Modern Real Estate Practice in Pennsylvania 12th Edition Chapter 7: Forms of Real Estate Ownership

7Forms of Real Estate Ownership Learning objectives –Identify the four basic forms of co-ownership –Describe the ways in which various business organizations may own property –Explain how a tenancy in common, joint tenancy, and tenancy by the entirety are created, and how they may be terminated –Distinguish cooperative ownership from condominium ownership –Define key terms 2 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Forms of ownership –Severalty –Co-ownership –In trust 3 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Forms of co-ownership –Tenancy in common –Joint tenancy Four unities: possession, interest, time, title Partition –Tenancy by the entirety Married couples only –Community property Married couples only Community property versus separate property 4 ©2012 Kaplan, Inc.

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Co-ownership –Title held by two or more persons Tenancy in common Joint tenancy Tenancy by the entireties Community property Characteristics do not affect use or occupation of the property Differences arise: alienation (disposition, or conveyance) 8 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Tenancy in common –Ownership by two or more Undivided fractional interest Owners have unity of possession, not interest Ownership interest, not property, is divided –Can be equal or unequal interest –Can sell, convey, mortgage, transfer without approval –At death, ownership interest passes to devisee PA Reg — two or more owners, unless married, are tenants in common 9 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Figure 7.1 ©2012 Kaplan, Inc. 10

7Forms of Real Estate Ownership In Pennsylvania –Tenancy in common If deed does not stipulate tenancy, two or more owners become tenants in common Unless conveyance is made to husband and wife (tenants by the entirety) 11 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Joint tenancy –Unity of Possession — undivided right to possession –Unity of Interest — equal ownership interests –Unity of Time — acquire interest at the same time –Unity of Title — acquire interest by the same document 12 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Creation –Title acquired by one document or deed –Deed executed and delivered at one time Deed conveys equal interests to all parties Parties hold undivided possession of property 13 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Figure 7.2 ©2012 Kaplan, Inc. 14

7Forms of Real Estate Ownership Joint tenancy with right of survivorship –Surviving tenants acquire the interest of a deceased tenant. –Joint tenancy continues until one owner remains in severalty. 15 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership In Pennsylvania –Transfer is automatic at death (supersedes a will) –Right of survivorship must be clearly stated –A and B as joint tenants WROS, not as TIC –Otherwise, treated as tenants in common 16 ©2012 Kaplan, Inc.

