analysis depending on many factors: Taxes Liability Management Number of investors - Sophisticated parties should work with both a lawyer and a tax professional to make the choice and draft the governing documents
Private Equity Fund
- Did not really exist prior to early 1990s - Have a finite life (typically 7-10 years) - Finite life forces fund manager to dispose of assets & return investors' capital - Typically include some degree of side-by-side investment by fund manager --> Aligns manager's incentives and returns with investors - Often in the form of a limited partnership - Fund manager is general partner of fund; investors are LPs who are passive - Manager typically contributes 1% of fund's equity, the other 99% comes from other investors
Effects of Technological Change on Urban Form
- Dispersion of employment and urban functions to suburbs - Obsolescence of older structures: Vertical manufacturing facilities Low-ceiling, small-depth buildings Non-air-conditioned office and retail buildings - Very slow but profound change in streets and other aspects of transportation system
As the sizes of an investor's portfolio and wealth increase, the economics of direct ownership make more sense:
- Easier to retain in-house experts or hire consultants - Diversify risk - Create liquidity across assets classes
Demise of Thrifts
- Flood of home loans in late 1970s - Interest rates soared in war on inflation - Asset-liability mismatch severely damaged thrifts - Almost one-third failed - 70% had disappeared by 2001
Limited partnership
- Form of partnership similar to a general partnership - In addition to one or more general partners, there are one or more limited partners - Managed only by general partner(s) Limited partners are passive and have no say in operations - Governed by terms of a Limited Partnership Agreement (private document) - Must have "LP" or "Ltd." in name - General partners have unlimited liability (can be averted by designating a limited liability entity as general partner) - Limited partners have limited liability - Pass-through taxation
General Partnership - Disadvantages
- General partners liable for all debts (Contractual debts, debts arising from legal actions, wrongful acts committed by other partners...) - Personal assets are subject to claim's of the partnership's creditors --> Result?: Fairly uncommon Those that are created have few partners
Personal Real Estate Investments
- Home ownership: The "American Dream"; Will be largest single investment by most - Private equity investments
LLC limited liability company
- Hybrid business entity having certain characteristics of both a corporation and a partnership - Comprised of "members" - Most are managed by elected "managers" (but can be managed directly by members) - Governed by terms of a Limited Liability Company Agreement (private document) - Must have "LLC" or "LC" in name - Members have limited liability - Pass-through taxation
"Savings and Loan" Crisis:
- In the 1970-80's, banking regulations were loosened and S&L's began engaging in high-risk activities to compete for capital - depositors continued to funnel money into these risky endeavors because their deposits were insured by the Federal Savings and Loan Insurance Corporation (FSLIC) - Widespread corruption and other factors led to the insolvency of the FSLIC, a $124 billion bailout of junk bond investments and the liquidation of more than 700 S&Ls
For direct co-ownership:
- Income/liabilities are proportional to ownership (can be altered by contract) - Unless otherwise stated, ownership interests are equal - Oxymoron, but you can have a "50% undivided interest" "50%" describes income/liabilities - "Undivided interest" describes right to enjoy the whole - During their lifetime, each party has the right to sell, mortgage, etc. their respective interest
Limited Partnership-Disadvantages
- LP's give up control of management and policy making - A "principal-agent" relationship is created with its attendant problems
Private Equity Returns
- LPs earn a preferred return (e.g., 8%) before GP earns bulk of its expected fees/return - Once LP returns exceed threshold, GP earns a disproportionate share of excess returns, usually around 20% The 20% is termed the "promote": - GP's interest is promoted to a greater share of the returns once LPs earn their preferred return - Besides the promote which is the bulk of their income, there are additional sources of GP compensation (management fees, leasing commissions, etc.)
C-Corporations
- Legal and taxable entity separate from shareholders - Potential double taxation - All shareholders (SH) have limited liability - Managed by a board of directors - Separation of ownership and control, which creates agency problems - Many non-real estate C corporations own real estate, but not a desirable structure for investing in RE
Arguably the most catastrophic collapse of the banking industry since the Great Depression
- More than 1,000 S&Ls failed by 1989 - Ended one of the most secure sources of home mortgages
Disadvantages of Pooling Equity
- Must relinquish management control to active managers - Must compensate syndicator/sponsor with fees, salary and/or a disproportionate share of equity ownership - All else being equal, this results in lower returns on equity
Traditional: Building Codes
- Older than zoning (circa 1900) - Building code: rules that specify the standards for constructed improvements Issues of safety Fire: Materials, alarms, electrical and gas systems Sanitation: Plumbing, water, and HVAC requirements Injury: Design and strength - Codes are developed by a private group (e.g., International Code Council, Inc.) - If adopted by government, they have the force of law - Continue to evolve
These functions may be separated (with market participants concentrating on one or the other function) or combined Combination examples:
- Owner-occupied office building - Personal residence
Types of Estates
- Ownership Estates (freeholds) vs - Leasehold (nonownership or non-freehold)
Factors that Drive Real Estate Investment
- Population growth - Deterioration of infrastructure (obsolescence) As the population grows over time --> real estate demand goes up --> land or supply is limited What we currently have is deteriorating
Property Rights
- Private property is guaranteed by the US and state governments - Contracts are enforced by the court system (civil) - The justice system punishes those who unlawfully confiscate private property (criminal)
At least half of all S&L's were based in Texas Industry was reformed by FIRREA (1989) and Resolution Trust Corporation (RTC) was funded to resolve the remaining troubled S&Ls
- Pushed the state into a steep recession - Bad land investments were liquidated, causing real estate prices to plummet - Office vacancies rose significantly - Price of crude oil dropped off by half - Several Texas banks, such as Empire - Savings and Loan, took part in criminal activities that further drove the Texas economy into the ground
S-Corporations
- Same limited liability for shareholders as C-corporations - Although a separate legal entity, it is not a separate taxable entity - Pass-through taxation - Must not have more than 100 shareholders - Used in some cases by individuals and families to own real estate
Tenancy in Common (TIC)
- TIC's - one of the oldest forms of co-ownership - Essentially, fee simple interest with multiple owners - Investors receive separate deed...are direct owners - Investors may hold different ownership percentages, otherwise interests are indistinguishable - Generally considered bad form for investing in RE (no limited liability)
Three-step process:
