Principles of California

Real Estate

Lesson 2:
Estates in Land and
Methods of Holding Title

Introduction

» This lesson will discuss:

— types of estates in land
— ways of holding title to property

Estates in Land Estates地產, 財產, 資產– Possessory 所有的

Interests in real property
» Interest: An interest in real property is a right
to the property or a claim against it.
» Interests may be:
— possessory (also called estates)
— nonpossessory
Interests股份/股權 – the right to exclusive use
and possession of the property, now/future.
Other interests not Estates – a Lien先得權, 留置
權 (example: mortgage抵押借款/契據) is an
interest in property but not estate.

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Categories of Estates
» Two basic categories:
—freehold estate (includes title)
—leasehold estate (no title)
Privity – mutual relationship of multiple estates
on a property, eg: freehold estate, leasehold
estate & mortgage hold estate can exist at the
same time.

» Both a freehold and a leasehold estate

may exist in the same property; the
relationship between the two estates is
known as privity.

Freehold Estates

» Two kinds of freehold estates:

—fee simple estate
—life estate

Freehold Estates A fee simple estate - also called 'a fee',

Fee simple estates
» Fee simple:
— the most common type of estate
— the highest and most complete form of
land ownership
— can potentially last forever
A fee simple estate is perpetual,
transferable, and inheritable.
representing the entire 'bundle of rights.' It is
the greatest estate in real property that a
person can have.
Perpetual - potentially last forever
Transferable - from one owner to another
Inheritable - also called 'the estate of
inheritance'

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Fee Simple Estates
» Two types of fee simple estates:
—absolute
—defeasible (qualified)
Fee Simple Estates
Fee simple absolute
» Fee simple absolute: Title owner not subject
to any special limitations or conditions.
» Fee simple absolute is the default estate,
unless it is clear the grantor intended
otherwise.
Fee Simple Estates
Fee simple defeasible
» Fee simple defeasible: Fee title with a
condition or qualification attached
— Interest will end if a specified act or
event occurs
Fee simple estates are usually conveyed
without qualifications or conditions.
The current owner transfers title to the new
owner with no special limitations, and the
new owner is free to do whatever he wishes
with the property.
Sometimes owners want to control the future
use of the land after selling or giving it to
someone else.
So they transfer the property with a
condition or qualification attached to the
title.
The deed states that the new owner will own
the property until or unless a specified act or
event takes place.
The new owner’s estate is a fee simple
defeasible, also called a qualified fee. The
owner of a fee simple defeasible holds the
same interest as the owner of a fee simple
absolute, except that the defeasible interest
will end if the specified act or event occurs.
eg: Ruth owned some property next to Clearview
Elementary School. 20 yrs ago, Ruth donated her
property to the school district. The deed said the
property was given on condition that it be used for
school purposes only. The school district put the
property to use as a school playground. This year,
20 years after Ruth's gift, the school district has
decided to close down Clearview Elementary.
Unless the school district puts the lot that was
Ruth's property to some other school-related use,
Ruth (or her heirs) will have the right to file a legal
action to terminate the school district's interest in
the property. So the school district cannot start
using the property as a public parking lot, or try to
sell the property to someone who wants to develop
it as a shopping mall. But the school district would
be allowed to sell the property to someone who
was going to open a private school there. The same
condition that was imposed in Ruth's deed would
still apply to the new owner (the private school).
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 Freehold Estates The holder of a life estate is called the life
Life estates tenant.

» Life estate:
— limited in time
— lasts only as long as a specified person
is alive

Life estates are sometimes used to simplify

Life Estates
the division of property in a will, or to
Example
avoid the expense of probate. By creating a
James donated his farm to the Children’s life estate, a property owner can transfer
Aid Society, but retained a life estate in title to someone else before his death, yet
the farm. James has exclusive possession
and use of the farm until he dies, and then
keep possession of the property for himself
the farm will belong to the Children’s Aid until he dies.
Society. While James is alive, he is the
life tenant.

