Forms of Ownership. Learning Objectives

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1 Forms of Ownership Learning Objectives Upon completion of this section you should: Itemize the factors that influence home ownership. Identify various forms/types of housing. Describe the various types of estates in land and provide examples of estates in each group. Define fee simple, determinable fee and fee simple subject to condition subsequent. Describe a conventional life estate and differentiate between remainder interests and reversion interests. Discuss separation of rights of possession and use under different forms of ownership. Define ownership in severalty. Define forms of co-ownership including: Community property, Joint tenancy, Tenancy by the entirety, Tenancy in common, Dower and curtesy, Land trusts. Name and define the powers of government that may limit ownership of real property. Provide examples of typical restrictions under each. Define ways in which business organizations can hold ownership of real property including: Partnerships, Joint ventures, Corporations, Cooperatives, Condominiums, Limited liability companies and partnerships, Syndications, Real estate investment trusts.

2 Forms of Ownership Home ownership is a big decision and, on an individual level, should be made after careful consideration of its effect on a person s family, friends, and lifestyle. On a broader level, the housing market is affected by the supply of affordable homes and the amount of money people have for housing. Put simply, the market depends on the supply and demand for homes. There are many things that affect the supply or demand of homes. On the supply side, the availability of credit affects how many homes builders can afford to build. The availability of land also plays a major role. If space is limited, it becomes difficult to keep adding homes to the market. Finally, another factor is zoning, which is governmental policy that determines what can be built where. For example, if a local government rezones a neighborhood that was previously designated for lots (a piece/parcel of land) of 20,000 square feet to allow lots of 6,000 square feet, then the number of housing units that can be built increases. Demand is also influenced by many factors. First, demand for homes is driven partly by the amount of money that is available for housing. To clarify, it is not only the amount of income that residents have that matters, but the portion of all money that is available for housing. If the price of housing is high, it will offset some of the income people earn; that is, a greater portion of income will be needed for housing. Also, interest rates affect the amount of money that is available for housing because lower interest rates decrease the cost of borrowing allowing more people to afford the same home. Examples of other demand factors include housing prices, rent prices, desirability of a neighborhood, commuting options, and proximity to job opportunities. Types of Housing Demand for homes generally can go up and down, as it can for different types of housing. The various types of housing all have unique characteristics. Let s look at some different types: Single family detached homes are most commonly associated with residential real estate. It is a structure that is situated on land owned by the same owner as the structure.

3 Condominiums are individually owned units in a larger building or complex. Condominiums may include detached homes that share a larger complex with communal facilities, such as a pool or clubhouse. They also have general rules that govern the use of the units and how the complex is managed. These general rules are known as Covenants, Conditions and Restrictions (CC&R). Single family attached homes differ from condominiums since there are usually no association dues. Association dues exist to cover common expenses for communally owned areas, structures, and services. As the name suggests they are attached to other units, sharing a common wall. Housing cooperative is a corporation that owns the real estate and buildings. It is the corporation then sells shares to members who are given the right to live in one of the units. An interesting difference between housing cooperatives and condominiums is that cooperatives select their members through a screening process. Boats and floating homes may or may not have a motor and can be moored permanently to a dock. Also, some will float permanently and others will only float when the water level rises. Manufactured and modular homes are slightly different from one another. Both are prefabricated, meaning large portions (if not all) of the structure are built away from the property in a factory. They are then either transported whole or assembled on site. The difference between them is that manufactured homes have a permanent chassis, allowing the house to be moved as a whole. Multi-family homes are a general category that refers to when multiple residents live in a single building. This includes condominiums and cooperatives. Mixed use homes have retail space below and apartments or condominiums above, signifying the mixed use. Public housing includes property owned by the government. Public housing is meant to provide affordable rentals to eligible families and individuals. Military housing is government owned property designated for use by those serving in the military. With so many types of housing available, brokers will often choose to focus on a few rather than all types of homes. For example, floating homes (houseboats) require special maintenance and inspection prior to purchase. Therefore, some brokers might choose not to sell houseboats because of the time required to learn all of the protocols. It s important to make sure you are well equipped to handle all of the questions clients may pose during the purchase or leasing process.