1. Issue mortgage commitment to potential borrower 2. Close or originate loan (funding loan) 3. Sell loan
Leasehold Estates include:
- Tenancy for years: leasehold interest for a definite period of time exceeding one year, must be in writing to be enforceable - Tenancy at will: granted by the landlord to the tenant allowing them to remain in possession without a written agreement until either gives notice - Tenancy at Sufferance: when a tenant thats supposed to vacate doesnt
Apartment vs. condo
- The difference is ownership and use Apartment Residence in a multi-unit complex or building, all under common ownership Almost always leased to others Condo Privately-owned residence in a multi-unit complex or building Multiple owners May be leased to others
Reasons for Real Estate Investment
- Users - build to keep through life cycle (active) - Developers - build and sell/lease (active) - Investors (passive) Diversification Tax benefits User needs
Examples of Direct Co-Ownership: a. Tenancy in common
- as close to the fee simple absolute estate as possible - each has the right to the ENTIRE use/enjoyment/disposition of the property - the default form of co-ownership
Timeshare plans
- commonly involves "floating time intervals" and multiple resort properties - a buyer purchases point which are used to bid annually for a particular site and time unit within the set of resorts and designated floating time interval
Cooperative
- corporation owns the property - Each owner owns shares of the corporation (but not title to the land) - Each owner holds a proprietary lease (no term and no rent) Proprietary lease: contract between the cooperative (corporation) and the member that sets the conditions for the right to occupy a particular unit -Not a common form of residential property ownership in Texas - occupants cant obtain mortgage financing
License
- easement is the RIGHT to use another's land, a license is the PERMISSION to do so - revocable by grantor - can be granted orally, where easements cant Easements are real property Licenses are personal property - Licenses grant contractual rights - Do not "run with the land" - Are personal to the recipient: Cannot be transferred (unless otherwise agreed) Examples: Driver's license, Dallas Cowboys tickets
Ownership Estates Include:
- fee simple absolute: most complete bundle of rights possible - fee simple conditional: bundle of rights is complete unless a condition or trigger event occurs (reverter: uncertain interest held by previous owner) - ordinary life estate: an estate in real property that ends at death when ownership of the property may revert to the original owner, or it may pass to another person - legal life estate: life estate created by the action of law
Investment in RE through intermediaries
- help lessen various cons of direct investment: supplying expertise, improving liquidity, diversification, and risk sharing - involves another layer of costs - shifts control to intermediary
Characteristics of RE markets
- heterogeneous products - immobile products - localized markets - segmented markets - privately negotiated transactions w high transaction costs
voluntary without a deed
- implied easement: usually created when a subdivision map is placed on public records - easement by estoppel: if a landowner gives a neighbor permission to depend on her land (rely on sewer) - dedication: to convey certain lands of a subdivision to the government
National government
- income tax policy--> affects the value of RE and the incentive to invest in it - Federal reserve system and FDIC - national fair housing laws and other civil rights legislation influence housing markets
General Partnership
- investors avoid double taxation - All partners can make operating decisions (how much leverage, when to sell, etc.) - No separation between ownership & control; lessens potential conflicts of interest - Share of cash flow and taxable income determined by Partnership Agreement
Local Government
- largest influence on real estate - affects the supply and cost through: zoning codes and land use regulations, fees on new land development, building codes that restrict methods of construction - affects rental rates in user markets through property taxes - affects the supply and quality by its provision of infrastructure in the community
State government
- least effect on RE values - licensing of RE agents; constrains entry into RE professions - statewide building codes --> affect building design and cost - set the basic framework of requirements for local government land use controls - affect the provision of public services important to the community
Voluntary conveyance by a deed
- majority - "normal transactions" - patent - little risk of title becoming unmarketable
Timeshare rights
- may convey any level of real property interest (could acquire a slice of fee simple interest) - but, the buyer often acquires a leasehold interest for a fixed # of years - at the end of the term, the buyer's interest is extinguished - its possible the buyer only acquires a license for partial use - in this case, buyer may NOT transfer the license and license is revocable --> buyers of timeshares MUST examine what legal interests theyre getting
Competition for access creates the ____ of urban land uses
- patterns If you cant access it, then why would you invest in real estate there. If people cant get to it and use it then they cant produce cash flows there. This causes urban clustering and cities start forming. They all want the same access causes competition. Creates patterns of land uses
Real estate can be purchased with:
- the expectation of attaining a return (an investment good in the "capital market") - the intention of using it (a consumption good in the "space market" both of the above
real estate valuation
1. Estimate all future net cash flows 2. Convert into estimate of present value an asset is worth the cash flows that it produces in the future How are investment decisions made?: --> By comparing estimate of present value to required equity investment
Texas deed requirements
1. In writing 2. Signed ("subscribed") by the grantor at the end of the document 3. Include the grantee's name 4. Contain the legal description of the property 5. Delivered to and accepted by the grantee Important: a deed does not need to be recorded to be valid (recording is only required to put others on notice)
What are the 3 elements that Value Depends on...?
1. Magnitude of expected cash flows 2. Timing of expected cash flows 3. Riskiness of expected cash flows
At least two requirements for property rights to exist:
1. The ability of individuals to obtain and dispose of property 2. A government that enforces property rights and the contracts that create them
Two main forms of "evidence of title"?:
1. Title abstract with attorney's opinion: Summary of all records in chain of title reviewed by an attorney for completeness 2. Title insurance commitment: Indemnifies grantee if challenge to title arises
Four Modes of operation for megamortgage bankers
1. Traditional "face-to-face" or "retail" lending 2. Wholesale mortgage banking 3. Internet lending 4. Lending through brokers **Tremendous consolidation in last decade
Easement appurtenants are 2 types:
1. affirmative: gives the dominant parcel some intrusive use of the servient parcel (driveway, drainage, common wall, etc.) 2. negative: allows no intrusion onto the servient parcel (scenic easement: restricts construction on adjacent parcels so as to preserve a valued view)
3. Property markets ___
1. allocate available property investments among competing investors 2. determine the pace of new construction 3.
