Legal Aspects of RE - Chpt 3 - Estates and Ownership Flashcards
(95 cards)
1
Q
Fee Simple Estate
A
A freehold estate of potentially unlimited duration is a fee simple estate: an estate limited to the life of the owner is a life estate.
2
Q
Fee Simple Absolute
A
The fee simple absolute estate is a perpetual estate that is not conditioned by stipulated or restricted uses. It may also be freely passed on to heirs. For these reasons, the fee simple absolute estate is the most desirable estate that can be obtained in residential real estate. It is also the most common.
3
Q
Fee Simple Defeasible
A
The defeasible fee estate is perpetual, provided the usage conforms to stated conditions. Essential characteristics are:
the property must be used for a certain purpose, or under certain conditions
if the use changes or if prohibited conditions are present, the estate reverts to the previous grantor of the estate
The three types of fee simple defeasible are determinable, condition subsequent, and executory interest.
Determinable. The deed to the determinable estate states usage limitations. If the restrictions are violated, the estate automatically reverts to the grantor or heirs.
Condition subsequent. If any condition is breached, the previous owner may repossess the property. However, reversion of the estate is not automatic; the grantor must re-take physical possession within a certain time frame.
Executory interest. If a specific condition is violated, the property goes to a third party, not the grantor or heirs.
4
Q
What is meant by the term “undivided interest”?
A
An owner’s interest in a property in which two or more parties share ownership
5
Q
For what reasons might the government or a public utility take private property for public use and what is this called?
A
Some examples would be to widen roadways, easements, or develop a highway. This is called eminent domain.
6
Q
What is the highest form of ownership interest one can acquire in real estate?
A
Fee simple freehold estate
7
Q
What are the two forms of fee simple estate and what do they mean?
A
The fee simple absolute is a perpetual estate that is not conditioned by stipulated or restricted uses.
The defeasible fee estate is perpetual, provided the usage conforms to stated conditions.
8
Q
Ordinary life estate
A
An ordinary life estate ends with the death of the life estate owner and may pass back to the original owners or their heirs (reversion) or to a named third party (remainder).
For example, John King grants a life estate in a property to Mary Brown, to endure over Mary’s lifetime. John establishes that when Mary dies, the property will revert to him.
9
Q
Pur autre vie
A
A pur autre vie life estate endures over the lifetime of a third person, after which the property passes from the tenant holder to the original grantor (reversion) or a third party (remainderman).
For example, Yvonne grants a life estate to Ryan, to endure over the lifetime of Yvonne’s husband Steve. Upon Steve’s death, Yvonne establishes that her mother, Rose, will receive the property.
10
Q
Dower and Curtesy
A
Dower is a wife’s life estate interest in the husband’s property. When the husband dies, the wife can make a claim to portions of the decedent’s property. Curtesy is the identical right enjoyed by the husband in a deceased wife’s property. Property acquired under dower laws is owned by the surviving spouse for the duration of his or her lifetime.
11
Q
Elective Share
A
Elective share is a state-level statute enabling a surviving spouse to make a minimum claim to the deceased spouse’s real and personal property in place of the provisions for such property in the decedent’s will.
For example, if a husband’s will excludes the wife from any property inheritance, the wife may, upon the husband’s death, make the elective share claim.
12
Q
Homestead
A
A homestead is one’s principal residence. Homestead laws protect family members against losing their homes to general creditors attempting to collect on debts. Homestead laws usually exempt all or a portion of one’s homestead from a forced sale in an attempt to collect general debts.
13
Q
Estate for Years
A
The estate for years is a leasehold estate for a definite period of time, with a beginning date and an ending date. The estate for years may endure for any length of term. At the end of the term, the estate automatically terminates, without any requirement of notice.
For example, a landlord grants a tenant a three-year lease. After the three years, the leasehold terminates and the landlord may re-possess the premises, renew the lease, or lease to someone else.
14
Q
Estate from Period-to-Period
A
In an estate from period-to-period, also called a periodic tenancy, the tenancy period automatically renews for an indefinite period of time, subject to timely payment of rent. At the end of a tenancy period, if the landlord accepts another regular payment of rent, the leasehold is considered to be renewed for another period.
