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Modern Real Estate Practice in Texas, 15th Edition

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Title: Modern Real Estate Practice in Texas, 15th Edition


1
Modern Real Estate Practice in Texas, 15th
Edition
  • By Cheryl Peat Nance, Ed.D., DREI, CREI

2
21 Leases
  • Learning Objectives
  • Discuss the requirements of laws related to
    leasing residential real estate
  • Identify the characteristics of the four types of
    leasehold estates and the various types of leases
  • Describe
  • The requirements and general provisions of a
    valid lease
  • How a lease may be discharged

3
21 Leases
  • Learning Objectives (cont.)
  • Explain the key points of the Texas Landlord and
    Tenant Act
  • Occupancy limits
  • Rental applications
  • Security deposits
  • Maintenance of premises
  • Smoke alarms
  • Security devices
  • Breach of lease

4
21 Leases
  • Lease, Overview
  • A lease
  • Is a contract between
  • An owner (lessor) and a tenant (lessee)
  • Transfers right to exclusive possession and use
  • For a specified period of time
  • Is conveyance of a leasehold estate
  • Landlord retains
  • rights for payment for use and
  • reversionary right for possession after lease term

5
21 Leases
  • Related Laws
  • Statute of Frauds
  • Agency Disclosure - Information about Brokerage
    Services form
  • Sex Offender Disclosure
  • Lead-Based Paint Disclosure
  • Americans with Disabilities Act (ADA)
  • Fair Housing ? ? ?

6
21 Leases
  • Fair Housing
  • Equal access to housing without differentiation
    in terms or conditions because of
  • Race ?Color
  • Religion ?National origin
  • Sex ?Handicap
  • Familial status

7
21 Leases
  • Fair Housing (cont.)
  • Special focus on accessibility
  • To allow full enjoyment of housing and related
    facilities for persons with a handicap
  • Modification
  • Permit a structural change to be made to premises
  • Accommodation
  • Make a change, exception, or adjustment to a
    rule, policy, practice, or service

8
21 Leases
  • Leasehold Estates
  • Estate for Years
  • Lease for a definite period of time
  • Specific start/stop dates
  • No automatic renewal
  • No notice required to terminate
  • Periodic Estate (Estate from Period to Period)
  • Lease for an indefinite period of time
  • Automatically renews with payment and acceptance
    of rent
  • Notice required to terminate

9
21 Leases
  • Leasehold Estates (cont.)
  • Tenancy at Will
  • Lease for an indefinite term
  • At the will of each party
  • Notice required to terminate
  • Terminates on death of either party
  • Tenant enters rightfully and holds over rightfully

10
21 Leases
  • Leasehold Estates (cont.)
  • Estate at Sufferance
  • Previously lawful tenancy, continued without
    landlords consent
  • Tenant suffered or permitted to remain
  • May require eviction
  • Tenant enters rightfully but holds over illegally

11
21 Leases
Leasehold Estates
12
21 Leases
  • Requirements of a Valid Lease
  • Offer and Acceptance
  • Consideration
  • Capacity to Contract
  • Legal Objectives
  • Legal Description Covenant of Quiet Possession
    (Implied)

13
21 Leases
  • Common Lease Provisions
  • Term of Lease state start/end dates
  • Possession of Leased Premises
  • Use of Premises
  • Improvements
  • Neither party is required to make improvements
  • Tenant improvements are with landlord consent and
    remain on lease termination
  • Options and Right of First Refusal to renew
    lease or purchase property

14
21 Leases
  • Landlord and Tenant Act
  • Occupancy Limits
  • HUD 2/bedroom infant with parents
  • Texas 3 adults/bedroom
  • Owner needs a written occupancy policy

15
21 Leases
  • Landlord and Tenant Act (cont.)
  • Rental Application
  • Applicant must be given printed or online notice
    of tenant selection criteria
  • Before completing the application
  • Including grounds for which application may be
    denied
  • Criminal history previous rental history
    current income
  • Credit history inaccurate or incomplete
    application form
  • Applicant must sign an acknowledgment of notice
    or acknowledge receipt online