Life Estates Measuring life is usually the life of the

Duration
» Measuring life: The life on which a life estate
depends. (Need not be the life tenant)
— In the example, James’s life is the
measuring life for his life estate. The
life estate will end when James dies.
person who has the life estate (the life
tenant), although it doesn't have to be.
Life Estate is a limited estate, much more
limited than fee simple ownership.
The life tenant's ownership lasts only as
long as the measuring life.

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 Life Estates
Future interests
» Future interest: The ownership interest that
will begin when the life estate ends.
» When a life estate is created, a future
interest in the property is created at the
same time.
A life tenant can sell, lease, or mortgage his
interest, but that interest is only a life
estate. So the buyer's or tenant's or bank's
interest would end at the end of the
measuring life, too. eg: Suppose James
leases his life estate property to Terry for
two years. If James happens to die at any
point during that period, his death will
terminate Terry's lease. A lease from a life
tenant can last no longer than the life estate.

Life Estates
Future interests

» Two types of future interests:

— estate in reversion
— estate in remainder When a life estate is created, a future interest in the property is
created at the same time.
The future interest is the ownership interest that will begin when the
life estate ends.
The person who now holds a future interest will have fee simple title
when the life estate ends. A future interest can be classified as either
an estate in reversion or as an estate in remainder.
If the future interest is held by the grantor or her heirs, it's an estate in
reversion. If it's held by someone else, it's an estate in remainder.

Future Interests
Estate in reversion

Margarita grants a life estate to John, and

stipulates that the property will come back
to her (or to her heirs) at the end of the
measuring life. Margarita and her heirs
have an estate in reversion. They are called
reversioners.

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 Future Interests
Estate in remainder
On the other hand, if Margarita stipulates
that the property will go to Sam (not back to
her or her heirs) when John dies, then Sam
has an estate in remainder. Sam would be
called a remainderman.

Estates Because someone else (the reversioner or

Duties of a life tenant
» A life tenant must pay any taxes,
assessments, and other liens on the
property.
» A life tenant must not commit waste (by
permanently damaging the property).
remainderman) has a future interest in the
property, therefore the life tenant has certain
duties during the life estate.
1. A life tenant must pay any taxes,
assessments, and other liens on the property.
2. A life tenant must allow those with future
interests in the property to inspect it from time
to time.
3. A life tenant must not commit waste. i.e. he/
she must not injure, alter/destroy the premises.
must keep the property in good repair.

Summary
Freehold Estates

» Freehold estate
» Fee simple absolute
» Fee simple defeasible
» Life estate

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Categories of Estates
Leasehold estates
» Leasehold estate: A limited, temporary
estate created by a lease contract.
— Parties = landlord and tenant
— Tenant gets the right to exclusive use and
possession of the property.
— Landlord retains title to the property
Leasehold Estates
Types of estates
» Term tenancy
» Periodic tenancy
» Tenancy at will
» Tenancy at sufferance
Types of Leasehold Estates
Term tenancy
» Term tenancy: A leasehold estate that lasts
for any fixed term. Also called an estate for
years.
If you have a leasehold estate, you don't own
or have title to the property. The landlord does.
However, for a limited period you have a right
to the exclusive possession and use of the
property. The landlord retains only a
reversionary interest. This limited, temporary
kind of estate is created by a contract called a
lease.
The parties to a lease contract are the landlord
(the lessor) & the tenant (the lessee).
A lease called a chattel real = personal
property that is closely tied to real estate.
Any conveyance of a leasehold estate is called
a demise.
A lease often makes reference to the "demised
premises."
Most leasehold estates can be inherited by the
tenant's heirs.
The fixed term may be a specified number of
years, months, weeks, or days.
The "an estate for years" name is misleading
because the term doesn't need to be a year or
several years; the term only needs to be a fixed
period of time.
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 Types of Leasehold Estates A surrender - Termination of a lease by mutual
Term tenancy
consent.

If either tenant or landlord wants to terminate it

» Created by express agreement only.
sooner, they may do so only if they both agree.
» Ends automatically when term expires.
If tenant decided in the middle of lease term
» No notice requirement
that he no longer needed the leased space, he
could assign his lease to another person, unless
the lease specifically prohibits an assignment.
Of course, the new tenant would have the right
to possess the property only through the end of
lease term.

