DISCLAIMER: Copyright: 2014

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1 DISCLAIMER: This publication is intended for EDUCATIONAL purposes only. The information contained herein is subject to change with no notice, and while a great deal of care has been taken to provide accurate and current information, UBC, their affiliates, authors, editors and staff (collectively, the "UBC Group") makes no claims, representations, or warranties as to accuracy, completeness, usefulness or adequacy of any of the information contained herein. Under no circumstances shall the UBC Group be liable for any losses or damages whatsoever, whether in contract, tort or otherwise, from the use of, or reliance on, the information contained herein. Further, the general principles and conclusions presented in this text are subject to local, provincial, and federal laws and regulations, court cases, and any revisions of the same. This publication is sold for educational purposes only and is not intended to provide, and does not constitute, legal, accounting, or other professional advice. Professional advice should be consulted regarding every specific circumstance before acting on the information presented in these materials. Copyright: 2014 by the UBC Real Estate Division, Sauder School of Business, The University of British Columbia. Printed in Canada. ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced, transcribed, modified, distributed, republished, or used in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, web distribution, or used in any information storage and retrieval system without the prior written permission of the publisher.

2 CHAPTER 6 REAL PROPERTY OWNERSHIP AND INTERESTS THE BUNDLE OF RIGHTS FEE SIMPLE IN THEORY AND IN PRACTICE The complexity of real property ownership in Canada today suggests that a true fee simple interest seldom exists because nearly all properties are encumbered to some degree by easements, reservations, or private restrictions. Although most appraisers define the interest being appraised as a fee simple interest, once a lease or a mortgage creates a partial interest, the fee simple interest becomes largely theoretical. Even so, many assignments call for the valuation of the fee simple interest.

3 6.2 The Appraisal of Real Estate Third Canadian Edition Figure 6.1 The Bundle of Rights Right to Sell Right to Bequest Right to Transfer Right to Lease Right to Occupy partial interest Divided or undivided rights in real estate that represent less than the whole. divided interest An interest in part of a whole property, e.g., a lessee's interest. undivided interest Fractional ownership without physical division into shares, e.g., a joint tenant or tenant in common. PARTIAL INTERESTS IN REAL PROPERTY

4 Chapter 6 Real Property Ownership and Interests 6.3 Figure 6.2 Interests Created by Real Property Ownership Forms of ownership interests held by individuals or entities include individual corporations/ shareholders partnerships/ partners tenants in common joint tenants who can own financial interests as an equity position or a debt position, collateralized by a mortgage pledge of specific property in an identified legal estate from which economic benefits derive Indeterminate Duration Defined Duration Freehold Includes a Future Interest or Possession Leasehold Estate for Years Fee Simple Estate Life Estate Estate from Period to Period Estate at Will Fee Simple Absolute Fee Simple Defeasible Leased Fee Interest Estate at Sufferance Economic Interests

5 6.4 The Appraisal of Real Estate Third Canadian Edition Leased Fee Interests Leases specify the rights of the lessor (e.g., to collect rent, to repossess the property upon lease expiration, to dispose of the property through sale or transfer) and the rights of the lessee (e.g., to use, occupy, improve, and sublease the property). Leasehold Interests fee simple interest Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, expropriation, police power, and escheat. leased fee interest The ownership interest held by the lessor, which includes the right to the contract rent specified in the lease plus the reversionary right when the lease expires. leasehold interest The right held by the lessee to use and occupy real estate for a stated term and under the conditions specified in the lease.

6 Chapter 6 Real Property Ownership and Interests 6.5 Subleasehold or Sandwich Interests Legal Interests sublease An agreement in which the lessee in a prior lease conveys the right of use and occupancy of a property to another, the sublessee, for a specific period of time, which may or may not be coterminous (expire at the same time) with the underlying lease term. sandwich lease A lease in which an intermediate, or sandwich, leaseholder is the lessee of one party and the lessor of another. The owner of the sandwich lease is neither the fee owner nor the user of the property; he or she may be a leaseholder in a chain of leases, excluding the ultimate sublessee.

7 6.6 The Appraisal of Real Estate Third Canadian Edition Figure 6.3 Sandwich Position in a Sublease Transaction Sandwich Position Lessor 1 (Original Landlord) Lessee 1/Lessor 2 (Original Tenant/Sublessor) Lessee 2 (Sublessee) Right of use and occupancy Right of use and occupancy Right of use and occupancy Compensation in the form of rent Compensation in the form of rent Compensation in the form of rent Leased Fee Interest Sandwich Leasehold Interest Subleasehold Interest Life Estates

8 Chapter 6 Real Property Ownership and Interests 6.7 Easements life tenant One who owns an estate in real property for his or her own lifetime, the lifetime of another person, or an indefinite period limited by a lifetime. remainder interest A person who is entitled to an estate after a prior estate or interest has expired; also called remainderman or remainder.