For example, a two-year lease expires and the landlord grants a six-month lease that is automatically renewable, provided the monthly rent is received on time. At the end of the six months, the tenant pays, and the landlord accepts another monthly rent payment. The acceptance of the rent automatically extends the leasehold for another six months.
15
Q
Estate at Will
A
The estate at will, also called a tenancy at will, has no definite expiration date and hence no “renewal” cycle. The landlord and tenant agree that the tenancy will have no specified termination date, provided rent is paid on time and other lease conditions are met.
For example, a son leases a house to his father and mother “forever” or until they want to move.
The estate at will is terminated by proper notice, or by the death of either party.
16
Q
Estate at Sufferance
A
In an estate at sufferance, a tenant occupies the premises without consent of the landlord or other legal agreement with the landlord. Usually such an estate involves a tenant who fails to vacate at the expiration of the lease, continuing occupancy without any right to do so.
For example, a tenant violates the provisions of a lease and is evicted. The tenant protests and refuses to leave despite the eviction order.
17
Q
What is a life estate?
A
A freehold estate that is limited in duration to the life of the owner or other named person. Upon the death of the owner or other named individual, the estate passes to the original owner or another named party.
18
Q
What are the major forms of legal life estate?
A
Dower and curtesy
Elective share
Homestead
19
Q
What are leasehold tenants entitled to?
A
They are entitled to possess and use the leased premises during the lease term in the manner prescribed in the lease.
20
Q
What are the four types of leasehold estates and which of the four has no definite expiration date?
A
Estate for Years Estate from Period-to-Period Estate at Will Estate at Sufferance Estate at will has no definite expiration date.
21
Q
Encumbrances
A
An encumbrance is an interest in and right to real property that limits the legal owner’s freehold interest. In effect, an encumbrance is another’s right to use or take possession of a legal owner’s property, or to prevent the legal owner from enjoying the full bundle of rights in the estate.
An encumbrance does not include the right of possession and is therefore a lesser interest than the owner’s freehold interest. For that reason, encumbrances are not considered estates. However, an encumbrance can lead to the owner’s loss of ownership of the property.
Easements and liens are the most common types of encumbrance.
22
Q
Easement
A
An easement, such as a utility easement, enables others to use the property, regardless of the owner’s desires
23
Q
A lien
A
A lien, such as a tax lien, can be placed on the property’s title, thereby restricting the owner’s ability to transfer clear title to another party.
24
Q
Easement Appurtenant
A
An easement appurtenant gives a property owner a right of usage to portions of an adjoining property owned by another party. The property enjoying the usage right is called the dominant tenement, or dominant estate. The property containing the physical easement itself is the servient tenement, since it must serve the easement use.
25
Transfer.
Easement appurtenant rights and obligations automatically transfer with the property upon transfer of either the dominant or servient estate, whether mentioned in the deed or not. For example, John grants Mary the right to share his driveway at any time over a five-year period, and the grant is duly recorded. If Mary sells her property in two years, the easement right transfers to the buyer as part of the estate.
26
Non-exclusive use.
The servient tenement, as well as the dominant tenement, may use the easement area, provided the use does not unreasonably obstruct the dominant use.
27
Easement by Necessity
An easement by necessity is an easement appurtenant granted by a court of law to a property owner because of a circumstance of necessity, most commonly the need for access to a property. Since property cannot be legally landlocked, or without legal access to a public thoroughfare, a court will grant an owner of a landlocked property an easement by necessity over an adjoining property that has access to a thoroughfare. Necessity and not just convenience must be shown when granting an easement by necessity. The landlocked party becomes the dominant tenement, and the property containing the easement is the servient tenement.
28
Party Wall Easement
A party wall is a common wall shared by two separate structures along a property boundary. Party wall agreements generally provide for severalty ownership of half of the wall by each owner, or at least some fraction of the width of the wall. In addition, the agreement grants a negative easement appurtenant to each owner in the other's wall. This is to prevent unlimited use of the wall, in particular, a destructive use that would jeopardize the adjacent property owner's building. The agreement also establishes responsibilities and obligations for maintenance and repair of the wall.