16
21 Leases
  • Landlord and Tenant Act (cont.)
  • Application deposit
  • Similar to earnest money
  • Given with rental application before lease signed
  • Binds the applicant while application is
    reviewed, credit checked, etc.
  • Refunded if applicant rejected
  • Applied to other fees due when lease signed if
    applicant accepted

17
21 Leases
  • Landlord and Tenant Act (cont.)
  • Application fee
  • Charge to offset actual costs of screening
    applicant credit report, etc.
  • Does NOT have to be returned if applicant
    rejected UNLESS
  • Landlord does not have a copy of Tenant Selection
    Criteria signed by applicant

18
21 Leases
  • Landlord and Tenant Act (cont.)
  • Security Deposits
  • Safeguards against tenant destruction of premises
  • Induces tenants to honor their agreement
  • Encourages thorough cleaning on move-out
  • Frequently 1 months rent

19
21 Leases
  • Landlord and Tenant Act (cont.)
  • Security Deposits (cont.)
  • Must be returned within
  • 30 days of residential tenants surrender of
    property
  • 60 days of commercial tenants surrender of
    property
  • Return the money or
  • An accounting for money withheld
  • No obligation to return earnest money without
    tenants written notice of forwarding address
  • Transferred to a new buyer not prorated upon
    sale of property

20
21 Leases
  • Landlord and Tenant Act (cont.)
  • Late fees
  • Must be specified in the lease
  • Must be a reasonable estimate of damages to
    landlord for getting rent late
  • May be charged after rent has been unpaid one
    full day after the initial due date rent due on
    the 1st late fees, on the 3rd

21
21 Leases
  • Landlord and Tenant Act (cont.)
  • Assignment and Subleasing
  • May not assign or sublease without landlords
    consent
  • Maintenance of Premises
  • Tenant Must return the property in same
    condition received, reasonable wear and tear
    excepted
  • Landlord Units and common elements must be in
    habitable condition - Habitability Statute

22
21 Leases
  • Landlord and Tenant Act (cont.)
  • Smoke Alarms
  • Must be installed in all residential rental
    property
  • Unless rented under 90 days through a sale
  • Must be in each bedroom and a corridor that
    serves multiple bedrooms
  • Must install for hearing-impaired, if asked
  • Must be in good working order when tenant moves
    in
  • Presumed to be working until tenant requests
    repair
  • Tenant must replace batteries

23
21 Leases
  • Landlord and Tenant Act (cont.)
  • Security Devices
  • Specified by law
  • Window latches doorknob locks
  • Sliding door handle latches and pin locks
  • Keyless deadbolts
  • Door viewers on each exterior door
  • 7 days to rekey locks after new tenant occupancy

24
21 Leases
  • Discharge of Leases
  • Termination of Lease
  • May be terminated by
  • Expiration of lease term estate for years
  • Notice from either party (written usually)
  • Periodic estate and tenancy at will generally
    30 days notice
  • Active military duty
  • Victim of family violence or sexual assault,
    under certain circumstances

25
21 Leases
  • Discharge of Leases (cont.)
  • Landlord termination of lease and eviction if
    tenant breaks the lease
  • Mutual agreement
  • Tenant abandonment
  • Tenant liable for terms of leaseincluding rent
  • Landlord duty to mitigate damages

26
21 Leases
  • Discharge of Leases (cont.)
  • Foreclosure of property
  • May 20, 2009 - December 31, 2014
  • Protecting Tenants at Foreclosure Act
  • Renter of foreclosed property may remain until
    the end of the lease
  • Unless the tenant has no lease or
  • The purchaser intends to use the property as a
    primary residence then a 90-day notice required

27
21 Leases
  • Discharge of Leases (cont.)
  • Foreclosure of property
  • January 1, 2015
  • Return to Texas law
  • Leases executed after the date of the mortgage
    require a 30-day notice to vacate before a lease
    can be terminated

28
21 Leases
  • Discharge of Leases (cont.)
  • Termination Does Not Occur
  • When the Owner or Tenant Dies
  • Heirs are bound by the lease
  • Landlord of deceased tenant has duty to mitigate
    damages
  • When the Landlord Sells the Property
  • Purchaser is bound by the lease

29
21 Leases
  • Discharge of Leases (cont.)
  • Breach
  • Landlords lockout remedy
  • Suit for possessionactual eviction
  • Tenants remedyconstructive eviction

30
21 Leases
  • Breach of Lease
  • Landlords lockout remedy for nonpayment of rent
  • Must give tenant 3-5 days notice that locks are
    going to be changed
  • Include amount of rent due
  • Designate where rent can be paid to avoid lockout
  • Can use lockout remedy only once per payment
    period
  • If locks are changed ? ? ?