4 Types of Estates in Land An estate is an interest in real property that currently or in the future may be occupied and/or controlled. While this is a mouthful, an estate is essentially the rights of possession in real property either now or in the future. There are different types of estates that signify the rights of possession, since there are different degrees of ownership interests and possession rights. Estates can be placed in two categories: Freehold Estates Leasehold Estates Freehold Estates A freehold estate is the exclusive right to use and enjoy the possession of land for an indefinite period of time without interference from others. A freehold estate must be land or some interest in land possibly of indefinite duration. There are two types of freehold estates: Fee Simple Fee Simple Absolute Qualified Fee Estate Fee Simple Subject to Condition Subsequent Fee Simple Determinable Life Estate (Pur Autre Vie or Ordinary) Estate in Remainder Estate in Reversion The following diagram summarizes the hierarchy of the types of estates.

5 Fee Simple A fee simple estate represents the highest form of ownership and contains the entire bundle of rights and can be passed on to the heirs. All freehold estates which are able to be passed on to heirs, such as a fee simple estate are classified as an estate of inheritance. It allows for enjoyment not only during the owner's life but carries the right to pass it on to heirs or successors after death. A property owner with a fee simple estate is entitled to full enjoyment of the property, limited only by zoning laws, deed or subdivision restrictions or covenants. A deed is the signed legal document granting ownership. The property is freely inheritable and transferable. The duration of this ownership is not limited and can be passed along in a will to the owner's heirs. While fee simple ownership represents the highest form of ownership, it is still limited by the four basic powers of government: taxation, eminent domain, police power and escheat. Fee simple estates carry with them the right to pass on property to the heirs of the person who died. As mentioned as one of the powers of government, even though a property is owned as a fee simple estate, could be subject to escheat. Escheat is the legal doctrine where real property reverts to the government when a person dies without heirs or a will. Dying without a will is referred to as intestate. Conversely, when a person dies with a will, it is known as testate. Testate and intestate are commonly used phrases in real estate. There are other important vocabulary terms regarding the death of an owner of property, including demise, devise, and descent. Demise is the act of transferring

6 property through a lease or a will. Devise is extremely similar in that it is the act of transferring property by will. If a person dies intestate (without a will), before the property is subject to escheat (reverting to the government), it s ownership will transfer through the law of descent, meaning the property will transfer by inheritance to the heirs of the person who died. It was important to set a base of knowledge for when property is passed on through a will, without a will, and through the laws of descent because the ability to pass property to others after death is a key differentiator in the various types of estates. Moving back to fee simple estate, other names used for fee simple estate are fee and fee simple absolute. When a grantee receives title in fee simple, it is assumed to be a fee simple absolute estate (unconditional). There is also a different type of fee estate besides fee simple absolute, known as a qualified fee estate. Qualified Fee Estates A qualified fee estate is a fee simple estate that is qualified by a condition or event happening. A qualified fee estate is also known as a conditional fee estate or a defeasible fee estate. The owner of a qualified fee estate is subject to the conditions of the estate and therefore termination of their interest. If the event occurs or the condition met, then the interest in the property would revert to the prior owner. Let s look at an example of a qualified fee estate. Example: Aunt Sue grants property to her niece, Mary, so long as Mary attends college. If Mary drops out of college, then the property will automatically revert back to Aunt Sue. Qualified fee estates come in two types: fee simple subject to a condition subsequent and fee simple determinable. The example of Aunt Sue is a case of fee simple determinable. Fee simple determinable ends automatically if a condition is not met. Typically included is the phrase as long as, until, or during. Let s consider one more example of fee simple determinable: Example: John grants an estate to a property to his son Bill during the term of the current President of the United States. When the current President of the United States leaves office, then the property will automatically revert back to John.