29
Easement in Gross
An easement in gross is apersonal right that one party grants to another to use the grantor's real property. The right does not attach to the grantor's estate. It involves only one property, and, consequently, does not benefit any property owned by the easement owner. There are no dominant or servient estates in an easement ingross. An easement in gross may be personal or commercial.
30
Personal Easement
A personal easement in gross is granted for the grantee's lifetime. The right is irrevocable during this period, but terminates on the grantee's death. It may not be sold, assigned, transferred, or willed. A personal gross easement differs from a license in that the grantor of a license may revoke the usage right.
31
Commercial Easement
A commercial easement in gross is granted to a business entity, rather than a private party. The duration of the commercial easement is not tied to anyone's lifetime. The right may by assigned, transferred, or willed.
Examples of commercial gross easements include:
a marina's right-of-way to a boat ramp
a utility company's right-of-way across a lot owner's property to install and maintain telephone lines
32
Easement Creation - Voluntary
A property owner may create a voluntary easement by express grant in a sale contract, or as a reserved right expressed in a deed.
33
Easement Creation - Necessity
A court decree creates an easement by necessity to provide access to a landlocked property.
34
Easement Creation - Easement by prescription
If someone uses another's property as an easement without permission for a statutory period of time (the period of time in California is 5 years) and under certain conditions, a court order may give the user the easement right by prescription, regardless of the owner's desires.
Note: An easement by prescription cannot be obtained against a state, federal, or local entity.
35
Easements terminate by
express release of the right by the easement holder
merger, as when a dominant tenement acquires the servient property, or vice versa
purposeful abandonment by the dominant tenement
condemnation through eminent domain
change or cessation of the purpose for the easement
destruction of an easement structure, such as a party fence
non-use of an easement by prescription
36
What is an encumbrance?
An interest in and right to real property that limits the legal owner's freehold interest
37
What are the primary differences between an easement appurtenant and an easement in gross?
The easement in gross does not attach to the grantor's estate; it involves only one property, and does not benefit any property owned by the easement owner. The easement appurtenant involves more than one property, transfers when any of the affected properties is transferred, and benefits the property owned by the easement owner.
38
What is an easement by necessity?
An easement appurtenant granted by a court of law to a property owner because of a circumstance of necessity, most commonly the need for access to a property, since property cannot be legally landlocked
39
How are easements created?
By voluntary action, by necessary or prescriptive operation of law, and by government power of eminent domain
40
Liens
The other main type of encumbrance is liens. A lien is a creditor's claim against personal or real property as security for a debt of the property owner. If the owner defaults, the lien gives the creditor the right to force the sale of the property to satisfy the debt. This is what distinguishes a lien from other types of encumbrances. Liens are attached to property because of a debt.
41
Liens have the following legal features:
A lien does not convey ownership, with one exception.
A lienor generally has an equitable interest in the property, but not legal ownership. The exception is a mortgage lien on a property in a title-theory state. In these states, the mortgage transaction conveys legal title to the lender, who holds it until the mortgage obligations are satisfied. During the mortgage loan period, the borrower has equitable title to the property.
A lien attaches to the property.
If the property is transferred, the new owner acquires the lien securing the payment of the debt. In addition, the creditor may take foreclosure action against the new owner for satisfaction of the debt.
A property may be subject to multiple liens.
There may be numerous liens against a particular property. The more liens there are recorded against property, the less secure the collateral is for a creditor, since the total value of all liens may approach or exceed the total value of the property.
A lien terminates on payment of the debt and recording of
Payment of the debt and recording of the appropriate satisfaction documents ordinarily terminate a lien. If a default occurs, a suit for judgment or foreclosure enforces the lien. These actions force the sale of the property.
42
Homestead laws generally provide that:
All or portions of one's homestead are exempt from a forced sale executed for the collection of general debts (judgment liens). The various states place different limits on this exemption.
