Real Estate Three Definitions Real Estate is a Tangible physical Asset Structures improvements on the land Improvements to the land o Utilities roads sidewalks driveways etc Raw and improved land Real Estate can be an Intangible non physical Asset Mortgages Leases Easements rights of way Real Estate is a Bundle of Rights legal view Right of exclusive possession Right of use or enjoyment Right of disposition Real Estate is as an Industry or Profession Brokerage leasing Real estate finance lending Appraisal valuation Acquisitions investment Asset property management Government services planning property tax housing finance environmental Construction development Real estate law regulation The Value of Real Estate Assets constitute approx half of the world s wealth generate approx 25 of the U S gross domestic product GDP generate approx 70 of local government revenue property tax Real estate values are determined by the interaction of two markets The User Space Market The Capital Market The User space Market Market for physical space Where users buyers and renters individuals and firms complete for space Where owners landlords developers provide space in response to demand from users Where values rental rates cap rates are observed The most profitable user outbids others for the best location Both demand supply side of user markets are very specific to location building type Sometimes called the housing apartment office retail industrial or hotel market o Implies that space markets are very segmented Where real estate assets complete with other assets stocks bonds commodities for The Capital Market investor dollars Where investors supply funds based on expected returns and risk Includes capital allocated to both debt and equity side of the real estate investment Capital Market Investment activity by investors bidders determine o the expected returns on bonds affecting mortgage rates o the expected returns required by investors for risky investments the risk premia affecting commercial real estate values Quadrants of The Real Estate Capital Market 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 credit unions mortgage banks insurance companies private lenders Investors in mortgage backed securities and mortgage REITs Private Capital Markets Individual whole properties or assets are typically bought and sold in a transaction indivisibility Assets trade infrequently in private transactions thus a lack of transparency Absence of centralized market or even price lists Higher transaction costs Less liquidity than public markets Small homogeneous units shares of ownership in assets trade in public exchanges Public Capital Markets Many buyers and sellers Price quotes available for all to see Characterized by a high degree of liquidity Tend to be more informationally efficient The Nature of Real Estate Real Property A Bundle of Rights What do we mean by rights What are property rights What is real property What is personal property What do we do when the difference is unclear Freedoms guaranteed by Constitution Supreme Court interpretations of Constitution Personal rights Property rights Real property Rights in land and its permanent structures Surface of the earth and improvements 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 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 Fixtures Rules of Fixtures Manner of attachment Character of the article and manner of adaptation custom screens storm windows built in furniture Intention of the parties Dominant rule Customary assumptions of the realm Example Kitchen appliances in a single family residence vs appliances in an apartment Relation of the parties Trade fixtures personal property Fences and other agricultural improvements Items installed by tenant in a residence Distinguishing Real vs Personal Property Construction materials Valuable chandelier Custom drapes Kitchen range and refrigerator Basketball goal on a garage Backyard playhouse Retail display cases Restaurant booths The Nature of Real Estate Real Property Interests o The set of rights in real property Possessory Interests in Real Property o Estates includes right of exclusive possession Non possessory interests o Easements o Restrictive covenants o Liens Estates Non Possessory Interests in Land Easements o The right to use land for a specific and limited purpose o Easements Appurtenant Easements in Gross Restrictive Covenants Liens Tenancy for years For a specific period of time few days to many decades Must be written if for more than one year Written lease contract governs entirely Periodic tenancy No definite length of time Often by oral agreement State law governs notice of termination time required is usually half of the payment period Tenancy at will For no prescribed period which can be terminated by either tenant or owner Easement Appurtenant Affirmative easements Driveway or access right of way Sewer line Drainage Common wall Negative easements Light and air easement Scenic easement An Easement Appurtenant Involves a Dominant Parcel and a Servient Parcel Easements in Gross Commercial Easements Right to use land unrelated to any other parcel Restrictive Covenants Deed Restrictions Covenants that impose restrictions on land use Extract minerals or oil and gas Build a roadway or railway Lay a pipeline power line or cable Run an irrigation ditch Place and maintain a billboard or communications tower Transferable separately from land title or ownership No dominant parcel only servient parcels Examples Setback lines height restrictions for structures Minimum floor area No chain link fences No RVs or boats parked in view of the street No garage door facing the street No external antenna satellite dish or clothesline Required architectural review Lien An interest in property as security for an obligation Usually a debt General Liens Arise from events unrelated to the property Court awarded damages Three levels of liens on a personal residence Federal tax liens Specific liens Arise from ownership and use of the property Mortgage