7 In contrast, with a fee simple subject to condition subsequent, the estate does not revert back to the grantor automatically if a condition is not met. Instead, the grantor must take action to end the estate. Example: Bonnie grants an estate to Tom on the condition that he continues to raise livestock on the property. If Tom discontinues raising livestock on the property, the property will not automatically revert back to Bonnie unless Bonnie takes action to end the estate. Next, we ll discuss the second type of freehold estate: life estates. Refer to the diagram to check where in the hierarchy each type of estate fits. Life Estates A life estate is an estate for the duration of the lifetime of one or more persons. The duration of the life could be that of the tenant, or it could be the lifetime of another person. A life estate based on a third party is known as pur autre vie. As a result of the estate not being indefinite, it conveys fewer possessory rights than a fee simple estate. The beneficiary of the life estate is the life tenant, who can use and enjoy the property in full until the property is legally transferred at the end of the measuring life. Along with the rights of use and enjoyment, the life tenant is responsible for taxes, insurance, and maintenance of the property. An overlooked right of a life tenant is the ability to rent the property to others. The rent during the time the life tenant has rights to the property are to the benefit of the life tenant not the person granting the life estate. Even though a life tenant has many rights of use and even the ability to lease or rent the property, they must not do anything to devalue the property under the legal doctrine of waste. Waste states a life tenant cannot devalue or damage the asset. Example 1: Person A gives a life estate to Person B based on the life of Person C. B only has a life estate so long as C is alive. (C is the third party.) So, B's life estate interest is current, it is not a future interest. Example 2: Ann conveys a life estate to Paul based on the life of Troy. What is the status of the life estate if Paul dies before Troy? In this question, Paul, or Paul's heirs, would have a life estate to the property so long as Troy was alive. It s pur autre vie, based on the life of another. Life estates convey a property for the lifetime of person, therefore at the end of that life, the estate will be passed to another person. It can be done in two ways: an estate in remainder or an estate in reversion.

8 Estate in Remainder means the grantor of an estate specifies that the property will go to another person (third party) upon the death of the life tenant. The third party is referred to as a remainderman. Example: Brian gave Steve an estate for the term of Steve's life. After Steve's death, the property is then given to Erin. This type of life estate is an estate in remainder. An estate in remainder is when the grantor specifies that a property will go to another person upon the death of the life tenant. Estate in Reversion means the grantor of an estate specifies that the grantor will get the estate back after the life tenant. Example: Brian gave Steve an estate for the term of Erin's life. Upon Erin's passing, Brian regains ownership. This type of life estate is an estate in reversion. An estate in reversion is when the grantor will get back the property after the life of the life tenant where an estate in remainder will convey the property to a third party (remainderman). Following, we ll discuss another type of estates: leasehold estate. Refer to the diagram to check where in the hierarchy each type of estate fits. Leasehold Estates Leasehold estates (also known as non-freehold estates) are considered less than freehold estates because they grant fewer rights. While there is a lot of terminology regarding leasehold estates, it is really just a fancy way of describing the rights conveyed between a renter and the landlord. The person holding the leasehold is referred to as the tenant (lessee), and the owner of the property is considered the landlord (lessor). The lessee doesn t own the property, but has the right to possess the property for a specific period. While the lessee has an interest in the property, they do not own it. The lease itself is considered personal property. There are four different leasehold estates: Estate for Years Periodic Tenancy Estate at Will Estate at Sufferance Estate for Years An estate for years is a lease for a fixed period of time. Unlike what the name might imply, it does not have to be for a period of one year in duration. It can be shorter or

9 longer than one year. The important point is the lease is for a fixed amount of time. Keep in mind that during this lease, the tenant is occupying the property legally. Example: Barry rents a condominium from Dave from Jan. 1 through April 15. Because the term is a fixed amount of time, this is an estate for years. Periodic Tenancy A periodic tenancy is a lease where there is no termination date set. It has a specific lease period, (for instance, one day, one week, or one year) and then continues for similar periods (one day, one week, or one year) until either party gives notice of termination. A periodic lease automatically renews at the end of each period. Example: Jose leases a house on a month-to-month basis from his landlord. At the end of each month, the lease renews itself unless either party gives proper notice to the other party to terminate the lease. Estate at Will An estate at will usually originates after an estate for years or a periodic tenancy has terminated. It may also occur in the absence of a formal lease agreement, and it allows either party to terminate the lease or tenancy at any time given proper notice. Example: Lynn had a lease for one year (an estate for years lease) with her landlord. The one-year lease expired and she is in the process of negotiating a new lease with the landlord. She continues to pay her rent according to the terms of the expired lease during their discussions. This situation is now an estate at will. Estate at Sufferance An estate at sufferance is a lease where the tenant is occupying the property illegally and without the consent of the landlord. Such cases might involve a trespasser or a tenant who has been asked to leave after the lease expired. Even though the tenant s possession is illegal, the landlord must seek legal procedures for eviction. Example: Byron had a lease with his landlord to occupy an apartment with a term from Feb. 1 through July 1. At the end of the term, his landlord gave him proper legal notice to vacate. Byron paid no attention to the notice, stopped paying rent and still occupied the property on Nov. 1. This is an example of an estate at sufferance.