31
21 Leases
  • Breach of Lease (cont.)
  • Landlords Lockout Remedy (cont.)
  • If locks are changed
  • No legal resident can be inside
  • Landlord must leave written notice on the door
  • Amount of rent and other charges due
  • 24-hour address or phone number for tenant to get
    a key
  • If no on-site location for key pickup, owner must
    deliver a key within 2 hours after the tenant
    calls

32
21 Leases
  • Breach of Lease (cont.)
  • Suit for PossessionActual Eviction
  • For breach of any terms of the lease
  • Owner must give a 3-day notice of suit
  • Suit for possession or forcible detainer suit
  • Must be heard in court within 10 days
  • If court issues a judgment for possession to the
    owner,
  • Tenant has 5 days to file an appeal

33
21 Leases
  • Actual Eviction (cont.)
  • After 5 days or after appeal
  • Court may issue a writ of possession to the owner
  • Within 48 hours after receiving the writ, owner
    must deliver written notice to the tenant that
    the writ will be enforced
  • Tenant must remove himself or herself and
    possessions

34
21 Leases
  • Actual Eviction (cont.)
  • If tenant does not vacate
  • Deputy sheriff or constable will oversee forcible
    removal of tenant and possessions
  • During or after eviction suit
  • Owner can file suit for damages, lost rent,
    attorneys fees

35
21 Leases
  • Breach of Lease (cont.)
  • Tenants remedyconstructive eviction
  • If certificate of occupancy is revoked, landlord
    must
  • Return security deposit and prorated rent
  • Reimburse tenant for expenses
  • If landlord breaches lease, tenant can sue for
    damages
  • If premises become uninhabitable, tenant may
    abandon them constructive eviction ? ? ?

36
21 Leases
  • Breach of Lease (cont.)
  • Tenants Remedy (cont.)
  • To claim constructive eviction, the tenant
  • Must give written notice to landlord
  • Must abandon the premises while uninhabitable
  • Tenant entitled to prorata refund of rent paid or
  • Seek court order requiring repairs (up to
    10,000) and awarding damages to tenant

37
21 Leases
  • Types of Leases
  • Gross Lease
  • Net Lease
  • Percentage Lease
  • Variable Lease
  • Ground Lease
  • Oil and Gas Lease

38
22 Property Management
  • Learning Objectives
  • Describe
  • A property managers functions
  • The basic elements of a management agreement
  • Explain the property managers role in
  • Budgeting
  • Renting
  • Maintaining property

39
22 Property Management
  • Learning Objectives (cont.)
  • Identify
  • Techniques a manager may use to attract, select,
    and retain quality tenants
  • The characteristics of an effective rental
    collection policy
  • A property managers primary responsibilities
    regarding compliance with consumer protection and
    privacy laws
  • Distinguish the property managers
    responsibilities for handling environmental and
    risk management concerns

40
22 Property Management
  • Property Management Overview
  • Leasing, managing, marketing, and maintenance of
    real estate owned by others
  • Real estate license required unless on-site
    apartment manager or employee of owner

41
22 Property Management
  • Property Management Overview (cont.)
  • Property manager Someone who preserves the
    value of an investment property while generating
    income as an agent for the owners may be
  • A general agent for the owner
  • Sharing operational liabilities with the owner
  • An independent contractor
  • Bearing almost all operational liabilities

42
22 Property Management
  • Elements of a Management Agreement
  • Description of property
  • Time period
  • Definition of managers responsibilities
  • Statement of owners goals
  • Extent of managers authority
  • Reporting requirements
  • Compensation
  • Allocation of costs

43
22 Property Management
  • Activities of the Property Manager
  • Administration
  • Marketing
  • Physical Management

44
22 Property Management
  • Management Functions
  • Hiring and supervising employees
  • Budgeting expenses
  • Controlling expenses
  • Keeping detailed records
  • Making periodic reports