Leasehold Estates
Types of estates
» Term tenancy
» Periodic tenancy
» Tenancy at will
» Tenancy at sufferance

Types of Leasehold Estates Lease Periodic tenancy - Uncertain duration, no

Periodic tenancy
» Periodic tenancy: A leasehold that is not
limited to a specific term. Also called a
periodic estate.
—Automatic renewal: continues from rental
period to rental period until terminated by
landlord or tenant, with proper notice.
—Required notice period = rental period.
set termination date, proper notice must be
given if either party to the lease wants to
terminate it, the notice period must be = the
rental period. If neither party gives notice of
termination, the periodic tenancy automatically
renews itself each month.

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 Leasehold Estates
Types of estates
» Term tenancy
» Periodic tenancy
» Tenancy at will
» Tenancy at sufferance

Types of Leasehold Estates It can be terminated at any time by either the

Tenancy at will
» Tenancy at will: Tenant has possession of
property with landlord’s consent, for an
indefinite period of time. Also called an
estate at will.
— No specified end date
— Rent may be paid on an irregular basis
or not at all
landlord or the tenant. It has no specified
termination date and no regular rental period.
In some cases, rent is paid on an irregular
basis; in other cases, no monetary rent is paid.
Under the common law definition of a tenancy
at will, no advance notice is required to
terminate the tenancy.

Types of Leasehold Estates

Tenancy at will

» Generally a tenancy at will can be

terminated at any time, by either the tenant
or landlord.

» California requires 30-day notice (from the

tenant or landlord) to terminate a tenancy at
will.

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 Types of Leasehold Estates
Tenancy at will
» Unlike other leasehold estates:
— tenancy at will cannot be assigned to
another person
— tenancy at will ends automatically upon
the death of either party
A typical tenancy at will occurs when a tenant
provides maintenance services to the landlord
instead of paying rent. For example, if Dave is
a gardener, you might agree to let him stay at
your house in exchange for landscaping the
yard. You don't require him to pay you any rent,
and his stay is for an uncertain length of time
because you don't know when he'll be done
with the work. If you decide you want Dave to
move out before then, you're legally required to
give him notice of termination.

Leasehold Estates
Types of estates

» Term tenancy
» Periodic tenancy
» Tenancy at will
» Tenancy at sufferance

A tenancy at sufferance inaccurately called an

Types of Leasehold Estates
Tenancy at sufferance
» Tenancy at sufferance: Tenant came to
property under valid lease, but no longer has
any right to possession.
— Tenant stays on after lease expires,
without landlord’s consent.
— More accurately called a holdover
tenancy.
estate at sufferance. Technically, it's not a true
estate at all. It arises when a tenant comes into
possession of the property under a valid lease,
but holds over after the tenancy has expired,
staying on against the landlord's wishes.
No notice of termination is required, as the
tenant no longer has legal possession of the
property.

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 Summary
Leasehold Estates
» Leasehold estate
» Term tenancy
» Periodic tenancy
» Tenancy at will
» Tenancy at sufferance

Ways of Holding Title

» All property has at least one owner—an

individual, a group of individuals, or a
business, agency or organization.

» Depending on the number and type of

owners, title to property can be held in
different ways.

Also called "separate" or "sole" ownership. The

Ways of Holding Title
Ownership in severalty
» Ownership in severalty: Ownership by one
person (often called “sole” ownership).
» Individual owner may be:
— a natural person (a human being)
— an artificial person (a legal entity such as
a corporation)
root of the word "severalty" is "sever," which
means to keep separate and apart. If you own
property in severalty, you own it separately,
apart from anyone else.
Here is an example of ownership in severalty.
It's likely that your city or town owns quite a bit
of property: parks, parking lots, and other
public spaces. It also owns buildings like the
city hall and public library. The city probably
has title to each of these properties in severalty,
because the city is legally regarded as a single
artificial person

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 Ways of Holding Title
Concurrent ownership

» Concurrent ownership: Ownership by two or

more persons at the same time (also called
co-ownership).