Tenancy in common in a Business Ownership Form
1. co-owners bear personal liability 2. spousal interests are governed by the state where the property is located 3. tax and legal implications less widely understood
Requirements of a deed
1. grantor (w/signature) and grantee 2. recital of consideration 3. words of conveyance 4. covenants 5. habendum clause 6. exceptions/reservations, if any 7. description of land 8. acknowledgement 9. delivery - only grantor must be legally competent
Easement appurtenant has 2 distinguishing features:
1. involves a relationship between 2 adjacent parcels of land (dominant benefits from easement, while servient is constrained by easement) 2. "runs with the land": becomes a permanent and inseperable feature of both parcels involved
3. Real estate professions vary widely, and include:
1. real estate brokerage, leasing, and property management services 2. appraisal and consulting 3. site selection 4. construction 5. mortgage financing
The term "Real estate" is used in 3 fundamental ways:
1. to identify the tangible assets of land and buildings 2. to denote the "bundle of rights" associated with the ownership and use of the physical assets 3. refers to the industry/line of business
The Meaning of "Title"
1.Title: Collection of evidence indicating a particular person(s) as holder of the "fee" 2. Title search: Examining public records to construct "chain of title" 3. Chain of title: the sequence of conveyances passing ownership down through time
Real estate has been estimated to represent _____ of the world's economic wealth, and viewed as a symbol of ___, ___, and ____
1/2; strength, stability, independence
Real estate is typically ____ of US GDP Generates over ___ of local government revenues
25% or more; 70%
Of the 1.9 Billion acres from the 48 contiguous states, ___% is nonfederal, rural land use. Approximately ___% is developed land
71%, 6% - mostly used for a. range land and b. water areas / federal land
____ jobs RE is worth ___ in US market value, and is the ____ asset class of them all
9 million; $22.6 trillion; largest
Resulting Market Failures in Real Estate
A. Monopolies: Utilities as "natural" monopolies "Holdouts" in land assembly efforts (roads, other public uses) B. Externalities - "Spillover" effects of land use for which initiator is not held accountable - Unintended and unaccounted consequences of one market participant on others (Traffic congestion Storm runoff Emissions (smoke, gases, particles, noise, light) Urban sprawl) C. Incomplete information - Construction quality hidden - Buyers unable to risk of natural disasters - Buyers unable to judge adequacy of structure quality D. Public goods and "free riders" Storm water control Traffic control
Economic base
Activities that bring income into a city Also known as "export" activities: - It's a product you're sending somewhere else out of the area in exchange for money - Products or services provided to the outside world (most manufacturing; higher education and research, advanced health care) - Activities that attract money (retirement, tourism)
Secondary (or "Local") Activities:
Activities that recirculate income in a city (local government, local merchants and services)
requirements of adverse possession
Actual Open and notorious Exclusive Hostile Under cover of claim Continuous and uninterrupted for the statutory period - Interesting to talk about, but the requirements are rarely met - If the occupant can meet the strict requirements, he will own fee simple title Trespass: entry to land or property without permission (criminal offense)
spillover effect
Also known as an externality - The factory owner's use is affecting the neighboring school - Causing pollution - The school is bearing the consequences of the factory owner's negative actions - Passing it on to someone else for them to deal
Real Estate Investment Trusts (REITs)
Although vast majority of commercial real estate is owned in private markets, $404 billion is owned and traded in public markets - limited liability protection - dont pay federal income taxes--> more cash to pay dividends - Most public market funds are in the form of REITs - Special type of corporation under the tax code - Access to public capital markets
What is a market study?
An examination of the characteristics of the asset and its market
Traditional: Zoning
An exercise of the government's police power to protect the public health, safety and welfare Features of traditional zoning: - Use classifications by district (zoning map): residential, commercial, industrial, automotive - Setback requirements (side, front and back) - "Bulk" or density limits (minimum lot size, height limits, maximum floor area ratios) - Special use districts: service stations, hospitals, churches, private schools, cemeteries - Administered by cities in Texas
Race example #2 Bernie owns 1,000 acres of real estate On May 1, Bernie sells the property to Mark and gives him a signed deed On May 3, Bernie sells the same property to Andrew and gives him a signed deed On May 4, Andrew records his deed On May 5, Mark records his deed Who has the superior claim?
Andrew - even if he bought it after mark, he recorded first. Mark would have to bring lawsuit
Notice example #1 Bernie owns 1,000 acres of real estate On May 1, Bernie sells the property to Mark and gives him a signed deed Andrew has no notice of the deed to Mark On May 3, Bernie sells the same property to Andrew and gives him a signed deed Who has the superior claim?
Andrew wins so long as 1. he paid value and 2. has no notice
A contract will be signed granting the lien The lien can be created:
At the time the property is purchased (a "purchase money" lien) Later, when the property is already owned by the borrower (i.e. a "refinance") - In Texas, the document that creates the lien is a "Deed of Trust"
Economic Base Multiplier
Basic Idea: As goes the base, so goes the city Multiplier effect: Base income is re-spent, producing additional income
In general, requested changes must:
Be compatible with a comprehensive plan Be justified if they require change in the comprehensive plan Not have undue effect on surrounding land uses or the community
Not many assets can be combined like this... Downside?: It's not uncommon for people to over-invest in real estate—that is, to invest more money in an asset than it is worth on the open market Why is real estate subject to this over payment?:
Because once it becomes a consumption good, then emotions start getting attached
Mortgage broker
Brings borrower and lender together for a fee; never owns the loan
High Transaction costs
Buying selling real estate costs much more than most types of transactions The costs include search costs, brokerage fees, legal fees, transfer taxes, and due diligence costs Transaction costs for the seller typically range between 1.5% and 6% of the purchase price In other countries, transaction costs for both buyer and seller can range between 15% and 20%
Thrifts Today
Changed approach to regulation - Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) - Risk-based capital standards Most are now large banks (acquired or converted) Others often have "boutique" roles: Mortgage banker Sub-prime lender Commercial loans Multifamily loans
Challenges to Comprehensive Planning?
Changing notion of "best practice" - Cul-de-sacs or grid streets? - Mixed use or containment of commercial use? - How much mass transit? Limited actual experience to rely on (at most 30 years) Insufficient theory and information Inability to predict the future with certainty
How to evaluate the risk of an investment?
Conduct a market study
New: Planned Unit Development (PUD)
Detailed development plan negotiated with authorities Mixed use Mixed density No standard setback requirements Open community spaces Community recreation and other facilities - This is the current mindset. Maybe the perfect solution isn't rigid zoning
Market Participants: Supply Side
Developers: Prepare raw land for building Results in new products for the market Renovators: Supply refurbished buildings to the market
Different question than zoning
Different question than zoning Must get permission to "subdivide" any land Not as concerned with the type of use, but more with the support for that use
Pooled Equity = Co-Ownership
Direct co-ownership or Indirect co-ownership
Characteristics of real estate:
Durable Heterogeneous High transaction costs: investing in real estate costs more than other investments Long time delays: it takes a long time to supply real estate Both an investment good and a consumption good Immobility
Agglomeration economies:
Economic efficiencies due to multiple local industries - Airport and transportation infrastructure - Financial services and banking - Communications and media
Industry economies of scale:
Efficiencies of production due to scale of local industry Supply of specialized labor - Publishing specialties in New York - Computer software and design in Silicon Valley - Performing arts in New York, Los Angeles, Nashville Supply of vendors and materials
[Technically] Fee simple absolute = all possible rights. But, two rights that will always be owned by the government:
Eminent domain and Taxation
Local governments have a platting review and approval process:
Ensures that all lots comply with the standards for development to protect the public health, safety, and welfare Plats are reviewed for compliance with regulations regarding minimum lot size, width and depth, street access and width, utility provisions, parks and open space provisions, and drainage and flood plain protection May require "exactions" in order to gain approval
What are the capital market categories?