45
22 Property Management
  • Marketing Functions
  • Setting rental rates
  • Selecting tenants
  • Tenant Selection Criteria printed notice
  • Identity Theft and Privacy Laws
  • Fair Credit Reporting Act
  • Fair and Accurate Credit Transactions Act of 2003
  • Red Flag Rules

46
22 Property Management
  • Marketing Selecting Tenants (cont.)
  • Identity Theft and Privacy Laws (cont.)
  • FTC privacy rule best practices
  • Get permission from rental to give out info.
  • Get request in writing from third parties
  • Texas privacy laws
  • Owners privacy policy if SSN required on
    application
  • Identity Theft Enforcement and Protection Act
  • U.S. Patriot Act

47
22 Property Management
  • Marketing Selecting Tenants (cont.)
  • Telemarketing
  • Federal Do-Not-Call Registry
  • State No Call List
  • Junk Fax Prevention Act
  • CAN-SPAM and Texas Anti-Spam
  • Collecting Rents
  • Resident Retention

48
22 Property Management
  • Physical Management Functions
  • Maintaining the Property
  • Preventive
  • Repair or Corrective
  • Routine
  • Construction
  • Handling Environmental Issues

49
22 Property Management
  • Risk Management
  • Avoid it
  • Control it
  • Transfer it share it
  • Retain it

50
22 Property Management
  • Risk Management (cont.)
  • Common Insurance Coverage
  • Fire and extended coverage
  • Business interruption
  • Liability
  • Workers compensation
  • Casualty
  • Surety bonds
  • Flood and hurricane

51
22 Property Management
  • Risk Management (cont.)
  • Specialty Insurance Coverage
  • Errors and omissions
  • Lead liability
  • Employment practices liability
  • Liquor liability
  • Employee benefits liability
  • On-site pollution liability
  • Tenant discrimination legal expense
  • Terrorism coverage

52
22 Property Management
  • Professional Management Organizations
  • Institute of Real Estate Management
  • Building Owners and Managers Association
    International
  • International Council of Shopping Centers
  • National Apartment Association
  • Texas Apartment Association

53
23 Control of Land Use
  • Learning Objectives
  • Identify the various types of
  • Public and private land-use controls
  • Subdivision regulations
  • Distinguish the function and characteristics of
  • Building codes
  • Zoning ordinances

54
23 Control of Land Use
  • Learning Objectives
  • Describe the environmental issues an agent must
    understand to protect his clients interests
  • Basic hazards
  • Discovery methods
  • Disclosure responsibilities
  • Liability issues
  • Explain
  • Major real estate industry green initiatives
  • Their goals for reducing the overall impact on
    human health and the environment

55
23 Control of Land Use
  • Public ControlsComprehensive Plan
  • Expresses community goals
  • Designates areas for residential, commercial and
    industrial development
  • Indicates location for community facilities and
    utilities
  • Proposes means for transportation
  • Recommends procedures for historic preservation,
    downtown renewals, flood control, and
    environmental concerns
  • Lists actions to carry out the plan

56
23 Control of Land Use
  • Public Controls - Zoning
  • Police Powerto regulate use of private land
  • Prevents incompatible adjacent use
  • Restricts height/size of buildings
  • Provides setbacks
  • Controls density
  • Promotes aesthetic values
  • Enforced through requirements for building permits

57
23 Control of Land Use
  • Public Controls - Zoning (cont.)
  • Use Classifications
  • Residentialsingle family
  • Residentialmulti-family
  • Commercial
  • Industrial
  • Agricultural
  • Planned Unit Development Buffer
    zonesTransition between uses

58
23 Control of Land Use
  • Adoption of Zoning Ordinances
  • Planning and Zoning Commission (PZ) recommends
    zoning ordinances to City Council for approval
  • Validity of ordinances require that
  • Power be exercised in reasonable manner
  • Provisions be clear and specific
  • Ordinances not discriminate
  • Ordinances promote public health, safety . . .
  • Ordinances apply to all property similarly

59
23 Control of Land Use
  • Zoning Issues
  • Zoning Map Amendment
  • Notification of property owners within 200'
  • Newspaper notice of public hearing
  • Public hearing and governing body vote
  • Spot zoning
  • Amendment differing significantly from area plan
  • Not permitted by courts if only one owner
    benefited