Ways of Holding Title

Concurrent ownership

» In California, there are three types of

concurrent ownership:
—tenancy in common
—joint tenancy
—community property

To hold title as tenants in common, two or

Concurrent Ownership
more persons must each have an ownership
Tenancy in common interest in a single piece of property. That's the
only requirement. Although tenants in common
» Most basic form of concurrent ownership often have equal shares of ownership, their
shares don't have to be equal.
» Created by terms in deed
or
» By default, if no other arrangement specified

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Tenancy in Common
Ownership interests
» Tenants in common can have unequal
ownership interests
» But each owner has an “undivided interest”
to enjoy the whole property (“unity of
possession”)
Tenancy in Common
Transfer of interests
» A tenant in common is free to sell, will, or
mortgage his interest without the consent of
the other tenants.
Tenancy in Common
Termination
» A tenancy in common will end if:
— all co-tenants agree to sell the property
— they agree to divide the property into
separate parcels
— a co-tenant files a partition suit, to have
the courts divide the property interests
Suppose Sharon transfers title to one acre of
land to Bob, Carmen, and Andy, as tenants in
common. If the deed doesn't state otherwise,
each co-tenant will be presumed to have a one-
third interest. On the other hand, Sharon's deed
could grant Bob a 50% interest, Carmen a 20%
interest, and Andy a 30% interest. The ownership
interests of tenants in common can be
apportioned in any way, as long as they add up
to 100%.
Apportioning ownership interests is not the same
thing as apportioning the land itself. The
interests held by tenants in common (and by
other types of co-owners) are called undivided
interests. They apply to the property as a whole,
not just a portion of it.
In our example, Bob, Carmen, and Andy all
have the right to possess and use the entire acre
that they own together. None of them is legally
restricted to a particular portion of it. Sharing
possession of the whole property is a hallmark of
co-ownership. It's referred to as unity of
possession.
A tenant in common is also transferable to their
heirs/ children.
Partitioning co-owned property means dividing
it into separate properties that are each owned
by one of the former co-tenants in severalty.
In some cases, tenants in common can't agree
on what to do with the co-owned property.
Then one of the co-tenants may file a legal
action called a suit for partition, asking a judge
to divide the property up among them. In a suit
for partition, if it won't work to subdivide the
land itself, the judge will order the property to
be sold. Each of the former co-tenants will
receive a share of the sale proceeds based on
his or her percentage of ownership.
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 Concurrent Ownership
Joint tenancy

» In a joint tenancy, two or more persons are

joint and equal owners of a property.

The four unities are essential to a joint tenancy.

If any one of the four unities doesn't exist at the
Joint Tenancy beginning, or is somehow broken, then the joint
Four unities tenancy either isn't established in the first place,
or it is destroyed—either partially or entirely.
» To create and continue a joint tenancy “four
unities ” must exist:
Unity of interest: each joint tenant must hold the
— unity of interest
same estate. Each must have an equal interest
— unity of title
in the property.
— unity of time
Unity of title: the joint tenants must receive their
— unity of possession
interests in the property through the same deed
or will.
Unity of Time: The joint tenants must all receive
their interests in the property at the same time.
Unity of possession: the same thing in a joint
tenancy as it does in a tenancy in common.
Joint tenants have the right to possess and use
Joint Tenancy the entire property, not just a particular portion
of it. They both own all of it. Their interests are
Right of survivorship
undivided.
» The right of survivorship is the key feature of
a joint tenancy.
Since joint tenancy property isn't part of a
deceased joint tenant's estate, the property
» When a joint tenant dies, her interest:
doesn't have to go through the probate process.
— automatically passes to surviving joint That's an advantage that may save the survivors
tenants
time and expense. Also, any liens or creditors'
— cannot be willed and is not part of estate
claims against the deceased joint tenant's
interest are extinguished at death. The surviving
joint tenants receive that interest free and clear.