Tax debts, seller financing debt, debts for home improvement, and mortgage debt are not exempt.
The family must occupy the homestead.
The homestead interest cannot be conveyed by one spouse; both spouses must sign the deed conveying homestead property.
The homestead exemption and restrictions endure over the life of the head of the household, and pass on to children under legal age. State laws define specifically how the interest transfers upon the death of the household head.
Homestead interests in a property are extinguished if the property is sold or abandoned. Abandonment is the discontinued use of the property. If the owner does not intend to use it again as a home, then the rights are extinguished.
In some states the exemption is automatic; in others, homeowners must file for the exemption.
43
Liens not subject to the homestead exemption include the following:
Purchase money on the homestead
Taxes on the homestead
Mechanic's liens for work or services completed on the homestead
Extensions of credit on the homestead (i.e. Home equity loan)
Some reverse mortgages
Debts owed to the federal government
Encumbrance that existed on the property prior to becoming a homestead
Owelty of partition liens, to settle divorce case claims, or death case claims
Child support
Refinancing a lien against the homestead
Manufactured home refinancing
44
What is a lien?
A creditor's claim against personal or real property as security for a debt of the property owner
45
What are four legal features of a lien?
A lien does not convey ownership, with the exception of mortgage liens.
A lien attaches to the property.
A property may be subject to multiple liens.
A lien terminates on payment of the debt and recording of
46
List four types of liens not subject to the homestead exemption.
Purchase money on the homestead
Taxes on the homestead
Debts owed to the federal government
Encumbrance that existed on the property prior to becoming a homestead
47
What additional benefits does a California homeowner gain by recording a homestead declaration?
Protection for voluntary sale of the property
Rebuttable presumption that the homestead is valid
A judgment creditor’s lien attaches only to surplus equity
48
Lien Types - Voluntary and involuntary
Voluntary and involuntary. A property owner may create a voluntary lien to borrow money or some other asset secured by a mortgage. An involuntary lien is one that a legal process places against a property, regardless of the owner's desires.
49
Lien Types - Statutory and equitable
If statutory law imposes an involuntary lien, the lien is a statutory lien. A real estate tax lien is a common example. If court action imposes an involuntary lien, the lien is an equitable lien. An example is a judgment lien placed on a property as security for a money judgment.
50
Lien Types - General and specific
A general lien is one placed against any and all real and personal property owned by a particular debtor. An example is an inheritance tax lien placed against all property owned by the heir. A specific lien attaches to a single item of real or personal property, and does not affect other property owned by the debtor. A conventional mortgage lien is an example, where the property is the only asset attached by the lien.
51
Lien Types - Superior and inferior lien
The category of superior, or senior, liens ranks above the category of inferior, or junior, liens, meaning that superior liens receive first payment from the proceeds of a foreclosure. The superior category includes liens for real estate tax, special assessments, and inheritance tax. Other liens, including income tax liens, are inferior.
52
Real estate tax lien - Superior Lien
The local legal taxing authority annually places a real estate tax lien, also called an ad valorem tax lien, against properties as security for payment of the annual property tax. The amount of a particular lien is based on the taxed property's assessed value and the local tax rate. We’ll discuss specific California property tax considerations on the next page.
53
Special assessment lien - Superior Lien
Local government entities place assessment liens against certain properties to ensure payment for local improvement projects, such as new roads, schools, sewers, or libraries. An assessment lien applies only to properties that are expected to benefit from the municipal improvement.
54
Federal and state inheritance tax liens - Superior Lien
Inheritance tax liens arise from taxes owed by a decedent's estate. The lien amount is determined through probate and attaches to both real and personal property.