Equity vs. debt Private vs. public investment
Side Note: Fee Tail
Estate in land with restrictions or entailment regarding the line of heirs to whom it may be willed Generally, only to male heirs Now abolished in most states
___ and ___ in real property are some of clearest forms of these ideas
Estates and interests Interest: the extent of a right in property (not limited to real property) Estate: legally recognized degree, quantity, nature, or extent of an interest in real property
Heterogeneity
Every unit of real estate is unique in terms of its location, its improvements, and its financing Makes pricing difficult: cant just look into the market because nothing is the exact same Increases search costs: Cant look at the market --> takes time and money to get information --> Information is expensive Creates information asymmetry Restricts substitutability
Exaction
Exaction: a form of blackmail, the county approves so they say while you are it, put in a park. If you don't, then they might not approve it. They also want you to pay for it, not the city
Variance
Exception to requirements granted due to hardship Wavier of setback requirement Mobility access 2002: residential 2002: bought it in the attempt to use it as an office You knew in advance this didn't conform Variance: after the fact. Its not grandfathered, its just a change just for you
Thrifts
Financial institutions that are generally smaller than "banks" - Also called "Savings and Loan", "Mutual Savings Banks", or "Credit Unions" - Origins in the goal of pursuing homeownership*** --> In the early 1800s, banks did not lend money for residential mortgages --> The members a group would pool their savings and lend them back to a few of the members to finance their home purchases --> As the loans were repaid, funds could then be lent to other members In 1980, there were almost 4,000 thrifts with total assets of $600 billion, of which about $480 billion were in mortgage loans (almost half of the market)
Rise of the Secondary Market
Firms purchase mortgages using funds raised though sales of securities they create Issue mortgage-backed securities (MBS) using mortgage pools as collateral Government-sponsored enterprises (NMA and FHLMC) eventually dominated the secondary mortgage market Mortgage lending became national in scope, when they used to be localized
[Practically] Fee simple = owner of the property ____
Forever - Can use and dispose as desired May not necessarily include all possible rights, but does include: Possession Control Exclusion Use and enjoyment Disposition
Freehold
Freehold: characterized by an undefined length of time Fee simple Life estate (to John for life...)
Originally, there were 2 basic forms of business entities: (1) general partnerships and (2) corporations:
General Partnerships: Composed of general partners Managed directly by partners Unlimited liability Pass-through taxation Corporations: Composed of shareholders Managed by an elected board of directors Limited liability Double taxation --> Forced to choose: tax benefits or limited liability? Then, states started to compete for business and enacted laws to offer more attractive entity forms --> These new entity forms offered the best of both worlds (LP and LLC)
Race
Gives priority of title to the claiming party that records first - Literally, a "race to the courthouse" - Obviously, recording is required
Notice
Gives priority to a later claim, so long as that party (1) paid value for the property and (2) did not have notice of an earlier claim Recording is not required...but, claimants are incentivized to record to put others on notice and protect their claim
Commercial (Large) Banks
Historically: Real estate needs of business clients - Business-related real estate loans - Home loans - Personal investments Assumed former roles of savings associations Large-scale construction lending Ex: Wells Fargo
judgment liens
If a monetary judgment is awarded in a lawsuit, the winning party can place a lien against property owned by the loser
tax liens
Imposed by the government to secure the payment of taxes - All types of taxes are covered (local property, federal income, etc.) In some cases, the lien exists automatically before taxes are due - Property tax liens are specific, but other tax liens are general
Historical Patterns of Urban Form
In 1923, we thought our cities would be organized like this. We thought the economic base would be industrial/downtown. But, we noticed over time that the way we use cities are changing due to technological innovation
Divorce settlements
In Texas, property acquired by married persons is part of the "community estate" Each spouse has an undivided ½ interest in the "community estate" - When the marriage is dissolved: a. Property in the "community estate" is no longer co-owned b. Now in the sole ownership of one of the spouses If the spouses cannot agree to an allocation, then the court will "settle" the estate by awarding ownership among the spouses
Real Estate Equity
Investment for a (direct or indirect) share of property ownership Residual claim (no security) Can be in public or private markets Profit is not fixed, but rather depends on performance of the property Equity investors receive last priority to be compensated behind debt holders May be only source of financing, or may be combined with debt What we have talked about this far have been real estate equity investments
Real Estate Debt
Investment for obligations (loans or bonds) of the property owner to be repaid with interest Senior, preferred claim Can be in public or private markets Profit is fixed based on the applicable interest rate Usually secured by a lien interest in the property It is unusual for real estate project to be financed by 100% debt Financial "leverage" is the use of debt in financing
Two most common forms of owning RE in Texas:
LLC and LP - Private RE funds are typically set up as LPs - Small, local investments typically set up as LLCs C-corporation and GP structures seldom chosen S-corporations popular with some sole proprietors/families
Factors Affecting Economic Base
Labor force characteristics: Special skills and experience Education level Unionization Work ethic Quality of life Leadership: Financial support Government support (subsidies, land use regulation)
Real property
Land, buildings and associated rights in them - Immovable
______ within the urban matrix is the most meaningful notion of location
Location - Distances from relevant activities - Relevant linkages depends on type of land use
Race Example #1 Bernie owns 1,000 acres of real estate On May 1, Bernie sells the property to Mark and gives him a signed deed On May 2, Mark records his deed On May 3, Bernie sells the same property to Andrew and gives him a signed deed On May 4, Andrew records his deed Who has the superior claim?
Mark - in a race system, recording is all that matters. Andrew would have to bring a lawsuit against Bernie to recover his money
Traditionally how we approached land planning
Separated uses: decent way of avoiding having a factory next to a school. But, almost too rigid. Automobile oriented Priority placed on easy ingress and egress Uniform density Cul-de-sac hierarchy in neighborhoods
Notice example #2 Bernie owns 1,000 acres of real estate On May 1, Bernie sells the property to Mark and gives him a signed deed On May 2, Mark emails Andrew and gives him notice of his deed On May 3, Bernie sells the same property to Andrew and gives him a signed deed Who has the superior claim?