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Joint Tenancy
Termination
» Like a tenancy in common, a joint tenancy
can be terminated through a partition suit.
» A joint tenancy will also be terminated if any
one of the four unities is destroyed, (but only
for the tenant doing the conveyance.)
Concurrent Ownership
Community property
» Community property is property owned
jointly and equally by a husband and wife in
California, and certain other states.
Concurrent Ownership
Community property
» In community property states:
— Everything owned by a married couple that
isn’t the separate property of one spouse is
the community property of both spouses.
— Courts presume all property acquired during
marriage is community property.
Example of broken unities: Gary, Beth, and Cal
own property as joint tenants. Suppose Gary
sells his one-third interest to Dan. Dan is not a
joint tenant in relation to Beth and Cal, because
he did not receive his title in the same deed at
the same time as they did. Instead, Dan is a
tenant in common, which means the right of
survivorship does not apply to his interest.
However, the two remaining original co-owners,
Beth and Cal, are still joint tenants in relation to
one another. Each still has survivorship rights in
regard to the other's interest.
If a joint tenant does not sell his interest in the
property, but merely executes a mortgage or
deed of trust against his interest in the property.
This does not break the unity of title, and the
joint tenancy is still valid. The mortgage is only
an encumbrance, not a transfer of title.
Community property is property owned
concurrently and equally by a husband and
wife.
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 Community Property
Definitions
» Separate property:
— property owned before marriage
— gift or inheritance acquired during the
marriage
— anything purchased with separate
property funds, or proceeds from
separate property
Community Property
Definitions
» Community property: All property acquired
during the marriage
— through skill or labor, or
— using community funds or community
credit.
Community Property
Joinder requirement
» Joinder: The signatures of both spouses are
needed in order to list, sell, or encumber
community real property, or to purchase
property that will be community real
property.
» Spousal approval usually not required for
transfer of personal property, unless
clothing, furnishings or personal residence
(mobile home or live-aboard boat.)
Acquired Before Marriage
Gift or Inheritance during marriage
Bought With Separate Funds during marriage
Profits or proceeds from separate property,
such as appreciation, rents, or interest from
separate property, are also classified as a
spouse's separate property.
Each spouse has an undivided 50% interest in
all of the couple's community property. If a
married person dies without making a will
(intestate), his or her interest in the community
property passes to the surviving spouse.
The joinder requirement-both spouses must
join in the transaction.
It's generally advisable to have a seller's spouse
sign the transaction documents even if the
seller believes the property is separate
property. In case the seller is mistaken, the
spouse's signature serves as a release of his or
her community property interest.
The joinder requirement applies to some, but
not all, community personal property. The
spouse's approval is needed to transfer the
following types of community personal
property: clothing, household furnishings, a
personal property residence (mobile home or
live-aboard boat).
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 Community Property
Right of survivorship
» Since 2001, California law has allowed
married couples to hold property as
community property with right of survivorship.
» This prevents a married person from willing his
half interest in community property to
someone other than the spouse (as the title
passes directly to the surviving spouse.)
Community Property
Domestic partners
» In 2005, California’s community property laws
were extended to apply to registered domestic
partners as well as married couples.
» Registered domestic partners may hold
property as community property or community
property with the right of survivorship.
Concurrent Ownership
Marital property in other states
» Property ownership for a married couple in a
non-community property state will vary, and
may be:
— no different than co-ownership by
unmarried parties
— tenancy by the entirety
— some other form of marital property
A married person can, however, will his or her
interest to someone other than the spouse.
Alternatively, a married couple may choose to
take title to property as community property
with right of survivorship. Property held in this
manner can't be willed to someone other than
the surviving spouse.
There is only a small group of states (nine in
all) that have a community property system. In
other states, ownership by a married couple is
no different than co-ownership by unmarried
parties, or else some other form of marital
property is recognized. In some states, Oregon
for example, married couples may hold title to
property as tenants by the entirety. A tenancy
by the entirety is similar to a joint tenancy--
there is a right of survivorship--but it can be
created only by a married couple.
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 Summary
Individual and concurrent ownership

» Ownership in » Joint tenancy

severalty — Four unities
» Concurrent — Right of
ownership survivorship
» Tenancy in common
» Community property
— Separate property
— Joinder

Ways of Holding Title Businesses can be organized in a variety of

Business organizations
» The way in which a business is organized
affects how title to property is held.
different ways, each with advantages and
disadvantages for the business owners, so
there is different types of business
organizations.