Joint Tenancy - Survivorship Figure 7.3 ©2012 Kaplan, Inc. 17

7Forms of Real Estate Ownership Terminating joint tenancy –Can be terminated by operation of law Bankruptcy Foreclosure –Creation of a mortgage by a participant 18 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Termination of co-ownership –Partition suit Legal way to dissolve partnership when parties do not dissolve voluntarily Will try to physically divide Otherwise, must be sold Used with JT-WROS and T-I-C 19 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership In Pennsylvania –Tenancy by the entirety Special form of joint tenancy between spouses recognized in PA Automatically created when owners are husband and wife Inherent right of survivorship Both must sign documents to convey property 20 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Termination of tenancy by the entirety –Husband and wife control ownership, transfer, indebtedness as a unit –Cannot encumber or convey individual interest –Automatic ownership at death of spouse Also can be terminated by the following: –Agreement (execution of a new deed) –Divorce (creates a T-I-C) –Court-ordered sale 21 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Tenancy by the entirety –May be terminated by J’s DAD: –Judgment sale (tenancy dissolved) –Death (survivor inherits in severalty) –Agreement (execute a new deed) –Divorce (parties become tenants in common) 22 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership In Practice: can combine interests One building can be as follows: –Split as T-I-C A couple owns half as tenants in the entirety Two, unmarried people own as joint tenants on the other half –Interests can vary 23 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership PA does not recognize community property –Marriage composed of equal partners — community property states –In PA, a marriage consists of one entity With community property –Separate property: owned by one spouse before a marriage, includes gifts and inheritances during marriage — only one signature required (PA) –Community property is that which both spouses acquired during the marriage (both must sign) On death, half owned by other spouse Other half distributed according to will 24 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership In practice –One form of ownership may be more advantageous than another. –Type of ownership has significant legal and estate planning implications. –Only an attorney should give legal advice on these matters. 25 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Ahem... a poem: –Tenants in common are left to heirs, And only they can have unequal shares. –Thalia DeLong, 10/05 Joint tenants: usually an emotional tie Tenants in common: usually a business or friendship relationship 26 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Trusts: One person transfers ownership to someone else for the benefit of a third person. –Trustor (known as settlor in Pennsylvania): the person who creates the trust –Trustee: the owner and manager of the property for the beneficiary; has a fiduciary responsibility –Beneficiary: the person who receives the benefits of the trust 27 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Purposes of trusts: –College education –Prevent unanticipated use of funds –Preserve anonymity of real estate purchasers Settlor (trustor) can be the following: –Person or entity –Trust company –REIT (real estate investment trust) 28 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Types of trusts –Living Trusts — agreement during property owner’s lifetime –Testamentary Trusts — agreement by will after property owner’s death –Settlor (trustor) conveys property to trustee to care for asset(s) Trustee is compensated Beneficiary is cared for by trustee 29 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Land trusts –PA permits the creation of land trusts –Real estate is only asset –Title conveyed to trustee, benefits to beneficiary –Public records do not usually name the beneficiary (used for secrecy) –Beneficial interest can be transferred by assignment –Property pledged as security without mortgage 30 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Trust deeds –Deed in trust — creation of a living, testamentary, or land trust –Deed of trust — financing document similar to a mortgage –Terms are not interchangeable 31 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Ownership of real estate by business organizations –Partnerships –Corporations –Limited liability companies (LLC) –Syndications 32 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Concept of ownership –Different forms of ownership for business purposes: Ownership by the entity itself Ownership directly by its members Legal implications for taxes and securities Legal, tax, and securities advisors play an important role on developing effective methods of ownership 33 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Partnerships –Association of two or more business co-owners who share in the business’s profits and losses 34 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership General partnership –All partners participate in management –May be held personally liable for losses –Even beyond their initial investment 35 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Limited partnership –Includes general and limited partners –General partner runs the business –Limited partners do not manage the business Each liable for only to the extent of individual investment Allows investment with smaller amounts of capital Popular method of organizing investors in real estate projects 36 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership In Pennsylvania –Common law says that partnerships can’t own real estate –In PA, under the Uniform Partnership Act, partnerships can own real estate –Likewise, under the Uniform Limited Partnership Act, limited partnerships can own real estate –Creates different tax situations for each partner 37 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Dissolution of general partnership –Unless the partnership agreement makes provisions for the following: Death of partner Withdrawal of partner Bankruptcy of partner Organization continues in most limited partnerships 38 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Corporation –A corporation is a legal entity — a non-natural person Managed by a board of directors Can own real estate Chartered under state law Exists in perpetuity Charter allows or limits purchases of real estate 39 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Corporate activities –Individuals invest by purchasing stock –Stock is personal property –Shareholders have no direct ownership in real estate –Shareholder liability limited to amount of investment Corporate profits usually subject to double taxation unless an S corporation –S corporation Legal entity created to avoid double taxation Profits to shareholders are taxed Profits of S corporation are not 40 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Limited liability company (LLC) –Combines features of a corporation and a partnership, created by the Limited Liability Company Act –Owners are members rather than partners or stockholders –Minimizes the personal liability of a partnership –Offers tax advantages over a corporation for federal taxes 41 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Condos, coops, and time-shares –Ownership alternative to apartment living –Efficient use of scarce building land Lower cost for lot development Less outlay for construction per living unit Savings in maintenance and heating bills Traditional rental system does not satisfy the need to own The terms condominium and cooperative refer to forms of ownership 42 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Condominiums –Condominium ownership –Creation of a condominium –Owning a condominium –Operation and administration –Condominium conversions –Condominium sales 43 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Condominium ownership –Fee simple ownership –Unique ownership characteristics –Created under Horizontal Property Acts –Full ownership of the layer of airspace –TIC ownership of the common areas Can be for any type of real estate, not just residential Town house: distinguish between the architectural style and ownership form 44 ©2012 Kaplan, Inc.