9 6.8 The Appraisal of Real Estate Third Canadian Edition easement An interest in real property that transfers use, but not ownership, of a portion of an owner's property. Access or right-of-way easements may be acquired by private parties or public utilities. Governments accept conservation, open space, and preservation easements on private property. easement appurtenant An easement that is attached to, benefits, and passes with the transfer of the dominant estate; runs with the land for the benefit of the dominant estate and continues to burden the servient estate, although such an estate may be transferred to new owners. Transferable Development Rights conservation easement A restriction that limits the future use of a property to preservation, conservation, or wildlife habitat. preservation easement A restriction that prohibits certain physical changes in a historic property; usually based on the property's condition at the time the easement was acquired or immediately after proposed restoration of the property. transferable development right (TDR) A development right that cannot be used by the land owner, or that the owner chooses not to use, but can be sold to land owners in another location; generally used to preserve agricultural land; may also be used to preserve historic sites or buildings and open space or to protect scenic features. TDRs are said to be transferred from a land owner in a sending district to the use of a land owner in a receiving district.

10 Chapter 6 Real Property Ownership and Interests 6.9 Physical Interests

11 6.10 The Appraisal of Real Estate Third Canadian Edition sub-surface rights The rights to the use and profits of the underground portion of a designated property; usually refers to the right to extract coal, minerals, oil, gas, or other hydrocarbon substances as designated in the grant; may include a right of way over designated portions of the surface. air rights The right to undisturbed use and control of designated air space above a specific land area within stated elevations. Such rights may be acquired to construct a building above the land or building of another or to protect the light and air of an existing or proposed structure on an adjoining lot. Financial Interests Equity Interests

12 Chapter 6 Real Property Ownership and Interests 6.11 Mortgage Interests REAL PROPERTY OWNERSHIP Public and Private Ownership

13 6.12 The Appraisal of Real Estate Third Canadian Edition Figure 6.4 Ownership Forms Ownership Entity Private Public Individual Concurrent Ownership Legal Entities Joint Tenancy Tenancy by the Entirety Tenancy in Common Land Trusts Partnerships Corporations Syndications taxation The right of government to raise revenue through assessments on valuable goods, products, and rights. expropriation The right of government to take or modify an individual's property right, especially through eminent domain, the inherent power of a government to take privately owned property, especially land, and convert it to public use, subject to reasonable compensation for the taking. Public Restrictions on Ownership

14 Chapter 6 Real Property Ownership and Interests 6.13 police power The right of government through which property is regulated to protect public safety, health, morals and general welfare. escheat The right of government that gives the state titular ownership of a property when its owner dies without a will or any ascertainable heirs. right of way A privilege to pass over the land of another in some particular path; usually an easement over the land of another; a strip of land used in this way for railroad and highway purposes, for pipelines or pole lines, and for private or public passage. party wall A common wall erected along the boundary between adjoining properties; the respective owners have a common right of use. Private Restrictions on Ownership

15 6.14 The Appraisal of Real Estate Third Canadian Edition FORMS OF OWNERSHIP Concurrent Ownership of Real Property Various tenancy arrangements apply to property ownership by two or more persons. tenancy The holding of property by any form of title. joint tenancy Joint ownership by two or more persons with the right of survivorship. land trust A legal vehicle for partial ownership interests in real property in which independently owned properties are conveyed to a trustee; may be used to assemble land for development or, in some cases, to facilitate the assigning of property as collateral for a loan. Legal Entity Ownership of Real Property Land Trusts

16 Chapter 6 Real Property Ownership and Interests 6.15 Partnerships Stock Corporations partnership A business arrangement in which two or more persons jointly own a business and share in its profits and losses. general partnership An ownership arrangement in which all partners share in investment gains and losses and each has personal and unlimited responsibility for all liabilities. limited partnership An ownership arrangement consisting of general and limited partners. General partners manage the business and assume full liability for partnership debt, while limited partners are passive and liable only to the extent of their own capital contributions.

17 6.16 The Appraisal of Real Estate Third Canadian Edition stock corporation A common legal entity in which investors provide organizational capital by subscribing to shares that represent ownership and a right to all proprietary benefits but are subject to the prior claims of operating expenses and debt service on capital raised by selling bonds, debentures, and other money market instruments. Limited Liability Companies Syndications syndication A private or public partnership that pools funds for the acquisition and development of real estate projects or other business ventures. 1 Rules and 7.10 of Appraisal Standards Rule of CUSPAP require an appraiser identify and analyze timesharing interests arising from real property.

18 Chapter 6 Real Property Ownership and Interests 6.17 Special Forms of Ownership Condominium Ownership Cooperative Ownership condominium ownership A form of fee ownership of separate units or portions of multi-unit buildings that provides for formal filing and recording of a divided interest in real property.

19 6.18 The Appraisal of Real Estate Third Canadian Edition cooperative ownership A form of ownership in which each owner of stock in a cooperative apartment building or housing corporation receives a proprietary lease on a specific apartment and is obligated to pay a monthly maintenance charge that represents the proportionate share of operating expenses and debt service on the underlying mortgage, which is paid by the corporation. This proportionate share is based on the proportion of the total stock owned. Timesharing

20 Chapter 6 Real Property Ownership and Interests 6.19 timesharing Limited ownership interests in, or the rights of use and occupancy of, residential apartments or hotel rooms. There are two forms of timesharing: fee timeshares and nonfee timeshares. Fee timeshares may be based on timeshare ownership or interval ownership. There are three types of nonfee timeshares: a prepaid lease arrangement, a vacation license and a club membership. 2 Under the laws of some provinces, vacation licenses and club memberships are not considered interests in real estate, but personal property.