Syndicate 企業聯合組織,財團

Business Organizations
Syndicates

A syndicate is a group of » General partnership

individuals who pool
resources to form a
business enterprise.
A syndicate may be
organized as a: ?
» Limited partnership
» Corporation
» Limited liability
company
» Joint venture
» Trust

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 Business Organizations A partnership is an association of two or more
Partnership persons to carry on a business as co-owners
and divide the profits.
» A partnership is an agreement of two or
more persons to conduct business as co-
owners and divide profits.

Business Organizations
Partnership

» Types of partnerships:
— general partnership
— limited partnership

Partnerships The partners' ownership interests may be equal

General partnership or unequal, depending on the terms of their
contractual agreement. A partnership
» In a general partnership, each partner has: agreement isn't required to be in writing, but
— an ownership interest putting it in writing is a good idea.
— a voice in management decisions
— a right to share in the profits
— an obligation to share liabilities

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General Partnership
Property ownership
» Property is partnership property if it’s:
— acquired in the partnership’s name
— acquired in partner’s name and deed
refers to the partnership
General Partnership
Property ownership
» Although partners have a right to use
partnership property, a partner is not a
co-owner of this property and has no
transferable interest in it.
» However, a partner’s interest in the
partnership itself may be transferred.
General Partnership
Unlimited Liability
» Each partner may be held personally liable
for the debts and obligations of the general
partnership.
Unless otherwise agreed, all of the partners
have an equal right to use and possess the
partnership property for partnership purposes.
But a partner is not a co-owner of the
partnership property and has no transferable
interest in it.
This means that if a partnership is owned
equally by three individuals, each would have
an equal right to use and possess partnership-
owned property.
However, it is the partnership (the business
entity) that owns the property, not the partners.
Each partner may be held personally liable for
the debts and obligations of the general
partnership.So, if creditors cannot satisfy their
claims out of the partnership property, they can
demand payment out of an individual partner's
own property. For example, they could place a
lien against a partner's home. This personal
liability is the main disadvantage of organizing
a business as a general partnership.
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 Partnerships
Limited partnership
» A limited partnership is more regulated than
a general partnership.
—Must meet requirements of California
Uniform Limited Partnership Act.
—Agreement must be in writing.
Partnerships
Limited partnership
» A limited partnership has at least one
general partner, plus one or more limited
partners.
» Limited partners have:
— no role in management decisions
— no personal liability for business debts
Business Organizations
Corporations
» A corporation:
— is a legal entity (an “artificial person”)
— can enter into contracts and own property
— is liable for business debts and obligations
— has perpetual existence (no joint tenancy)
The limited partners have limited liability,
which means that they are not personally liable
for the partnership's debts.
Only the general partners are personally liable.
Limited partners ordinarily are not permitted to
be involved in the day-to-day management of
the business. They also have no control over
the partnership property. The limited partner's
role is that of a passive investor, not an active
participant. Because a limited partnership can
have just a few investors and insulate those
investors from liability, many real estate
syndicates are organized as limited
partnerships.
Corporation 法人;社團法人
A corporation is made up of stockholders, a
board of directors, and corporate officers. The
corporation raises funds by selling shares of
common stock. The stockholders (also called
shareholders) are investors who own shares in
the corporation. Shareholders elect the board
of directors, which has overall control over the
business. The board supervises the officers of
the corporation, who manage the business
from day to day.
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Corporations
Shareholders
» A corporation is owned by its shareholders,
who purchase shares of stock as an
investment.
— Shareholders have no management
control
— Shareholders have limited liability
— Shareholders have a right to share
profits (but no interest in property)
Corporations
Securities
» Shares in a corporation are known as
securities.
» Securities are regulated by the Securities
and Exchange Commission (SEC).
Corporations
California law
» A corporation formed in California is known
as a domestic corporation.
» A corporation formed in any other state or
foreign country is a foreign corporation, and
must be certified by the state.
Although a corporation is owned by its stockholders, it
is a legal entity that is separate from the stockholders.
It's an artificial person that can enter into contracts or
own property. It can also get into debt and be sued, or
bring suit against someone else. If a stockholder dies,
the corporation continues to exist. By contrast, a
partnership won't necessarily continue if a general
partner dies. A corporation has a potentially perpetual
existence.
The major benefit of the corporate form of
organization is the stockholders' limited liability.
While the corporation itself is liable for its debts and
for illegal actions taken in its name, the stockholders
are not personally liable for its debts or actions. a
corporation has the same property rights as any other
person. It may own, convey, or encumber property. It
holds title in severalty.
Because of its potentially perpetual existence, a
corporation cannot own property in joint tenancy.
If one joint tenant has the potential to live forever,
there can be no true right of survivorship.
So when a corporation owns property with another
party, they take title as tenants in common.
The person who enters into a contract or conveyance
on behalf of the corporation must be an officer
authorized by the board of directors.
Shares in a corporation are securities, because they
represent a financial investment in an enterprise
without managerial involvement. Limited partnership
interests are also securities. Securities are regulated
by the Securities and Exchange Commission, a
federal agency.
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Business Organizations
Limited liability company (LLC)
» The LLC combines many of the advantages
of a corporation with those of a partnership:
— ability to manage the company
— limited liability
— avoidance of double taxation
Business Organizations
Limited liability company (LLC)
» To create an LLC, owners create an
operating agreement and file with the state.
—The owners of an LLC are known as
members.
—Managing members of an LLC can bind
the LLC with their actions.
Business Organizations
Joint venture
» Joint venture: Occurs when two or more
individuals or organizations join together for
a specific project or transaction.
— Not an ongoing business endeavor
— Generally regulated like a partnership
LLC-a relatively new form of business
organization. Depending on agreement
terms, all of an LLC's owners (referred to as
members) may manage the company, or
certain members may be appointed to
manage it.But an LLC's managing members
aren't personally liable for the LLC's debts. All
LLC members have limited liability, like
corporate stockholders.
The key benefit for an LLC in comparison to a
corporation is a tax advantage. A corporation
has the problem of double taxation.
Corporate earnings are first taxed as
corporate income. Then, when the earnings
are distributed to stockholders, they are taxed
again, as the personal income of the
stockholders. By contrast, the earnings of an
LLC are taxed only as the personal income of
the members.
There are no formal requirements for the
creation of a joint venture.The parties simply
agree that they're going to work together on a
particular project, and then they share their
profits or losses.
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 A trust is an arrangement in which one or more
Business Organizations
parties (known as trustees) manage assets for
Trusts
the benefit of others (known as beneficiaries).