Mark wins. Recording is not required, but a party is rewarded for giving notice. Mark paid value and gave notice. Lesson: a party is rewarded for giving notice
Megamortgage Bankers
Megabanks saw home mortgage lending as profit center Cyberelectronics imply huge economies of scale
new urban
Mixed use: bothretail and residential. Lofts on top floor and restaurant/store on the bottom floor Public transportation Pedestrian oriented: Sidewalks Houses close to street Rear alleys Grid streets with restricted traffic flows
Multiplier effect is greater as city is:
More isolated: if a $ goes into dallas, it might be spent in arlington. Lubbock is isolated so the likelihood of that $ staying there and getting spent more times, is greater More diversified: that $ is more likely to stay in the area because not having to go out to a different area to buy stuff. More options locally Larger: more local activities Base activity uses more local goods and services: medical uses doctors and supplies that might come locally
Where Do You Get a Mortgage Loan in Today's Complex System?
No simple answer, except to aggressively examine (and understand) the market Depository lenders may offer cost and interest rate advantage Brokers may offer service and down payment advantage Non-depositories may have best fixed-rate offers SHOP!
Encumbrance
Non-possessory interest in real property held by someone other than the fee owner that affects title or use of the property Common encumbrances: Easement (use) Lien (title) Restrictive covenants (title and/or use) Can be classified in various ways: Monetary vs. Non-financial Title vs. Use Acceptable vs. Unacceptable
Nonpossessory interests include:
Non-possessory: rights in property that is in the possession of another easements restrictive covenants liens
Mortgage banker
Not a bank - accepts no deposits - Originates loans to sell - Retains right to service the loan for a fee
Market Participants: Demand Side
Owner/user: Both owners and tenants Purchase property as an investment and also to utilize Owner: Pure investors Do not consume the real estate that they purchase Rent or lease the property to someone else Renter: Pure consumers
Owners are a demand side participant? What about the spaces they supply for rent?
Passive owners are [not]? on the demand side because they will turn it around and lease it to someone else
Recorded Plat
Platting" is part of the development process Developer creates a survey the entire development and names it as a "subdivision" Subdivision is divided into blocks, which are further divided into lots Plat is approved by local government and filed in the public records Individual parcels are identified by subdivision, block, and lot
possessory vs. non-possessory
Possession Right to immediately occupy or exercise control over land Possession does always not equal ownership (e.g. a tenant) Non-possessory interest Right to use (or restrict the use of) land that is in the possession of another
Where Do Cities Occur?
Preindustrial: Fortress or religious center Transition points in trade routes Natural resources
Drug dealers, Walgreens and...real estate?
Pricing data on generic drugs shows that it has a markup of 1,000% at walgreens than sams Generic drugs actually have pricing dissimilarities Walgreens is profit maximizing and taking advantage of pricing assymetry
Private Equity vs. Public Equity
Private: Direct ownership by individuals or entities Public: Securities in REIT's and real estate companies
Private Debt vs. Public Debt
Private: Loans by banks and other private lenders Public: CMBS and similar securities
Involuntary conveyance by a deed
Probate (distribution of estate) Bankruptcy Divorce settlement Condemnation Foreclosure
Personal Property
Property other than land and buildings - Movable
Counter-arguments?
Property rights vs. human rights ○ Fairness, equality, profit motive ○ There's a conflict between complete fairness and profit and freed Tragedy of the commons ○ Stems from rural England § A village existed with a common area in between, where everyone could use it for whatever they want § What happens when everyone puts all their cattle on it? The grass gets overgrazed § How do you fix it? Divvy up the land and allocate it. Need to buy it out if you need more, lease it, if you fail then its your fault
Immobility
Real estate does not move Consumers come to the good rather than the good going to the consumer No physical marketplace Market adjustment must occur by people moving to dwelling units, rather than the movement of the goods
Real estate resources are allocated among its various users in the ____. Real estate values derive from the interaction of what 3 sectors?
Real estate market; 1. local user markets (real world) 2. capital markets (financial world) 3. property markets
Property is divided into 2 classes:
Real property: rights in land and its permanent structures Personal property: anything thats not real property
Trade fixture
Removable personal property that a tenant attaches to leased land for business purposes - For a commercial tenant to be able to remove a trade fixture, the item in question must be: 1. Necessary for the business of the tenant 2. Removable without damage to the property 3. Removed from the property within a proper time If not a "trade fixture", it will become the property of the property owner
In What Do REITs Invest?
Retail 24% apartments 13% health care 10% office 10%
pipeline risk
Risk between loan commitment and loan sale the risk a lender takes that, between when a borrower is presented with a lock commitment and the time when that loan is closed, interest rates could increase, and the lender would incur a loss when selling the loan.
Real Estate Investment Returns
Since risk premiums vary, so do returns - High quality, safe real estate investments < 8% - Development > 30% Risk is directly related to returns
Housing Market Craze 200s
Single-family homes entered the speculative investment market Mortgage lending standards relaxed By 2006, housing prices had risen >80% from their 2000 level Baby boomers trading up increasing demand for up-scale housing Low mortgage interest rates
Direct ownership prevalent at smaller end of investor spectrum
Single-family rental homes, duplexes and fourplexes Owner-occupied office buildings
Ch. 2 A Broad View of "Property Rights":
Some may think the term "property rights" describes only claims to real property The term has a much broader meaning in economic, political and social studies Property rights define how any resource is used, and who owns that resource
Features of subdivision regulations
Standards for streets, sewers, and water systems Adequate water supply for fire safety Adequate drainage and run-off retention Open spaces Lot layout Easements for utilities Traffic and pedestrian safety Administered in Texas by counties
What is causing the change in urban form? What will it lead to?