55
Federal income tax lien - Junior Lien
placed on a taxpayer's real and personal property for failure to pay income taxes
56
State corporate income tax lien - Junior Lien
filed against corporate property for failure to pay taxes
57
State intangible tax lien - Junior Lien
filed for non-payment of taxes on intangible property
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State corporation franchise tax lien - Junior Lien
filed to ensure collection of fees to do business within a state
59
Judgment Lien
A judgment lien attaches to real and personal property as a result of a money judgment issued by a court in favor of a creditor. An example of a judgment lien would be a court-ordered lien against all real or personal property of a parent who defaults on child support. The creditor may obtain a writ of execution to force the sale of attached property and collect the debt. After paying the debt from the sale proceeds, the debtor may obtain a satisfaction of judgment or release of judgment to clear the title records on other real property that remains unsold.
60
Mechanic’s Lien
A mechanic's lien secures the costs of labor, materials, and supplies incurred in the repair or construction of real property improvements. If a property owner fails to pay for work performed, or materials supplied, a worker or supplier can file a lien to force the sale of the property and collect the debt.
61
What two factors primarily determine lien priority?
(1) the lien's categorization as superior or junior
| (2) the date of recordation of the lien
62
Estate (Ownership) in Severalty
If a single party owns the fee or life estate, the ownership is an estate (ownership) in severalty. Synonyms are sole ownership, and tenancy in severalty. This type of ownership severs or separates from any form of co-ownership.
When the sole owner is a husband or wife, the property is separate property. The owning spouse holds the title separately from his or her spouse.
The estate of a deceased tenant in severalty passes to heirs by probate.
63
Co-ownership
Co-ownership means that a parcel is owned by two or more persons or organizations. Co-owners are called co-tenants. In California there are four types of co-ownership that are recognized:
Tenancy in common
Joint tenancy
Community property
Tenancy in Partnership
64
Living Trust
A living trust allows the trustor, during his or her lifetime, to convey title to a trustee for the benefit of a third party. The trustor charges the trustee with all necessary responsibilities for managing the property, protecting its value, and securing whatever income it may produce. The trustee may also be ordered to sell the property at a given point. The beneficiary receives all income and sales proceeds, net of the trustee's fees.
65
Land Trust
A land trust allows the trustor to convey the fee estate to the trustee and to name himself or herself the beneficiary. The land trust applies only to real property, not to personal property. The agreement, or deed in trust, grants the beneficiary the rights to possess and use the property, and to exercise control over the actions of the trustee.
66
Tenancy in Common
The tenancy in common, also known as the estate in common, is the most common form of co-ownership when the owners are not married. The defining characteristics are:
```
Two or more owners
Identical rights
Interests individually owned
Electable ownership shares
No survivorship
No unity of time
Two or more owners - Any number of people may be co-tenants in a single property.
```
Identical rights - Co-tenants share an indivisible interest in the estate, that is, all have equal rights to possess and use the property subject to the rights of the other co-tenants.
No co-tenant may claim to own any physical portion of the property exclusively. They share what is called undivided possession or unity of possession.
67
Interests individually owned (Tenancy in Common)
All tenants in common have distinct and separable ownership of their respective interests. Co-tenants may sell, encumber, or transfer their interests without hindrance or consent from the other owners. (A co-tenant may not, however, encumber the entire property.)
68
Electable ownership shares (Tenancy in Common)
Tenants in common determine among themselves what share of the estate each party will own. For example, three co-tenants may own 40%, 35%, and 25% interests in a property, respectively. In the absence of stated ownership shares, it is assumed that each has a share equal to that of the others.
69
No survivorship (Tenancy in Common)
A deceased co-tenant's estate passes by probate to the decedent's heirs and devisees rather than to the other tenants in common. Any number of heirs can share in the ownership of the willed tenancy.
70
No unity of time (Tenancy in Common)
It is not necessary for tenants in common to acquire their interests at the same time. A new co-tenant may enter into a pre-existing tenancy in common.
71
Joint Tenancy
In a joint tenancy, two or more persons collectively own a property as if they were a single person. Rights and interests are indivisible and equal. Each has a shared interest in the whole property which cannot be divided up. Joint tenants may only convey their interests to outside parties as tenant-in-common interests. One cannot convey a joint tenant interest.
The defining characteristics and requirements of joint tenancy are:
Unity of ownership - Whereas tenants in common hold separate title to their individual interests, joint tenants together hold a single title to the property.