» In a trust, one or more trustees manage
property for beneficiaries, with powers listed
in the trust agreement.
—Trusts are sometimes used as a form of
business ownership.
—One example is a real estate investment
trust (REIT).
Trusts
Real estate investment trust
» REIT: An unincorporated syndicate created by
investors to finance large real estate projects.
— Qualifies for special tax treatment
— Regulated by SEC
— Investors have limited liability
— Strict requirements:
§at least 100 investors
§only invest in real estate and mortgages
§distribute at least 90% of income to
investors
Title to the trust property is vested in the
trustees, who must manage the property
according to the terms of the trust.
REIT- a business association that invests almost
exclusively in real estate or real estate
financing. By doing so, it qualifies for special
tax treatment, such as the ability to avoid
double taxation. It passes profits through to its
investors without paying corporate income tax.
To qualify for that tax advantage, an REIT must
meet strict requirements.
REIT investors have the benefit of limited
liability, like corporate stockholders, limited
partners, or LLC members.
Interests in a real estate investment trust are
freely transferable.
Those interests are securities, so their sale is
subject to the supervision of the Securities and
Exchange Commission.
In a typical REIT, trustees invest and manage
the trust property on behalf of the investors,
following guidelines in the documents that
established the trust.
A real estate investment trust generally is not
incorporated.