10 Types of Ownership Property can be owned by one person or multiple people. There are various ways it can be owned by multiple people, but let s start by examining the real estate definition of sole ownership. Ownership in Severalty When a property is held by one person or by one legal entity (corporation), this is known as ownership in severalty. The term tenancy in severalty is often used. The origin of the name is derived from severed, because the owner is severed from other owners. The term sole owner is also used to describe this form of ownership. Forms of Co-Ownership (Concurrent Ownership) The title to real property may be held by one person, referred to as ownership in severalty, or it may be held by two or more persons, which is referred to as concurrent ownership. Let s look at some ways that concurrent ownership can be held. Community Property Some states in the western United States use a community property system of ownership. This system is Spanish in origin and is used in Washington state. With this form of ownership, the title must be held by married couples. They each have equal interest in the property. Each spouse must agree on the use and disposition of the property, and the interests cannot be sold separately. Upon death, the surviving spouse retains full interest unless otherwise designated by a legal will. A right of survivorship is what is created when the death of one owner will cause their share to transfer to surviving owners and is a key component to community property. Tenancy by the Entirety Some states that do not have a community property system allow married couples as tenants by the entirety. Both the husband and wife hold an undivided interest in the property and holds a right of survivorship. Again, the couple must be married. A tenant by the entireties cannot convey their interest without the consent of the other tenant. Joint Tenancy Joint tenancy can occur when two or more individuals purchase property together. Their ownership must be equal. All owners must agree on the use and disposition

11 (transfer) of the property. The key feature of joint tenancy is the right of survivorship. The survivor(s) are the other owners in the property, or, the joint tenants. The property doesn t pass to the heirs of the party who dies, but to the other tenants. To create a joint tenancy, the following four unities of title must exist: Unity of Interest Each joint tenant has an equal interest in the property. Unity of Title Each joint tenant received the property through the same deed or will. Unity of Time The deed was executed at a single time. Unity of Possession Each joint tenant is entitled to an undivided possession of the property. Since the title passes directly to other joint tenants upon death, the property cannot be willed. One advantage to this form is avoiding the cost and delay of probate proceeding, while a disadvantage is giving up the right to convey the property by will. A probate proceeding is the process of having a personal representative distribute a deceased person s assets according to their will. Example: Betty, Hong, Bob and Sue own property as joint tenants. Betty dies. Now Hong, Bob and Sue own the property. Betty s heirs have no claim to the property. Tenancy in Common In tenancy in common, two or more individuals have an undivided interest in a property. Each tenant in common has a right to share possession of the whole property, not just a part it (unity of possession). Tenants in common may have equal or unequal interests in the property. Let s look at an example of tenancy in common. Example: Jane, Barbara, Susan and Annette wish to purchase a property. Annette has twice the funds available for the purchase than Jane, Barbara or Susan. Since Annette is investing twice the dollar amount of the others, she would like to have a greater interest in the property. Tenancy in common vesting will allow Annette to own a larger percentage interest in the property. Tenants in common may deed their interest to someone else and do not need the consent of the other tenants. They may also mortgage their interest without the consent of the other tenants. Upon death, the individual s interest passes to their designated

