CHAPTER 19

1. CHAPTER 19 Real Property and Land Use

2. INTRODUCTION This chapter discusses the forms of real estate ownership and the transfer of ownership, the role of brokers and the effect of express and implied warranties concerning the condition of the property. The chapter outlines the alternatives to acquiring real property for cash, including tax-deferred exchanges, sale and leasebacks, and real estate investment trusts. Finally, the chapter outlines governmental regulation of the use of real property by the exercise of police and condemnation powers and the circumstances in which government restrictions on land use are deemed “takings,” requiring compensation of the owner under the U.S. Constitution.

3. FORMS OF OWNERSHIP • Choice of ownership is initially very important for managers because changing ownership later may result in adverse tax consequences. • Individual ownership – simplest • Tenancy in Common – two or more persons have an undivided interest in the whole property that is assignable and inheritable. • Joint Tenancy – two or more equally owned property with the right of survivorship where interest passes automatically to surviving joint tenants. Conveyance of one’s joint tenancy interest severs that interest and creates a tenancy in common.

4. FORMS OF OWNERSHIP • Tenancy by the Entirety – husband and wife own with a right of survivorship. • Community Property – eight states have this; property acquired during marriage is owned equally and undividedly by each spouse. • Separate Property – acquired before or after marriage (can be transformed into community property). • Conveyance – cannot be accomplished without consent of both spouses. • Divorce – affect varies. • Trust – owned by trustee for beneficiaries.

5. FORMS OF OWNERSHIP • General Partnership – each partner liable for partnership debts. • Limited Partnership – limited partner’s liability limited to capital contributed to the limited partnership. • Corporate Ownership – Board of Directors usually authorize transfers. • Limited Liability Company – becoming the most popular business entity for real property.

6. TRANSFER OF OWNERSHIP • Ownership of land is transferred by deed from Grantor to Grantee and recorded in the county in which the property is located. • Title – seller must convey marketable title. • Types of Deeds • Grant Deed – marketable title and after-acquired title. • Quitclaim Deed – no warranties; grantor conveys whatever title the grantor had. • Warranty Deed – implied warranties of a grant deed, and express warranties of title and quiet possession.

7. RECORDING STATUTES • They establish an orderly process for claims to interests in real property to be resolved; three types of recording statutes: • Race • Pure Notice • Race-Notice

8. TITLE INSURANCE • Extent of Coverage – insures against undisclosed liens or defects in title, and errors in the abstraction of title. • Escrow – money held in a special account until sales-contract provisions have been met. • Neutral Party

9. NEUTRAL PARTY Case 19.1 Synopsis. Schoepe v. Zions FNB (D.Utah 1990). Lion Hill, a partnership, contracted to sell mining property to Pacific Silver Company. Both parties signed an escrow agreement with Zions whereby Pacific Silver would make installment payments to Zions as escrow agent, and Zions would then pay Lion Hill. During the installment period, Zions made loans to Pacific Silver; Lion Hill was unaware of these loans. Subsequently, and after Lion Hill agreed to payment extensions, Pacific Silver defaulted on the payments to Lion Hill. Lion Hill sued claiming it never would have agreed to the extension if it knew of the loans, and that Zions should have disclosed this information to Lion Hill as its escrow agent. Issue: Does an escrow agent have a fiduciary duty to disclose dealings with principals that fall outside the scope of the escrow agreement? HELD: NO, Zions had no legal duty to Hill to disclose.

10. BROKERS • Compensation – percentage of the sales price. • Listing Agreements • Open Listing – paid only if a buyer is located. • Exclusive Listing – broker has the right to sell the property. • Net Listing – broker paid excess of sales price over net listing price of the seller. • Regulation of Brokers – heavily regulated in most states. • Agency Relationship – broker cannot act for both the buyer and the seller in the same transaction without full disclosure of this information.

11. ACQUISITIONS AND DISPOSITIONS • The contracts must be in writing. • Representations and Warranties – no longer exclusively caveat emptor. • Implied Warranty of Habitability. • Seller’s Duty to Disclose. • Contractual Protections and Due Negligence • Environmental Considerations – hazardous waste sites (CERLA).

12. ACQUISITIONS AND DISPOSITIONS • Tax-Deferred Exchanges – exchanged for real property instead of for cash. • Sale and Leaseback – two simultaneous transactions:an institutional lender purchases property from a corporation, then leases the same property back to the same corporation. • Synthetic Leases – treated as a conventional lease for accounting purposes and a loan for tax purposes. • Real Estate Investment Trusts(REITS) – a real estate investment vehicle. • Transactions with Foreigners – regulated by the federal government.

13. SELLER’S DUTY TO DISCLOSE Case 19.2 Synopsis. Strawn v. Canuso (N.J. 1995). Developers of new houses and real estate brokers marketing the new houses did not disclose to prospective buyers that the houses had been constructed near an abandoned hazardous waste site. ISSUE: Do the developers of new homes and the real estate brokers marketing those homes have a duty to disclose to prospective buyers that the homes have been constructed near an abandoned hazardous-waste dump? HELD: YES. The court held that the developers and brokers violated their duty to disclose, among other duties.