Summary:
Business organizations
» Syndicate » Corporation
» General partnership » Joint venture
» Limited partnership » Real estate
» Limited liability investment trust
company (LLC) (REIT)

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 Ways of Holding Title
Condominiums and cooperatives
» Two special types of properties combine
aspects of individual ownership and
concurrent ownership:
— condominiums (condos)
— cooperatives (co-ops)
Condominiums
Ownership
» Condominiums are usually residential, and
often look like an apartment complex
» Residents:
— own individual units (in severalty)
— share ownership of common elements
Condominiums
Common elements
» Common elements: Areas of the property
that may be used by all residents.
Examples: grounds, hallways, lobby,
elevator, and swimming pool
2 special types of properties that involve co-
ownership: condominiums and cooperatives.
Most condominium developments are
residential, can be commercial/industrial too.
A typical condominium is made up of one or
more multi-family residential buildings and
looks just like an apartment complex.
-each condominium resident (or family) owns a
unit in fee simple.
-all of the unit owners share ownership of the
condominium's common elements as tenants
in common.
-maximize the use of available land.
-Condominiums with five or more units are
regulated as subdivisions, even if they share
walls.
Common elements are also called common
areas. Examples: grounds, the building's lobby,
the elevator, the main hallways, the roof, and
swimming pool.
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Condominiums
Common elements
» A specific interest in the common elements
is assigned to each unit.
» The legal description of a unit might read:
“Unit 20, together with a 3.5% undivided
interest in the common elements”
Condominiums
Limited common elements
» Limited common elements: Features that
serve a single unit, but are outside the unit’s
boundaries (and belong to all the owners)
Examples: parking spaces and balconies
For example, the parking lot might be part of the common
elements, but each assigned parking space might be a
limited common element. Parking space 16 might be a
limited common element reserved for the use of the
owners of Unit 9B.
Any feature that's designed to serve a single unit, but is
outside the unit's boundaries—such as a window box, an
awning, or a balcony—is also classified as a limited
common element reserved for that unit.
Condominiums
Units as separate properties
» The owner of a condominium unit:
—receives a deed for the unit
—finances the purchase with a separate
loan
—obtains a separate title insurance policy
—pays separate taxes
—is unaffected by foreclosures on other
units
A given unit's percentage of interest in the
common elements usually depends on the total
number of units in the condominium and their
relative value. The percentages are set forth in
the condominium declaration, a document
prepared by the developer that provides
detailed information about every aspect of the
condominium property.
Note that the seller must give the condominium
buyer a copy of the declaration, any private
restictions (CC&Rs), and the bylaws and
financial statements of the condominium
association.
The actual boundaries of a condominium unit
are the finished interior surfaces of its walls,
floors, and ceilings.
Anything within those boundaries is ordinarily
owned by the unit owner.
All aspects of the condominium property
outside of the units are common elements.
A unit owner's separate property is the airspace
occupied by the unit.
Limited common elements are owned by all of
the unit owners as tenants in common, but they
are reserved for the exclusive use of the owners
of a specific unit or a specific group of units.
For most purposes, the individual units in a
condominium are separate properties.
Sometimes the owner of an apartment building
decides to change the complex into a
condominium. This process is called
conversion. Conversions are subject to state
regulations that protect the rights of the tenants
of the apartment building. For instance, each
tenant must receive 180 days' advance written
notice of the conversion.
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 Cooperatives Title to a cooperative project is held by a
Ownership corporation formed for that purpose. The
corporation owns the property. The residents
» A residential cooperative might look like a simply own shares in the corporation.
condominium, but the ownership structure is
very different.
The shareholders do not actually own their
— Title is held by a single entity, often a
corporation. units. Instead, each shareholder has a long-
— Residents: term proprietary lease on a unit.
§own shares in the corporation, and
§have a long-term proprietary lease An interest in a cooperative is not title to real
on a unit estate. However, the long-term lease does give
the resident a leasehold estate in the property.

A cooperative project is financed with a single

mortgage & taxed as a single property.

Cooperatives The rent that a shareholder-tenant pays to the

corporation is a proportionate share of the
cooperative's operating expenses. one tenant's
» A cooperative project is: failure to pay her share can affect all of the
— financed with a single mortgage other tenants.
— taxed as a single property
— funded by shareholder rent payments
(which are prorated share of expenses)

Condos and Co-ops

Comparison
Condos Co-ops
Own and finance units Tenants own shares
individually Corp. owns property

Individual financing Blanket loan

Unaffected by defaults Responsible for

by other residents other tenant defaults

Can sell property freely Need approval for

sale

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 Summary
Condos & Co-ops

» Condominium
» Common elements
» Limited common elements
» Cooperative

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