60
23 Control of Land Use
  • Zoning Issues (cont.)
  • Conditional use permit
  • Allow a property use if stipulated conditions are
    met
  • Benefit a neighborhood
  • Nonconforming use
  • Building or use no longer conforms to zoning
    classification
  • Usually permitted to remain until use or
    ownership changes

61
23 Control of Land Use
  • Zoning Issues (cont.)
  • Variance
  • Exception to a zoning ordinance a waiver from
    compliance
  • Granted when an ordinance would cause undue
    hardship to the owner
  • Usually for height of building, setback, etc.
  • Benefits one parcel only
  • Requests for a variance Heard by the Zoning
    Board of Adjustment (ZBA)

62
23 Control of Land Use
  • Zoning Board of Adjustment (ZBA)
  • Hears complaints about effects of zoning
    ordinances on a specific property
  • Board members must be free of personal or
    political influence
  • ZBA decisions appealed to court

63
23 Control of Land Use
  • Extraterritorial Jurisdiction (ETJ)
  • Subdivision of land within ½ to 5 miles of a town
    must be approved
  • Purchasers of property outside a city limits must
    be given a disclosure that the property might be
    annexed in the future
  • City must give 3 years notice prior to
    annexation (in most cases)
  • City may unilaterally annex without permission of
    persons living in that area

64
23 Control of Land Use
  • Process of Land Development
  • Initial Planning Stage
  • Developer finds land
  • Subdivision plat drawn up by licensed surveyor
  • Subdivision regulations
  • Initiated by city planning staff
  • Streets lot dimensions
  • Sewers water mains utility easements
  • Areas reserved for public use

65
23 Control of Land Use
  • Process of Land Development (cont.)
  • Final Planning Stage
  • Approval of final plans and plat
  • By PZ and/or City Council
  • Plat recorded with county clerk
  • City issues a permit to developer
  • Developer obtains permanent financing
  • Final budgets are prepared
  • Marketing programs are designed

66
23 Control of Land Use
  • Process of Land Development (cont.)
  • Disposition or Start-Up Stage
  • Streets, curbs, gutters, utilities are installed
  • Open areas are landscaped
  • Marketing programs are initiated
  • Individual lots are sold to builders for home
    construction

67
23 Control of Land Use
  • Building Codes
  • Ordinances that specify construction standards
  • Must be met when repairing or erecting buildings
  • Set requirements for
  • Kinds of materials sanitary equipment
  • Electrical wiring fire prevention standards

68
23 Control of Land Use
  • Building Codes (cont.)
  • Building permit required before construction or
    alteration begins
  • To verify compliance with building codes and
    zoning ordinances
  • Does not verify compliance with deed restrictions
  • Structures built without permits may have to be
    dismantled
  • After structure is completed
  • City inspector issues a certificate of occupancy,
    if found satisfactory

69
23 Control of Land Use
  • Private Land Use Controls
  • Deed Restrictions or Restrictive Covenants
  • Placed on property by a developer
  • In a deed or separate recorded declaration
  • Restrict use
  • Type of building type of construction
  • Height, setbacks, size, cost
  • May NOT restrict owners rights to sell,
    mortgage, or convey

70
23 Control of Land Use
  • Deed Restrictions (cont.)
  • Private transfer fees
  • Fee paid to developer on sale of property
  • Not permitted after June 15, 2011
  • Existing transfer fees must be filed and renewed
    with county clerk
  • If not, void
  • Written disclosure must be given to a purchaser

71
23 Control of Land Use
  • Deed Restrictions (cont.)
  • Limited effective term, such as 25 years
  • May be extended by majority of owners
  • Validity of a deed is not affected if a
    restriction found void by a court
  • Enforced by JP court injunction

72
23 Control of Land Use
  • Deed Restrictions (cont.)
  • Altering deed restrictions or restrictive
    covenants 2 methods
  • ? By waiver
  • All owners, mortgage lenders, and original
    developer must agree
  • ? By judicial process filing a lawsuit