Equal ownership - Joint tenants own equal shares in the property, without exception. If there are four co-tenants, each owns 25% of the property. If there are ten co-tenants, each owns 10%.
Transfer of interest - A joint tenant may transfer his or her interest in the property to an outside party, but only as a tenancy in common interest. Whoever acquires the interest co-owns the property as a tenant in common with the other joint tenants.
The remaining joint tenants continue to own an undivided interest in the property, less the new cotenant's share.
Survivorship - –In most states, joint tenants enjoy rights of survivorship. That means if a joint tenant dies, all interests and rights pass to the surviving joint tenants free from any claims of creditors or heirs.
The survivorship feature of joint tenancy presents an advantage to tenancy in common, in that interests pass without probate proceedings. On the other hand, joint tenants relinquish any ability to will their interest to parties outside of the tenancy.
72
Creation of Joint Tenancy
To create a joint tenancy, all owners must acquire the property at the same time, use the same deed, acquire equal interests, and share in equal rights of possession. These are referred to as the four unities. The acronym PITT can help you remember them.
Unity of possession - All parties must receive the same rights of possession.
Unity of interest - All parties must receive equal undivided interests.
Unity of time - All parties must acquire the joint interest at the same time.
Unity of title - All parties must acquire the property in the same deed of conveyance.
73
Termination of Joint Tenancies - Termination by Partition Suit
A partition suit can terminate a joint tenancy or a tenancy in common. Foreclosure and bankruptcy can also terminate these estates.
A partition suit is a legal way for an owner to dispose of his or her interest against the wishes of other co-owners. The suit petitions the court to divide, or partition, the property physically, according to the owner's respective rights and interests. If this can’t be done, the court may order the property sold and the proceeds divided among the co-owners.
74
What are the three main forms of ownership?
In severalty – Held by only one owner
In co-ownership – Held by two or more people
In trust – Held by a third party for the benefit of someone else
75
What four types of co-ownership does California recognize
Tenancy in common
Joint tenancy
Community property
Tenancy in Partnership
76
What does a living trust do?
Allows the trustor, during his or her lifetime, to convey title to a trustee for the benefit of a third party
77
What are the four unities needed to create a joint tenancy?
Unity of possession
Unity of interest
Unity of time
Unity of title
78
Community Property Rights
In California, community property laws state that the husband and wife are equal partners. Community property law distinguishes real and personal property into categories of separate and community property. Separate property belongs to one spouse; community property belongs to both spouses equally.
Separate property consists of:
Property owned by either spouse at the time of the marriage
Property acquired by either spouse through inheritance or gift during the marriage
Property acquired with separate-property funds
Income from separate property
A spouse may gain an equitable interest in separate property if:
the value of the separate property increases during the marriage
community property funds were used to discharge any debt on the separate property
Community property consists of all other property earned or acquired by either party during the marriage.
79
Tenancy in Partnership
Tenancy in partnership is a form of ownership held by business partners, as provided by the Uniform Partnership Act. The partnership tenancy grants equal rights to all partners, but the property must be used in connection with the partnership's business. However, if the partners have a written, signed contract, the contract terms override the terms outlined in the California Uniform Partnership Act. We’ll discuss partnerships in more detail on later screens.
80
Common Interest Developments
A common interest development, or CID, is a development characterized by the individual ownership of either a housing unit or parcel coupled with the right to use shared common areas and facilities. Common areas can include roads, parks, open spaces, lakes, clubhouses, gyms, pools, basketball courts, or tennis courts.
Common interest developments in California include:
Condominiums
Planned unit developments (PUDs)
Cooperatives
Timeshares
81
What happens to community property upon the death of a spouse?
Half of the deceased's community property passes to the surviving spouse, and the other half passes to the decedent's heirs.
82
What form of ownership is a condominium?
A condominium is a hybrid form of ownership which combines ownership of a fee simple interest in the airspace within a unit with ownership of an undivided share, as a tenant in common, of the entire property's common elements.
83
What is the main ownership difference between condominiums and planned unit developments?