12 heir(s). Therefore, tenancy in common provides flexibility because it allows owners to own different percentages of the property, and allows them to sell or pass on their share to heirs. Owners can terminate a tenancy in common through legal action called a partition suit. Usually the partition occurs when there is a dispute over the real property. Since property is extremely difficult to divide, its common for a court to order one of the co-owners to buy out the others. Dower and Curtesy The following section covers two old laws designed to give a certain percentage of a person's estate to their surviving spouse. Also included is popular real estate ownership tactic designed to avoid the courts in the event of death. Dower Under English common law and in colonial America, dower was the share of a deceased husband's real estate to which his widow was entitled after his death. After the widow's death, the real estate was then inherited as designated in her deceased husband's will; she had no rights to sell or bequeath the property independently. She did have rights to income from the dower during her lifetime, including rents and income from crops grown on the land. By default, a widow was entitled to one-third of her late husband's real property, unless the husband increased the share in his will. At times when a mortgage or other debts were greater than the value of real estate and other property at the husband's death, dower rights meant that the estate could not be settled and the property could not be sold until the widow's death. In the eighteenth and nineteenth centuries, increasingly, dower rights were ignored in order to settle estates more quickly, especially when mortgages or debts were involved. In 1945 in the United States, a federal law abolished dower, though in most states, one-third of a husband's estate is awarded to a widow automatically if he dies intestate. Some laws limit the rights of a husband to bequeath less than a one-third share to his widow except in prescribed circumstances.

13 Curtesy Curtesy is essentially the same system as dower in reverse, giving the husband a percentage share of his wife's estate. However, dower and curtesy have generally become obsolete in the modern world. Laws of descent, distribution, divorce, use of joint tenancies, tenancies-in-common, and tenancies by the entirety have largely made it unnecessary to be concerned with the surviving spouse being left with no part of the marital property. Land Trusts A land trust is an agreement where one party (the trustee) agrees to hold ownership of a piece of real property for the benefit of another party (the beneficiary). Land trusts are used to keep their real estate ownership private, avoid probate (the legal process of settling an estate) and provide several other benefits. Corporations sometimes set up land trusts when they want to compile large pieces of land without arousing suspicion or alerting people to their plans (which could cause the asking price to rise). For example, the land for Walt Disney World near Orlando, Florida was put together by using many land trusts to buy smaller pieces of land. Individuals use land trusts for privacy and to avoid probate. A person s bank balance or stock investments are usually private. However, anyone with an Internet connection can look up a person's real estate holdings through public records. A person who has injured another person often becomes a target for a lawsuit in any real estate investment. To avoid this, many investors buy their properties through land trusts so that their names do not appear in the public records. The land trust also allows the property to immediately pass to the owner's heirs at death, rather than go through a time-consuming and costly probate process. Business Ownership of Real Property It s not always individuals who own or rent property. Businesses are constantly dealing in real estate and are organized in different ways. Below we summarize the major forms of businesses we see in real estate, which are: partnerships, joint ventures, corporations, cooperatives, condominiums, syndicates, and real estate investment trusts.

14 Partnerships A partnership is the association of two or more individuals doing business as co-owners. There are two types of partnerships: General partnership Limited partnership In a general partnership, all partners share in the profits and management of the assets of the partnership. Each partner has an equal share in the partnership, unless stated otherwise. Each partner is an agent for the partnership, so the acts of one partner are binding on the entire partnership (e.g. when one partner signs a legal document). Each partner also has a fiduciary relationship, which requires that all partners act with good faith toward one another. Real property can be acquired under the name of the partnership or by one or more of the partners. The partnership is formed by a contract. While this contract is not required to be in writing, it is prudent to have a written contract to identify all of the terms of the agreement. In the absence of a written agreement, the partnership will be governed by the terms of the Uniform Partnership Act of Washington State. A limited partnership will have one or more general partners and one or more limited partners. The general partners have unlimited liability (e.g. their personal assets can be seized to satisfy debts) for the partnership s obligations and debts and have the right to manage the business. On the other hand, the limited partners have no liability for partnership obligations and debts and cannot make management decisions. The limited partnership agreement must be in writing and conform to the requirements of the Uniform Limited Partnership Act. General and limited partnerships are different in the amount of responsibility assigned to each partner. While a general partnership infers active management and decision making by the partners, a limited partner is a passive investor who doesn t take part in decision making, but would share in the firm's profits. Joint Ventures A joint venture is a contractual business arrangement between two or more parties. It is similar to a business partnership, with one important difference: a partnership generally involves an ongoing, long-term business relationship, whereas a joint venture is based on a single business transaction. Individuals or companies choose to enter joint ventures in order to share their strengths, minimize risks, and increase their competitive