Condominium Ownership Figure 7.5 ©2012 Kaplan, Inc. 45

7Forms of Real Estate Ownership Condominium ownership –Common area Common elements: land, courtyards, hallways, lobbies, elevators, etc. Can include: pool, recreation area, golf course, tennis court Owned in form of tenants in common (no right to partition) 46 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Condominium is a form of ownership Architecture can be as follows: –Highrises –Town houses –Patio homes –Garden apartments –Single detached houses Be sure to recognize if the property is a town house (separately-owned lots) or a condominium Not limited to residential dwellings: commercial, office, parking condos 47 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Creation of a Condominium in Pennsylvania Uniform Condominium Act (federal) Owner must execute and record a declaration of condominium: –Legal description of units and common elements –Bylaws governing operation of owner’s association –Survey –Drawings and legal descriptions of each unit –Restrictive covenants controlling ownership ©2012 Kaplan, Inc. 48

7Forms of Real Estate Ownership Condominium ownership –Deed conveys fee simple ownership of the living unit and proportionate undivided interest in the common areas –Title held by one or more in severalty, by the entirety, as joint tenants, or as tenants in common –Owners can sell (association may reserve right of first refusal), lease, give it away, or leave it to heirs Each unit is a financial entity –Receives an individual tax bill –Foreclosure of adjoining unit has no impact on other units ©2012 Kaplan, Inc. 49

7Forms of Real Estate Ownership Condo operation and administration –By-laws create an association (of unit owners) to manage the condominium: –Maintain, repair, and clean common elements –Enforce by-laws (aka, covenants, conditions, and restrictions — CC&Rs) –Maintain insurance (fire, extended coverage, liability) Governed by board of directors (elected) –Administers bylaws following Uniform Condominium Act) –Manages finances –Can hire professional management company ©2012 Kaplan, Inc. 50

7Forms of Real Estate Ownership Condominium fees –Unit owners responsible for common elements –Association collects funds for maintenance and special assessments –Fees may be collected monthly, quarterly, or annually –Fees may vary based on size of unit –Unpaid fees may become a lien against a unit or can even be enforced by foreclosure 51 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Condominium assessments –Special assessments may be required for repairs or maintenance: Major repair Capital improvement New roof or recreational facilities –Larger units pay larger assessments –Unpaid assessments can become a lien 52 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Uniform Condominium Act of PA –Changes made in January 2005 –Affected: Governance by boards of directors Management and operation Collection of fees and assessments Buyers must be aware of HOA CC&Rs 53 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership In Pennsylvania Condominium Conversions –Rental property can be transferred to condos –Existing tenants have some protection: Must be properly informed Given ample time to consider purchase Allowed to remain as tenants for a period of time (protects leases and rents) 54 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership In Pennsylvania: Condominium Sales –PA Uniform Condominium Act requires that buyers be informed about fees and restrictions –Must receive public offering statement 15 days before sales contract is signed (or receive 15 days to review after receipt) –Fines up to $2,000 (5 percent) 55 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Condo conversion –New owners must get two-year warranty against structural defects –Must receive report from independent architect or engineer detailing age and condition of property Unit sales: existing condominiums –Owner must provide prospective purchaser with a resale certificate and condominium documents. –Buyer can void AOS within five days after receiving certificate. 56 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Cooperative ownership –Title is held by a corporation –Corporation offers shares of stocks for sale (pieces of paper granting access to a unit) –Create proprietary lease (personal property) 57 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Cooperative management –Determined by corporation’s bylaws –Ownership requires –Commitment to abide to bylaws –Transfer of shares –Board of directors may reserve right to approve a shareholder Tenant-owner may be required to sell shares back at original price (corporation benefits from profits) 58 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Cooperative operation –Tenant responsible for paying the mortgage on the cooperative –Payment to maintenance and repair of common areas –Insurance policies (liability, fire, etc.) Collected through monthly fees 59 ©2012 Kaplan, Inc.

7Forms of Real Estate Ownership Time-share interests –Fee simple interest in time-share estate (real) –Right to use a time-share use (personal) Purchaser receives the right to occupy a certain unit for a specified time frame each year (one week being the most common) Timeshares have special PA license (30 hours, 30 days, no test) Campgrounds have special PA license (15 hours, 30 days, no test) 60 ©2012 Kaplan, Inc.