Planned unit development owners own the land where their unit is located, not just the air space around the unit.
84
What is timeshare ownership?
A fee, or leasehold interest, in a property whose owners or tenants agree to use the property on a periodic, non-overlapping basis.
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Sole Proprietorship
In a sole proprietorship, one person owns the whole business and reports all the profits and losses on his or her personal income tax return.
This type of business is easy to organize and operate. Many real estate brokers choose this type of business structure. The business owner can use his or her own name or a fictitious name that he or she registers as state law requires.
There are certain tax advantages to being incorporated that are not available to sole proprietors. So it is becoming increasingly common for sole proprietors to incorporate to avail themselves of these benefits, such as pension plans and profit-sharing plans.
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Partnerships
When two or more people become associated to carry on a business for profit, they make up a partnership. An agreement to share in the profits of a business creates a presumption that a partnership exists.
Partners in a partnership may have varying degrees of interest in a partnership property and interests can be bought and sold by members leaving the partnership or new partners. For this reason, real estate ownership by a partnership is tenancy in common.
A general partner is an active partner in the partnership who has unlimited personal liability for the debts of the partnership. If a new general partner joins an existing partnership, he or she would have unlimited liability for future debt to the partnership, but his or her liability for the existing partnership debts would be limited to the extent of his or her investment of capital.
Under the Uniform Partnership Act of 1994, general partners:
Have equal rights to use partnership property for partnership purposes.
Cannot transfer their interests to another without the consent of the other partners.
Creditors of the partnership have first claim on the assets of the partnership. Partnership assets cannot be attached or executed to satisfy the private debts of the partners. However, bankruptcy of a partner would dissolve the partnership as it applies to the bankrupt partner and the creditors would be able to get to the bankrupt partner’s share of the partnership assets.
87
Limited Partnerships
Limited partnerships are partnerships in which the limited partners have limited liability as opposed to the unlimited liability of a general partnership. Limited partners are liable only to the extent of their investment. However, a limited partnership must have at least one general partner who has unlimited liability.
Here are some important points about limited partnerships.
The partnership agreement must be in writing, and the partnership must file a formal certificate of limited partnership.
A limited partner cannot permit his or her name to be used in a way that would signify that he or she is a general partner.
According to the1983 Revised Limited Partnership Act, partners may contribute services to the partnership. In the past, a limited partner could contribute only money to the partnership.
Any limited partner may ask for an accounting from a general partner.
Limited partners have the authority to get rid of the general partner for cause.
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Joint Ventures
Joint ventures are partnerships for a single undertaking rather than a continuing business. Because the joint venture is set up for a limited purpose, the implied authority of the members is more limited than in general partnerships.
A joint venture can take on a number of different partnership forms. The most common is the limited partnership. As is the case with all partnerships, there must be at least one general partner and any number of limited partners. Generally in real estate, limited partners are the investors that provide most of the equity capital, while general partners are usually responsible for managing the partnership assets and they may contribute a relatively small amount of the required capital. Limited partners are generally very restricted in the management of a joint venture.
A member of a joint venture partnership does not necessarily have the power to bind the other joint venture partners. Since a joint venture is considered a partnership, it is taxed in the same way as a partnership; that is, the individual joint venture members are responsible for paying the taxes. Joint venture members also have the joint and several liability of partners with regard to third parties. However, unlike a partnership, one joint venture member can sue the joint venture. Also while the death of a partner in a partnership automatically terminates the partnership, the death of a joint venture member does not necessarily dissolve the joint venture. A managing partner typically has control of the joint venture.
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Corporations
A corporation is a separate legal entity established under state law by the filing of articles of incorporation with the Secretary of State. Because a corporation is a legal person, real estate ownership by a corporation is an ownership in severalty. Here are some key things to know about corporations.
Corporations can own property in the corporate name.
Shareholders of a corporation have limited liability and do not participate directly in managing the corporation.
Shareholders elect a board of directors, who are the ones responsible for setting corporate policy.
The directors hire corporate officers, who operate the corporation.
The corporate bylaws, which are the rules of the corporation, lay out the power of the corporate officers.