15 advantages in the business world. Joint ventures can be distinct business units (e.g. Hulu is a joint venture between NBCUniversal, Fox, and ABC) or collaborations between businesses. In collaboration, for example, a high technology firm may contract with a manufacturer to bring its idea for a product to the marketplace. The former provides the know-how, and the latter provides the means to carry out the idea. The chief concern with joint ventures is that they can restrict competition, especially when they are formed by businesses that are otherwise competitors or potential competitors. Regulators at the Justice Department and the Federal Trade Commission routinely evaluate joint ventures for violations of antitrust laws. Corporations A corporation is owned by individual shareholders who purchase stock in the company. The corporation itself is legally a separate entity from the shareholders and by law is known as an artificial person. The corporation can own property, enter into contracts and incur debt and liability just like a natural person. A corporation is the most common form of a business. The process of becoming a corporation, called incorporation, gives the company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued (a condition known as limited liability). The fact that the owners have limited liability is one of the main advantages of this form of business. Another advantage includes the issuance of shares of easily transferable stock. Corporations of course also have disadvantages. Most notably, they are subject to double taxation. They are first taxed on any profits. Then, if the profits are distributed to the shareholders in the form of dividends, the same profits are taxed again as personal income for the shareholders. When referring to companies formed under the laws of the United States, the term domestic corporation is used. Conversely, a company formed outside of the United States is a foreign corporation. If a foreign corporation wants to conduct business in Washington they must get approval from the Washington Secretary of State. Cooperatives A housing cooperative is formed when people join together to own or control the housing and/or related community facilities in which they live. Usually they do this by forming a not-for-profit cooperative corporation. Each month they simply pay an amount that covers their share of the operating expenses. Personal income tax deductions,

16 lower turnover rates, lower real estate tax assessments (in some local areas), controlled maintenance costs and resident participation and control are some of the benefits of choosing a cooperative (or, simply co-op ). The main distinction between a housing co-op and other forms of home ownership is that in a housing co-op, you don't directly own real estate. But if you don't own real estate, what exactly are you buying? You are buying shares or a membership in a cooperative housing corporation. The corporation itself owns or leases the real estate. As part of your membership (being a shareholder) in the cooperative, you have an exclusive right to live in a specific unit (which is established through an occupancy agreement or proprietary lease) for as long as you are a member, provided you don't break any of the rules or regulations of the cooperative. As part of your membership, you also have a vote in the affairs of the cooperative s corporation. There are three different types of housing cooperatives as far as equity is concerned. Market rate housing cooperatives Limited equity housing cooperatives Leasing cooperatives (or zero equity cooperatives) In a market-rate housing cooperative, a person can buy or sell a membership or shares at whatever price the market will bear. In this way, purchase prices and equity accumulation are very similar to condominium or single family ownership. In a limited-equity housing cooperative (LEC) there are restrictions (most commonly maximum prices) on what outgoing members can get from selling their shares. The restrictions are usually imposed because the co-op's members benefit from features that make the housing more affordable to both the initial and future residents for a specified period of time. For example, mortgage loans that offer lower than normal interest rates, grants, and real estate tax abatement (tax reduction). In some co-ops, these limitations are voluntarily imposed by the members. These restrictions are usually found in the cooperative's bylaws. The documents may also establish limits on income for new members so the co-op can target the special benefits of the housing to families who need them the most. In a leasing cooperative, the cooperative corporation leases the property from an outside investor, which is often a nonprofit corporation that is set up specifically for this purpose. Since the cooperative corporation does not own any real estate, the cooperative is not in a position to build up any equity (just as a tenant doesn't build any