Technology. The way we live has changed. We don't know. Good to know in order to value
Texas Recording Statute
Texas is a "notice" state Found at Texas Property Code §13.001(a) The bottom line: A party is rewarded for giving notice Recording is the best way to give notice to the entire world
Pass-Through Taxation
The income of the entity is treated as the income of the investors ( it "passes through" to the investors) - The entity itself is not considered to have any income for federal tax purposes - Avoids "double taxation" because only the investors are taxed on the revenue
Recording in texas
The proper place for recording is the county clerk's office of the county where the land is located Fee for recording To be recorded, an instrument conveying real property must be: a. Signed by the grantor; and b. Witnessed by 2 witnesses OR acknowledged by a notary Copies are NOT accepted E-recording in certain counties All instruments are "indexed" according to the names of the grantor (seller) and grantee (buyer) Lubbock County index is on-line: https://www.co.lubbock.tx.us/department/division.php?fDD=2-8 Once a document is recorded, the original is no longer necessary (although it is a good idea to keep it, if possible, as a backup)
Leasehold Estates are different because ___
They are temporary rights of exclusion, use and enjoyment, but not the right of disposition 1. are limited in time 2. there's no right of disposition bcuz property reverts back to landlord 3. they are not titled interests
Long Time Delays
Time delays due to the length of time it takes to finance, design, and construct new supply Relatively slow rate of change of demand Potential for disequilibrium in the short run Adjustment mechanisms tend to be slow relative to more fluid markets
Traditional and Modern Finance
Traditional: You would go to a bank or a thrift and make an appointment to make a loan Over time, you pay cash over time back to the bank until you own 100% equity - The loan stayed at the bank - highly localized - lenders primarly savings associations/thrifts Todays Market: Process starts the same, however, the loan does not stay at the bank Shipped off to the capital markets as a debt investment - megabanks, secondary mortgage markets, and securitization
Pipeline Risk: Risk of Mortgage Banking
Two components 1. Fallout risk: Risk that loan applicant backs out 2. Interest rate/price risk: Risk that closed loans will fall in value before sold *Mortgage bankers highly leveraged Very sensitive to pipeline risk Hedging necessary for survival
Single largest ____ Over ____ of all asset value in the developed world
US asset class; half
Property rights are backed by the _____ and ____ - Contracts are enforced by the ____ court system - The justice system punishes those who confiscate private property, _____ - The ___ th ammendment
US constitution and Texas constitution; civil; criminal 14th Amendment - nor shall any state deprive any person of life, liberty, or property, without due process of law
Eminent domain
Under Texas law, eminent domain is the legal authority of the government to take private property for "public use" - The takings process itself is called "condemnation" - One of the "sticks in the bundle" that a landowner will never own - The power is granted by the Texas Constitution, and the process is governed by Chapter 21 of the Texas Property Code - Governmental entities (and certain private business such as power companies) have the power - The condemning entity is required to pay "fair market value" to the landowner: Often established by an appraisal If the parties cannot agree, a court will decide what this means
Nonconforming use
Use conflicting with zoning map, but in place prior to its enactment Cannot be substantially changed Must be continuous Can be "amortized" away, (e.g. billboards) "Grandfathering" - 2001: buy office - 2002: city enacts a zoning ordinance that makes it all resedential Nonconforming use: recognizes the unfairness of the situation. So, if we change things up on a later date, we will continue you to use it because you're "grandathered" in
Board of Adjustment
Usually created by zoning ordinance Independent citizens, appointed by elected officials Reviews petitions for variances Decisions are final rather than advisory to the elected officials Only appeal is through the courts Appeal to the board of adjustment - They are the oversight of Planning and Zoning Administration
voluntary vs. involuntary liens
Voluntary liens - liens created by a contract or other agreement of the property owner - Mortgages and other finance liens - Some mechanics' liens (not all) Involuntary liens - liens created by statutes or other laws without the consent of the property owner - Tax liens - Judgment liens - mechanics liens
As you chip away at those assumptions, those are distortions We acknowledge were in the real world, not textbook Lets see how these types of things affect the real world
We need to understand these unique characteristics so we can better price
Ownership
interest under which an individual holds "title" to real estate
Multi-nuclei pattern
We now have individualized hubs within each city. Two centers of activity. Downtown is no long the single center of activity. This is why we have both downtown and uptown
Probate
When a person dies, his real property passes immediately to his heirs or to his beneficiaries (subject to the payment of debts)
undivided interests
Without specifying the interests of each party by percentage or description of a portion of the real estate - Each party has a right to enjoy the whole property - Must "reasonably cooperate" in cases of conflict
zoning
Zoning -regulation by a municipality of land use, buildings and structures located within the municipality's corporate limits
2. although real estate is a tangible asset, it can also be viewed as ___
a bundle of intangible rights associated with the ownership and use of the site and improvements
Raw land
a larger area of land that does not include structures or improvements
Banktruptcy
a legal procedure for dealing with debt problems of individuals and businesses - Bankruptcy Estate: property of the debtor at the time of the bankruptcy filing - Bankruptcy Trustee Appointed by the court as a representative of the bankruptcy estate; Can exercise statutory powers, including the sale or conveyance of real property
mechanics liens
a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property - If the subcontractor/supplier isn't paid, they must file a "claim of mechanic's lien" in the county where the property is located. The subcontractor/supplier then has typically two to six months to work out a solution with the property owner or file a lawsuit. Texas law is very favorable to mechanics and materialmen
A "plat" is
a survey of land which identifies the boundaries of the property and any easements, flood zones, roadway and access rights-of-way - In most cases, plats are required by law to divide land into smaller lots
Other New Land Use Controls:
a. Attempt to "internalize" the externalities b. Force owners to account for consequences on other owners c. Performance standards: Storm runoff limits Noise and emission limits Traffic impact limits Tree removal restrictions d. Impact fees Favorite of economists (in principle) Despised by many in the building community Revenue source or land use control? Are we just creating revenues with these fees or actually controlling land use? e. Growth restrictions Most drastic Example: temporary moratorium on all new development
Creating Restrictive Covenants
a. Deed conveying single parcel b. Imposed on an entire subdivision - Recorded as a separate document (CC&R's) - Mutually binding on all lots in subdivision c. Imposed by platting process
Ownership Interests from Marriage
a. Dower/Curtesy: gave wife 1/3 life estate in all the real property of a decendent husband that was owned by him during the marriage. Ignores personal property ****b. Elective Share: gives the surviving spouse a SHARE of most of the wealth of the decedent, usually 1/3 ****c. Community Property: gives spouse 1/2 claim on all property acquired during the marriage (seperate property includes: gifts/inheritance, prior acquired property, written agreement)
Mortgage Lenders
a. Portfolio lenders (depository institutions): Originate loans for their own portfolio Banks Thrifts Large credit unions vs. b. Non-portfolio lenders: Mortgage bankers Mortgage brokers
a. Improvements on the land vs. b. Improvements to the land
a. fixed structures like buildings, fences, walls, decks b. infrastructure like streets, walkways, drainage systems
the primary participants in user markets are _______
a. owners b. renters - based on their financial position, they decide whether to own or lease - 2/3 own property
Involuntary conveyence without a deed
adverse possession easement by prescription action of water
2. capital markers serve to ___
allocate financial resources among households and firms requiring funds - participants invest in stocks, bonds, MF's real estate, etc.