14. ENVIRONMENTAL CONSIDERATIONS Case 19.3 Synopsis. New York v. DelMonte (W.D.N.Y. Mar. 31, 2000). DelMonte had been in the demolition business for many years. In 1992, DelMonte acquired a piece of property (including an old run-down building) from Behringer Bros., Inc. DelMonte paid nothing for the property but signed an agreement accepting the property “as is.” The New York Department of Environmental Conservation (DEC) concluded that an impermissible amount of lead had been released at the site. Although DelMonte was aware that the area in which the site was located was contaminated, he claimed that he was unaware that the site itself was contaminated when he acquired it. In 1993 the site classified as a significant threat to the public health and environment by the DEC. DelMonte allowed people to trespass and later excavated the site. CONTINUED

15. ENVIRONMENTAL CONSIDERATIONS Case 19.3 Synopsis. (Cont’d) The DEC initiated an emergency clean-up of the lead. The total cost of the clean-up was $161,773.10. New York sued DelMonte for the recovery of these costs, and moved for summary judgment. ISSUE: Is CERCLA’s innocent landowner defense available to a current owner if he was unaware of the environmental hazards present at the site when he acquired the property? HELD: NO. Plaintiff’s motion for summary judgment was granted, and DelMonte was ordered to pay the clean-up costs of $161,773.10. One cannot be an “innocent landowner” under CERCLA if after learning of the contamination, he fails to take “precautions to prevent the ‘threat of release’ or other foreseeable consequences arising from the pollution on the site.”

16. PRELIMINARY AGREEMENTS • Option Contracts – potential buyer pays consideration to keep the offer open for a definite, stated time period; must be written to be enforceable. • Right of First Refusal – right to purchase at the price offered to a third party. • Letter of Intent – right to acquire an interest in specific property.

17. FINANCING • Permanent Loans – usually 25 to 30 years. • Fixed-Interest Loans – level throughout the loan period. • Variable-Interest Loans – changeable (within limits) over the life of the loan. • Points – a loan fee; one point equals one percent of the loan. • Loan-to Value Ratio – acquisitions of commercial, income-producing property. • Construction Loans – for slightly longer than the estimated construction period. • Development Loans - acquisition, sub-division, improvement, and sale of residential properties. • Equity Participation by Lender – lender is the partial owner.

18. WRAPAROUND FINANCING The second lender lends the property owner money and takes over the first loan in exchange for a higher interest rate on the second loan. In exchange, the owner executes a deed of trust or mortgage and an all-inclusive note, covering the combined amount of the first and second loans.

19. APPRAISAL METHODS The value of an income-producing property may be appraised by: • Cost Approach • Market Approach • Income Approach

20. PROTECTIVE LAWS FOR BORROWERS • Usury Laws – regulates what interest rate can be charged. • Fair Lending Laws – prohibit racial discrimination in lending practices. • Foreclosure – the sale of the property to repay (redeem) the debt on the property.

21. COMMERCIAL LEASING It is not only a conveyance of an interest in real property from the landlord to the tenant, but also a contract that governs the respective rights and obligations of the parties during the lease term. • Office Leases • Assignments and Subleases • Retail Leases • Industrial Leases • Ground Leases

22. GOVERNMENT REGULATION OF LAND USE • The National Environmental Policy Act – genesis of the environmental impact statement (EIS). • EIS Requirement – if not categorically exempt, one is needed if there may be a significant impact on the environment. • State Law Counterparts – most are like the NEPA. • Planning

23. GOVERNMENT REGULATION OF LAND USE • View from Cyberspace: Taking to the Rooftops. • The Police Power – protect the health, safety, and welfare of the citizens. • Rent Control • Regulatory Takings • Political Perspective: States Take Initiative in Protecting Property Rights.

24. REGULATORY TAKINGS Case 19.5 Synopsis. Tahoe-Sierra Preservation v. Tahoe Regional Planning Agency (9th Cir. 2000). Plaintiffs owned property in the Lake Tahoe Basin. Due to rapid development of the Lake Tahoe Basin, a significant increase in nutrients was being washed into Lake Tahoe which cause algae to grow and the lake to become more and more green and opaque. In order to halt the increasing environmental damage, TRPA withheld development permits for several years. Plaintiffs sued TRPA claiming that the moratorium constituted an unconstitutional taking for which compensation was due. The district court ruled that certain property owners in the basin were entitled to compensation, and TRPA appealed. CONTINUED

25. REGULATORY TAKINGS Case 19.5 Synopsis. (Cont’d) ISSUE:Did the temporary moratorium on property development in the Lake Tahoe Basin constitute an unconstitutional taking of property? HELD: REVERSED FOR TRPA. The U.S. Court of Appeals for the Ninth Circuit first pointed out that the U.S. Supreme Court has identified two circumstances where it will find that a government regulation constitutes an unconstitutional taking: (1) regulations that compel a property owner to suffer a permanent physical invasion or occupation of his or her property, and (2) regulations that deny all economically beneficial or productive use of land. The issue on appeal was whether the moratorium fell within the second category.

26. REGULATORY SCHEMES • The General Plan – long-range planning document (housing, natural resources, public facilities, transportation, etc). • Other Planning Documents – for portions of a city’s geographical area. • Zoning – specific land use restrictions. • Traditional Zoning – based on different uses of land. • Planned Unit Development – regulations reflect proposed development plans. • Zoning Relief – variance and conditional-use permits. • Nonconforming Uses – zoning changed on a previously lawful use.

27. REGULATORY SCHEMES • Subdivision – dividing land into separate parcels. • Conditions – upheld if reasonable [Dolan v. City of Tigard (1994)]. • Environmental Assessment • Vested Development Rights – fully guaranteed right to develop property. • Early Vesting

28. PHYSICAL ACCESSIBILITY TO COMMERCIAL FACILITIES Under the ADA, new renovations or alterations to commercial facilities must be accessible to disabled persons, including those in wheelchairs.

29. THE RESPONSIBLE MANAGER Buying and Using Real Estate The typical manger who does not manage real estate full-time will probably find that there are more laws, administrative regulations, and governmental practices associated with real estate than with many other management activities.

30. REVIEW 1. Compare and contrast joint tenancy and tenancy by the entirety. 2. How are EIS and cost-benefit analyses both beneficial and costly to business? 3. Should changes in zoning ever require compensation to the victims?