Modern Real Estate Practice in Pennsylvania 12 th

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

7 Forms 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 © 2012 Kaplan, Inc. 2

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

7 Forms 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 © 2012 Kaplan, Inc. 4

7 Forms of Real Estate Ownership © 2012 Kaplan, Inc. 5

7 Forms of Real Estate Ownership © 2012 Kaplan, Inc. 6

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

7 Forms of Real Estate Ownership • 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) © 2012 Kaplan, Inc. 8

7 Forms 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 © 2012 Kaplan, Inc. 9

7 Forms of Real Estate Ownership Figure 7. 1 © 2012 Kaplan, Inc. 10

7 Forms 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 wife (tenants by the entirety) © 2012 Kaplan, Inc. 11

7 Forms 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 © 2012 Kaplan, Inc. 12

7 Forms 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 © 2012 Kaplan, Inc. 13

7 Forms of Real Estate Ownership Figure 7. 2 © 2012 Kaplan, Inc. 14

7 Forms 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. © 2012 Kaplan, Inc. 15

7 Forms 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 © 2012 Kaplan, Inc. 16

Joint Tenancy - Survivorship Figure 7. 3 © 2012 Kaplan, Inc. 17

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

7 Forms 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 © 2012 Kaplan, Inc. 19

7 Forms 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 wife • Inherent right of survivorship • Both must sign documents to convey property © 2012 Kaplan, Inc. 20

7 Forms of Real Estate Ownership • Termination of tenancy by the entirety – Husband 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 © 2012 Kaplan, Inc. 21

7 Forms 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) © 2012 Kaplan, Inc. 22

7 Forms 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 © 2012 Kaplan, Inc. 23

7 Forms 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 © 2012 Kaplan, Inc. 24

7 Forms 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. © 2012 Kaplan, Inc. 25

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

7 Forms 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 © 2012 Kaplan, Inc. 27

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

7 Forms 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 © 2012 Kaplan, Inc. 29

7 Forms 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 © 2012 Kaplan, Inc. 30

7 Forms 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 © 2012 Kaplan, Inc. 31

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

7 Forms 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 © 2012 Kaplan, Inc. 33

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

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

7 Forms 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 © 2012 Kaplan, Inc. 36

7 Forms 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 © 2012 Kaplan, Inc. 37

7 Forms 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 © 2012 Kaplan, Inc. 38

7 Forms 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 © 2012 Kaplan, Inc. 39

7 Forms 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 © 2012 Kaplan, Inc. 40

7 Forms 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 © 2012 Kaplan, Inc. 41

7 Forms 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 © 2012 Kaplan, Inc. 42

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

7 Forms 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 © 2012 Kaplan, Inc. 44

Condominium Ownership Figure 7. 5 © 2012 Kaplan, Inc. 45

7 Forms 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) © 2012 Kaplan, Inc. 46

7 Forms 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 © 2012 Kaplan, Inc. 47

7 Forms 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

7 Forms 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

7 Forms 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

7 Forms 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 © 2012 Kaplan, Inc. 51

7 Forms 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 © 2012 Kaplan, Inc. 52

7 Forms 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 © 2012 Kaplan, Inc. 53

7 Forms 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) © 2012 Kaplan, Inc. 54

7 Forms 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) © 2012 Kaplan, Inc. 55

7 Forms 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. © 2012 Kaplan, Inc. 56

7 Forms 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) © 2012 Kaplan, Inc. 57

7 Forms 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) © 2012 Kaplan, Inc. 58

7 Forms 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 © 2012 Kaplan, Inc. 59

7 Forms 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) © 2012 Kaplan, Inc. 60