mortgage
an interest in property as security for a debt
Lien
an interest in real property that serves as security for an obligation Security - property to be forfeited in case of default Owner/holder of lien = creditor Owner of property subject to lien = debtor -Liens "run with property" and remain attached even if the property is sold
fixture
an object that was formerly personal property, but has become real property - use MARIA to determine if something is a fixture - intention is the most dominant rule
general lien
arises out of actions UNRELATED to ownership of the property; attach to all property of the debtor - The debt is secured by all the property of the debtor - The lien will only identify the debtor - damages for any reason or unpaid federal taxes
Property tax lien
automatic lien placed by local governments to assure payment of property taxes - assessment liens are placed to ensure those that receive primary benefit of neighborhood improvements is charged for it
Thrifts were formerly the ____
backbone of residential real estate debt market - Dominated mortgage lending - Extremely localized - Beginning in the 1930's, regulations increased - Phased out in the "new" financial world that emerged after the 1980
Why are housing starts and sales viewed as leading economic indicators?
because investors on wall street closely monitor real estate construction, construction permit activity, and real estate sales figures, since RE creates a significant influence on the nation's economy
Land is often used to refer to a ____
building site or lot, and includes the infrastructure and some improvements, but not any structures
In valuing any asset (real estate or otherwise), it is important to understand the _____ of the asset and its market. The better you understand these, the better you can predict _____ and, therefore, more accurately ____ the asset
characteristics; future cash flows; value
Easements in gross sometimes called______
commercial easements - non-commercial easements also exist: access for recreation purposes like fishing, hunting, boating etc.
the value of the property will tend to vary with the ____ of interst
completeness
For well-capitalized investors, choice of direct vs. indirect involves trade-offs between:
control access to managerial expertise liquidity risk sharing
Private property rights are somewhat ______
controversial - Communism - Not recognized by certain international treaties We take them for granted in US society, but this view is not universal
this competition for space with the existing supply of space is what determines ___ and ___ of a property
current rental rates and the expected cash flows - the riskiness of the CF depends on the uncertainty of future demand, future supply and the resulting future market equilibriums
__ are the primary means of conveying interest in real property. Under some circumstances though, property transfer can happen without a deed or any documentation at all
deeds - used to convey a permanent interest in real property - the deed may also carve out reductions using deed restrictions Important Distinction: a contract alone is not sufficient to convey real property; a deed must be executed
Non-freehold
defined length of time - Lease
specific lien:
derives directly from events related to a property (property tax liens, assessment liens, mortgages, mechanics lien) attach to a particular, identified parcel or parcels of real property - The debt is only secured by certain property - The lien will usually identify the property
Investors can hold ownership (equity) positions ___ or through __ . But...most investors are not well enough capitalized to invest ____
directly; intermediaries; directly - intermediary: an entity that invests in real estate and then sells claims on those investments to the investor
Key difference between thrifts and banks:
diversity of assets and liabilities
Zoning ordinance
divides a city into certain districts and prescribes regulations for each one having to do with the architectural design of structures, the area to be occupied by them, and the use to which property may be devoted
Traditional: Subdivisions
division of land into two or more divisions for the purpose of sale or development Subdividing: taking a 4 acre lot and divided it into 4, 1 acre lots - You must have approval to change the division - You have to pay - Counties usually have jurisdiction over subdivisions in texas (?)
Changing Leasehold Concepts
during the last few decades it has gone from: common law tradition of simple agrarian relationships that landlord get off land and leave tenant alone -----> to urban resedential tenant is receving shelter services from the landlord that must meet certain standards
Direct co-ownership
each co-owner holds a title interest in the property Ownership by multiple individuals who hold title collectively
Upon death in a tenancy in common, ___
each party's interest passes to its heirs (by will or otherwise) - Under Texas law, tenancy in common is presumed Example: GRANT, SELL AND CONVEY unto Bob, Ed, Lee and Sid
Government or public limitations on ownership include:
eminant domain police power taxation
The principal rights in property include _____, ___, and ____
exclusive possession, use(enjoyment), and disposition
Exclusive vs. non-exclusive easements
exclusive: you can extend your rights to others non-exclusive: you cant extend rights to others, prevents proliferation in use of the easement and preserves more of the value of the servient parcel
Have to focus on ____ activities in order to _____. Net wealth increases
export; grow
Fund managers often offer funds in a series due to their_______
finite life - Fund I, Fund II, Fund III, etc. - Important role for reputation in the market to raise funds
Stocks are ____
fluid If a lot of trading --> price goes up --> instantaneous - Real estate is not as fluid, not a fluid market - It takes a long time adjust
c. Tenancy by the Entirety
form of joint tenancy for husband and wife - reduces probate costs - In the event that one spouse dies, the full title of the property automatically passes to the surviving spouse
d. Condominium
form of ownership combining single person ownership and tenancy in common - owner holds fee simple interest to a certain space and tenant in common of the community elements - owners can mortgage their property without puttin other owners at risk
The ability to own property is not absolutely essential to society, but some argue that it is essential to _____
happiness Incentives for production and innovation Replace destruction with competition Personal pride Basis for credit banking system: (No concept of collateral, No ownership of money) Required for economic security: (Retirement funds,Without it, dependent on someone to allocate you with what you need) Required to be charitable
b. Joint tenancy
has right of survivorship - nothing passess to their heirs of the decendent - the decendent passes their interest equally among the sruviving parties - intentionally created
Riskiness spectrum
high: land speculation hospitality and restaurants offices apartments
Restrictive Covenants
impose limits on the uses of land Enforcement:? - Enforcement by court - Enforcement only by "parties at interest" Give a development a more standard appearance, and control some of the activities that take place within its boundaries --> When enforced, theory is that covenants protect property values
Direct Investment
individual or institutional investors purchase and hold title to the properties Gives individual & institutional investors complete control: Leasing Management Capital structure Disposition - But...investor must supply the expertise
the value of the bundle of rights is a function of the property's _______
locational, physical, and legal characteristics
Improvements to the land include the components necessary to ___
make the land suitable for building construction or other uses
the continuous bidding process determines ___ and ____ in property markets.
market values and transaction prices - government influences on this value determining process are numerous
investment value
maximum price an investor is willing to pay for ownership (or debt) interest in real property
Information asymmetry is A situation in which one party in a transaction has ______ compared to another Why could this be bad?
more or superior information Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge - Sellers inflate prices - In response, buyers not willing to pay full price
REITs ≈ ______ Types of REITs?:
mutual funds for investing in real estate - Diversification benefits - Liquidity Types of REITs: Equity REITs Mortgage REITs
Asset-liability mismatch
on the very short term time period we have deposit account (checking), its on demand. Now you're taking this money and putting it into a mortgage. Not so easily on demand Very delicate balance. If everyone on payday comes in and gets it out, the assets of the bank goes down to 0.