17 equity). However, as a corporation, the cooperative is often in a position to buy the property if it comes up for sale at which point they may convert it to a market rate or limited-equity cooperative. Some leasing cooperatives allow outgoing members to take with them at least part of their share of the cash reserves that were built up by the cooperative corporation while they were in occupancy. Condominiums A condominium is one of a group of housing units where each homeowner owns their individual unit, and each dwelling shares ownership of the areas of common use. The individual units normally share walls, but this isn't a requirement, detached condominiums exist where an individual owns the lot their unit is built on. However, we ll focus our remaining discussion on non-detached condominiums. The main difference between condos and single family homes is that there is no individual ownership of common areas. All of the land in the condominium project is usually owned collectively by the homeowners. The legal definition of condominium is: The absolute ownership of a unit based on a legal description of the airspace the unit actually occupies, plus an undivided interest in the ownership of the common elements, which are owned jointly with the other condominium unit owners. The common elements can be undivided or limited in nature. A common element would be a rooftop deck for all owners and a limited common element would be something assigned to the unit owner such as a storage space. Condo projects that are built as multi-story apartments are usually recognizable as condos because they don't have land under each unit. Each condo project will form a condo association to make decisions about the expenditures for repairs, handle administrative work and manage the common areas of the project. The association normally maintains the exterior of the building and common grounds, but does not maintain the interiors of the units. The maintenance and potential replacement of shared property is taken out of monthly homeowner dues, which is a fee to support the maintenance of the common areas. The association typically holds an insurance policy to cover the jointly owned parts of the property, while the individual owners carry insurance for the interior components of their unit. In a condominium, the owner has individual title (ownership) to the inside space of his/her unit. Sometimes the ownership of a condominium is described as beginning with the paint on the walls. Because the owners jointly own common areas, they have an undivided interest in them - for example, the physical components of the buildings and the land.

18 While some condo projects look like lofts or apartments, others may look like duplexes, garden homes or residences on regular lots. It is possible that a condominium may just be two units of a duplex. In this case, the two owners may jointly make decisions concerning maintenance of any common areas. By setting up the units of a duplex as two condos, the owner is able to sell them separately to two different owners. Generally, creating a condo development allows the developer to get a greater number of homes in a given area approved by the city or county than he/she would with single ownership lots. This is usually the reason why a condo development is chosen over the single ownership of lots. Many times, an owner of apartment buildings will convert the apartments into condominiums. There are regulations regarding this conversion process to help protect the existing tenants who may be displaced. Syndicates A different form of investment vehicle is known as a syndicate. In its simplest definition, a syndicate is an organization that allows two or more investors to participate in the ownership of an interest in real estate. More broadly, the term syndicate is used in conjunction with many types of assets including oil and gas exploration, and livestock and agricultural development, to name a few. In a syndicate, the real estate asset is divided into two or more investment units, which are acquired by the individual investors. It is important to realize that the investment unit refers to the particular asset that is acquired by the investors, and not the underlying real property itself. The precise nature of the investment unit will depend on the form of the syndicate. In essence, investment units represent a fractionalized ownership of one or more interests in real property rather than direct ownership of an entire interest. It gives individual owners the opportunity to own a part of a much larger project that would otherwise be inaccessible without pooling their funds with other individuals in a syndicate. A syndicate may be organized as a: Partnership Corporation Limited Liability Company Joint Venture Trust