Because a corporation is a separate legal entity, shareholders can sue the corporation.
Because a corporation is a legal entity, it has an unlimited life and theoretically exists forever.
If the corporation wants to sell all or a majority of its corporate assets, the majority of the stockholders must approve the sale.
If a corporation exists in name only - in other words, individual funds are commingled with corporate funds, the courts can decide that the corporation is actually a partnership or sole proprietorship. If this happens, the corporation will lose its limited liability protection.
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Limited Liability Company (LLC)
A limited liability company (LLC) is a hybrid business entity having characteristics of both a corporation and a partnership. Limited liability companies provide the limited liability protection of corporations without the regulations associated with corporations. It is a more flexible structure in that the owners have limited liability for the actions and debts of the company, and it is suitable for smaller companies with a single owner. The primary corporate characteristic is limited liability. The primary partnership characteristic is the availability of pass-through income taxation.
Some important facts about LLCs include:
All LLCs must have at least one member. LLC members are the owners of the LLC much as shareholders are the owners of a corporation or the partners of a partnership. Like shareholders, a member's liability to repay the LLC's obligations is limited to his or her capital contribution. Members may be persons, corporations, partnerships, or other LLCs.
A member's ownership interest in the LLC is called a membership interest. Membership interests are often called shares. In most cases, a member's right to control or manage the LLC is proportionate to his or her membership interest.
LLCs are managed by their members in proportion to their membership interests. Many LLC operating agreements, however, provide for a manager or board of managers to run the day-to-day operations of the LLC.
All LLCs must file evidence of their existence with the secretary of state of the state where they choose to be organized. All LLCs must disclose their company name, appoint a statutory agent, and disclose their valid business purpose.
The Operating Agreement of an LLC is the document most important to its success because it determines, defines, and apportions the rights of the members.
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Syndicates
The term syndication is not a legal term. It is a descriptive term for a group of two or more people who combine their financial resources to achieve certain investment objectives. A syndicate is able to acquire real estate that could not be purchased by an individual alone.
A typical real estate syndicate combines the money of individual investors with the management of a sponsor. The syndication has three cycles:
Organization – Planning, purchasing property, meeting registration and disclosure rules, and marketing.
Operation – Managing both the syndicate and the real property, usually done by the sponsor.
Liquidation – Reselling the property.
A syndicate is governed by whatever form of business organization the participants adopt. This could be any of the following:
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Limited Partnership
General Partnership
Joint Venture
Corporation
Real Estate Investment Trust
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Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust (REIT) is a special type of syndicate organized as an unincorporated trust that specifically holds a large portfolio of real estate investments.
REITs were first created in 1967. Similar to corporations, REITs have their own management and board of directors and they can be held publically or privately. However, a huge benefit to REITs, and a major difference from a corporation, is REIT’s profits are not taxed. In this way they act like mutual funds and distribute income as dividends to investors.
California REITs have the following characteristics:
They must receive 95% of their income from investments; 75% of that 95% must be from real estate.
They must pay at least 90% of their incomes to shareholders to maintain their favorable tax status.
They must have at least 100 investors.
No five investors can own 50% or more of the trust.
They are regulated by the Commissioner of Business Oversight of the State of California.
They must follow all federal and other applicable tax laws.
There are three types of REITs:
Equity REITs invest in properties directly and revenues come from rental income, dividends, and capital gains from property sales.
Mortgage REITs loan money to real estate owners or purchase existing mortgages. Their revenues are generated from the interest on the mortgage loans.
Hybrid REITs are a mixture of equity and mortgage REITs.
Registration of a REIT in any state is a complex process involving the federal Securities and Exchange Commission.
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In a limited partnership, what is the liability difference between a general partner and a limited partner?
(1) Limited partners are liable only to the extent of their investment.
(2) General partners have unlimited liability.
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What is a limited liability company (LLC)?
A hybrid business entity having characteristics of both a corporation and a partnership.
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What is the major benefit of Real Estate Investment Trusts (REITs)?
Profits are not taxed.