Indirect co-ownership
partnership, limited partnership, LLC, REIT, corporation - any of these businesses can acquire real estate, acting as a single artificial "person" - the artificial entity is what owns the property, not the individuals themselves --> Ownership passes through an entity which holds "title" --> Individuals are ultimate equity owners
1. real estate user markets are characterized by competition among users for _____
physical locations and space - determines who gains the use of each parcel of land and how much they must bid for its use - the demand derives from the need that these individuals have for convenient access to other locations, as well as for shelter to accommdate their activities
You cannot (easily) fix the unique characteristics of real estate that cause market distortions and, ultimately, market failures However, we can ________ in order to minimize market distortions
place restrictions on the way that we own and use real estate
If you're going to subdivide it, you have to get approval : ____
platting
securitized investments
pool money from multiple investors - purchased and resold in either public or private markets
Due to large size of typical RE investments, investors frequently ____ their equity capital - Forms of ownership for Pooled Equity Investments?:
pool; General partnership Limited partnership C-Corporation S-Corporation Limited liability company Tenancy-in-common REIT
Mortgage banker; originates and owns loans long enough to sell - Sell loans "whole" - ____ and ____ loans Servicing is ____ center
pool; securitize core profit
Plat approval is a _____ (not a right) that local governmental entities have the power to grant or withhold based upon the compliance with conditions
privelage The entire regulatory scheme depends on the approval of the plat
Real estate is ____. What does this refer to?
property; anything that can be owned or posessed
Public vs. Private markets
public markets: securities are bought and sold on an easily accessible exchange --> high liquidity and low transaction costs private: negotiated transactions --> low liquidity and high transaction costs
mortgage REITs
purchase mortgage obligations and become real estate lenders
2 types of recording statutes?:
race vs. notice
Possessory estate
rights to possess property and exclude others Fee simple Lease
To avoid information asymmetry --> people ____ --> creates _____
search for information; transaction costs
community development district liens
secures financing for improvements within a private community - attaches to the properties only within that community
Real estate is ______ in our society
single largest component of wealth - therefore, changes in the value of real estate can dramatically affect the wealth of businesses and their capacity to grow
Property can be ___ or ____
tangible; intangible
securitized investments are the norm in commercial real estate due to ____
the advantages of investing through intermediares plus the sheer access to greater amounts of capital
Timeshare
the arrangement whereby several joint owners have the right to use a property as a vacation home under a time-sharing agreement; the interests are NOT simultaneous - the estate is divided into seperate time intervals - never thought of as an investment Industry with a questionable history - Developer has all the market information, and the buyer has none - Differentiation is the sponsor organization's service
Interest refers to ____, estates refer to ____
the bundle of rights held by owners of real property.; interests in real property that include possession (possessory interest)
The adequacy in ____ and ____ affect the quality of life in a region
the housing stock; public infrastructure
1. When viewed as a tangible asset, real estate is defined as ___
the land and its permanent improvements
condominium declaration
the master deed creating or establishing the condo corporation
Condominium bylaws
the official rules and regulations that govern condo ownership Bylaws define owner rights: Share of all obligations Restrictions on sale or rental Methods of altering bylaws
Traditional: Planning & Zoning Administration
the ones who administer the rules Staff employees hired by elected officials Ultimately is advisory to elected officials Oversees implementation of the ordinance Considers requests for specific changes Recognizes that there might need to be exceptions
syndication
the pooling of equity capital by investors to purchase real estate in the private market
Easement
the right to use land for a specific and limited purpose - appurtenant vs. in gross
Easement in gross
the right to use land for a specific, limited purpose unrelated to any adjacent parcel - no dominant parcel, but one or more servient parcels - transferable to another owner without transfer of any parcel of land (right of way for roads, railroads, electric lines)
required investment returns equal ___. then, from the interaction between user and capital markets, the expected stream of rental rental Op. Income is ____ into value through "discounting"
the risk free rate + premium; capitalized - premium reflects how uncertain the forecasted net operating incomes are - discounting incorporates opportunity cost of waiting for uncertain CF
Real property is rights in land, but what is land?
the surface of earth and everything below and above - air space - mineral rights - water rights
information asymmetry
the two parties of the transaction have different amounts of information You'd rather be the person that knows a lot Selling vs. Buying: Selling has the superior information in this context Has history with the property Any time there is a buyer and seller, there will be information asymmetry There will be information asymmetry in real estate
REITs are NOT taxed at the corporate level IF ____
they satisfy a set of restrictive conditions on an ongoing basis including: - At least 100 shareholders - 75% of assets must be RE, cash, or government securities - 75% of gross income must come from RE assets - 90% of taxable income must be paid out in dividends each year
Marketable title
title that a prudent buyer would accept - In Texas, we refer to this concept as "good and indefeasible" title (for our purposes, these concepts are the same) If something exists that makes title "unmarketable," it is considered to be a "cloud" on title - All encumbrances affect the marketability of title (but to different extents) - Some (but not all) encumbrances are serious enough to make title "unmarketable" - Easements generally do not make title unmarketable - Liens generally do make title unmarketable
Rights to oil, gas, and minerals
traditionally all states follow "rule of capture" - the owner of an oil or gas well could claim all that is pumped from it, regardless of whether the oil or gas migrated from adjacent property
The ___ network and _____ respond to technical and market changes, but very slowly - over many years
transportation;urban patterns
Urban growth is not ___
uniform there are both emerging and declining nuclei
Real Estate Markets Derive from the ____ Economy
urban Urban growth causes real estate market growth Urban decline causes real estate market decline Urban change causes real estate market change Urban land use patterns dictate real estate location patterns
Demand for access causes ___
urban clustering - Access is sometimes called the "gravity" that creates cities
Exclusionary zoning:
utilization of zoning ordinances to exclude certain types of land uses from a given community Unreasonable lot size Inadequate provision for low-income housing If government administrations have abused zoning ordinances to exclusive certain types of uses in a community Ex: in order to live here, your value must be $1,000,000 or more or in order to live here you have to have 3 acres or more This is exclusionary, courts will strike it down
Conveying real property can be voluntary vs. involuntary:
voluntary w deed voluntary without deed involuntary w deed involuntary without deed
What is generally the determinant of a lien priority after tax and assessment liens?
when they are created/ chronology 1. property tax liens and assessment liens 2. mortgages and mechanics liens 3. judgment liens