19 Real Estate Investment Trusts (REIT) A REIT is a company that buys, develops, manages, and sells real estate assets and ownership of the REIT is usually traded on the public stock market. REITs allow participants to invest in a professionally managed portfolio of real estate properties. REITs qualify as pass-through entities, which are companies that are able distribute the majority of profit to investors without being taxed at the corporate level (provided that certain conditions are met). Another major advantage of investing in a REIT is its liquidity (ease of turning assets into cash), as compared to traditional private real estate ownership where it is not very easy to liquidate. One reason for the liquid nature of REIT investments is that its shares are primarily traded on major stock exchanges, making it easier to buy and sell REIT shares than to buy and sell properties in private markets. Timeshares Condominiums can be sold to allow occupancy for a specified period of time rather than purchasing an entire unit or a part ownership, which is a timeshare. Most often properties that are timeshares are located in vacation hotspots where tourists come and go often, and they include things like pools tennis courts and other vacation amenities. As an example, a property in a resort on the beach will sell the right to occupy one of the two bedroom units for one week a year during a specified time (e.g. August 1-15). Because timeshares allow people to purchase rights to occupancy real property it is regulated by the state of Washington. A person can sell timeshares in Washington without a real estate license, but they need to be registered as a timeshare salesperson. They have similar unprofessional conduct rules to real estate brokers to protect consumers and also must pay registration fees to the department of licensing. Real estate brokers and managing brokers are exempt from registration as a timeshare salesperson. Just like real estate purchases, it is required that timeshares provide disclosures to purchasers. There is a legally required period of 7 days that the purchaser must be allowed to review the disclosure document. The purchaser is supposed to receive the disclosure prior to signing any agreement, but if they do not, the agreement is voidable by the purchaser until the disclosure is delivered and up to 7 days after. It is important to note that the purchaser may void the timeshare agreement up to 7 days after signing the agreement or receiving the disclosure statement, whichever is later.

20 Forms of Ownership Key Terms Estate - An estate is an interest in real property that currently or in the future may be occupied and/or controlled. While this is a mouthful, an estate is essentially the rights of possession in real property either now or in the future. Freehold Estate - A freehold estate is the exclusive right to use and enjoy the possession of land for an indefinite period of time without interference from others. A freehold estate must be land or some interest in land possibly of indefinite duration. Fee Simple - A fee simple estate represents the highest form of ownership and contains the entire bundle of rights and can be passed on to the heirs. Zoning - is governmental policy that determines what can be built where. Lots - are a piece/parcel of land. Estate of Inheritance - All freehold estates which are able to be passed on to heirs, such as a fee simple estate are classified as an estate of inheritance. It allows for enjoyment not only during the owner's life but carries the right to pass it on to heirs or successors after death. Deed - is the signed legal document granting ownership. Qualified Fee Estates - A qualified fee estate is a fee simple estate that is qualified by a condition or event happening. Fee Simple Determinable - An estate that reverts to the grantor which is terminated when a condition or event happens. Fee Simple Subject to Condition Subsequent - An estate which can revert to the grantor at the grantor s option, after a condition or event happens. Life Estates - A life estate is an estate for the duration of the lifetime of one or more persons. The duration of the life could be that of the tenant, or it could be the lifetime of another person. A life estate based on a third party is known as pur autre vie.

21 Single Family Detached Homes - are most commonly associated with residential real estate. It is a structure that is situated on land owned by the same owner as the structure. Condominiums - are individually owned units in a larger building or complex. Condominiums may include detached homes that share a larger complex with communal facilities, such as a pool or clubhouse. They also have general rules that govern the use of the units and how the complex is managed. These general rules are known as Covenants, Conditions and Restrictions (CC&R). Single Family Attached Homes - differ from condominiums since there are usually no association dues. Association dues exist to cover common expenses for communally owned areas, structures, and services. As the name suggests they are attached to other units, sharing a common wall. Housing Cooperative - is a corporation that owns the real estate and buildings. It is the corporation then sells shares to members who are given the right to live in one of the units. An interesting difference between housing cooperatives and condominiums is that cooperatives select their members through a screening process. Boats and Floating Homes - may or may not have a motor and can be moored permanently to a dock. Also, some will float permanently and others will only float when the water level rises. Manufactured and Modular Homes - are slightly different from one another. Both are prefabricated, meaning large portions (if not all) of the structure are built away from the property in a factory. They are then either transported whole or assembled on site. The difference between them is that manufactured homes have a permanent chassis, allowing the house to be moved as a whole. Multi-Family Homes - are a general category that refers to when multiple residents live in a single building. This includes condominiums and cooperatives. Mixed use Homes - have retail space below and apartments or condominiums above, signifying the mixed use. Public Housing - includes property owned by the government. Public housing is meant to provide affordable rentals to eligible families and individuals.

22 Military Housing - is government owned property designated for use by those serving in the \

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