Chapter 01 The Nature of Real Estate and Real Estate Markets Real Estate is Property Two types of property Tangible physical assets that can be owned Can be real or personal property Intangible Non physical assets such as stocks bonds mortgages leases The Term Real Estate Used Three Ways Real estate as a tangible asset 1 Structures improvements on the land Improvements to the land Excavation and fill Roads and driveways Sewers and other utilities Raw land 2 Real estate as a bundle of rights Exclusive possession of the real property Use or enjoyment Can use as rental property to generate cash flow Disposition Can be unbundled in many ways 3 Real estate as an industry and profession Brokerage Leasing Asset management Appraisal Counseling Government regulation and taxation Mortgage finance Construction finance Long term finance Development Property management Real Estate Law Market consulting Planning Investment management Housing assistance Real Estate in the Economy Half of the world s wealth Generates over 28 of U S gross domestic product GDP Housing alone accounts for almost 20 Generates nearly 70 of local government revenue property tax Creates jobs for nearly 9 million Americans Land Use in the United States 2007 Developed Land Water areas and federal land Crop land CRP land Pasture land Range land Forest land Other rural land Aggregate Market Values of Selected Asset Categories 2011 Selected Household Assets as a Percentage of Total Assets Real Estate Markets Sectors Real Estate values are determined by interactions in 3 distinct markets sectors User Space Markets Capital Markets Governmental Sector s Space vs Property vs Capital Markets User Market Market for the physical real estate Buyers receive right to use space sometimes called space market or rental market Where rental rates are determined On demand side Separate local markets for various property types retail office industrial etc individuals households firms who require space either for consumption or production purposes On supply side real estate owners operators who rent space to tenants Segmentation of User Space Markets Both demand supply side of user markets are very specific to location building type Implies user space markets are highly segmented Compare to nationally integrated markets gasoline steel financial capital i e homogeneous commodities that can be moved from place to place Because of segmentation rental prices for physically similar space can vary widely Segmentation of User Markets across locations across property types Capital Markets RE competes for funds in capital market with other asset classes such as stocks and bonds Investors select a mix of investments based on expected returns risk Small homogeneous units shares of ownership in assets trade in public exchanges Public Capital Markets Many buyers and sellers Characterized by a high degree of liquidity Price quotes available for all to see Informationally efficient Private Capital Property Markets Absence of centralized market or even price lists Assets trade infrequently in private transactions thus a lack of transparency Common for whole assets to be traded in a single transaction indivisibility Less liquidity than public markets Higher transaction costs Property Asset Market Market for ownership claims to RE assets Buyers owners receive rights to cash flows generated by leasing space to tenants Demand supply side of asset market is made up of investors wanting to buy sell property Property market is integrated not segmented like space market i e investment capital can come from anywhere The Four Quadrants of Real Estate Capital Markets Private directly held Public indirectly held Equity Owners Individuals partnerships firms institutions Investors in publicly traded real estate companies equity REITs Debt lenders Commercial banks savings institutions Investors in mortgage backed securities and mortgage REITs credit unions mortgage banks insurance companies private lenders GOVERNMENT INFLUENCE Local State and National Land use controls Property Tax Building Codes Civil Rights Subsidies Housing Finance Support Etc Income Tax Policy Characteristics of Real Estate Markets Heterogeneous products Immobile products Localized markets Segmented markets Privately negotiated deals with high transaction costs Chapter 2 Legal Foundations to Value Rights in Our Society Personal Rights vs Property Rights Personal rights Freedoms guaranteed by Constitution Supreme Court interpretations of Constitution Property rights Exclusive possession Enjoyment of the use or benefit Use collect rents harvest Freedom to dispose as one pleases within the limits of safety sell convert rebuild etc Real Property Interests A Bundle of Rights Disposition Use Possession Exclusion Real vs Personal Property Real property Rights in land and its permanent structures Surface of the earth and improvements Air up to reserved air space or tallest structure Beneath the earth as far as technology allows Minerals oil and gas water Personal property All other property Personal and household goods Intellectual property Music Distinguishing Real vs Personal Property Which are personal property and which are real property Construction materials Custom drapes Retail display cases Basketball goal on a garage Valuable chandelier Kitchen range and refrigerator Restaurant booths Backyard playhouse Fixtures Fixtures are part of the real estate Fixture Real property that formerly was personal property Rules for determining when something becomes a fixture Manner of attachment Character of the article and manner of adaptation custom screens or storm windows church pews custom designed furniture Intention of the parties Dominant rule Contract will clearly define the intent of the parties Customary assumptions of the realm Follow the general rules of the area Example Kitchen appliances in a single family residence vs appliances in an apartment Relation of the parties Variant of rule of intention Trade fixtures personal property permanently attached but belongs to the tenant Fences and other agricultural improvements Items installed by tenant in a residence Q Which would most likely be a fixture A Custom built in bookshelves Real Property Interests Interest Any set of rights in real property Estate A real property interest that includes the right of exclusive possession Nonpossessory interests Easements Restrictive covenants Liens Estates Fee Simple Absolute Life Estate Considered the most complete