73
23 Control of Land Use
  • Private Land-Use Controls (cont.)
  • Conditions
  • Deed can be subject to conditions whereby title
    may revert to the seller
  • Determinable fee estate
  • Fee simple subject to a condition subsequent

74
23 Control of Land Use
  • Land Use Control Issues
  • Public ownership
  • State ownership 1 of Texas land
  • Federal ownership 4 of Texas land
  • Floodplains
  • Interstate Land Sales Full Disclosure Act

75
23 Control of Land Use
  • Environmental Protection
  • Texas Environmental Concerns
  • Ozone nonattainment
  • Impaired water bodies
  • Water supplies
  • Toxics Release Inventory
  • Superfund sites
  • Wetlands
  • Endangered and threatened species

76
23 Control of Land Use
  • Environmental Protection (cont.)
  • Disclosure and Discovery of Hazards
  • Sellers Disclosure of Property Condition
  • Lead-Based Paint
  • Conditions under the Surface
  • Environmental assessment addendum
  • Certified/licensed inspectors, consultants, and
    remediators
  • Environmental auditors
  • Phase I site assessment

77
23 Control of Land Use
  • Environmental Protection (cont.)
  • Environmental Responsibility and Liability
  • CERCLA Identify responsible parties and order
    cleanup action
  • Landowner may be liable for cleanup regardless of
    who created the contamination
  • Innocent landowner immunity ? ? ?

78
23 Control of Land Use
  • Environmental Protection (cont.)
  • Environmental Responsibility and Liability
    (cont.)
  • Innocent landowner immunity
  • A landowner who was completely innocent should
    not be held liable
  • Must have no actual or constructive knowledge of
    the damage
  • Must have had a Phase I site assessment before
    purchase
  • Must not be environmentally damaged

79
23 Control of Land Use
  • Environmental Protection (cont.)
  • Environmental Responsibility and Liability
    (cont.)
  • Real estate professionals
  • Responsible for discovery and disclosure
  • Appraisers
  • Lenders
  • Property and mortgage insurance companies

80
23 Control of Land Use
Environmental Hazards
81
23 Control of Land Use
  • Green Initiatives
  • Going Green
  • A philosophical and social movement centered on
    a concern for the conservation and improvement of
    our natural resources.
  • HUDs definition

82
23
23 Control of Land Use
  • Green Initiatives (cont.)
  • Green Building Programs
  • Designed to reduce the impact of buildings on
    human health and the environment
  • Efficiently using energy, water, and other
    resources
  • Protecting occupant health and improving employee
    productivity
  • Reducing waste, pollution, and environmental
    degradation

The City of Dallas adopted a city-wide green
building ordinance for new construction in 2008
83
23 Control of Land Use
  • Green Initiatives (cont.)
  • Green Building Certifications
  • Energy Star EPA and Department of Energy
  • LEED U.S. Green Building Council
  • National Green Building Standard (NGBS) National
    Association of Home Builders and the
    International Code Council

84
23 Control of Land Use
  • Green Initiatives (cont.)
  • Green Mortgages
  • Energy Efficient Mortgage (EEM)
  • New home built to Energy Star or similar energy
    efficient standards typically
  • Energy Improvement Mortgages (EIM)
  • Include funds for energy-efficient improvements
    to an existing home

85
23 Control of Land Use
  • Green Initiatives (cont.)
  • Tax Incentives
  • Texas
  • Ad valorem property tax exemption for the value
    of renewable energy improvements
  • Incentive programs for improving energy
    efficiency such as Austin Energys Green
    Building Program

86
23 Control of Land Use
  • Green Initiatives (cont.)
  • Tax Incentives
  • Federal
  • Residential Energy Efficiency Tax Credit
  • Available periodically for energy efficient water
    heaters, doors, windows, insulation . . .
  • Residential Renewable Energy Tax Credit
  • Up to 30 of qualified expenditures for a system
    serving a residence
  • Through December 31, 2016

87
23 Control of Land Use
  • Green Initiatives (cont.)
  • Remediation Programs
  • Texas
  • Reduction of greenhouse gas emissions
  • Clean energy
  • Off-shore carbon dioxide storage
  • U.S. Government
  • Waste disposal
  • Zero net energy buildings
  • Green building certification with Energy Star

88
23 Control of Land Use
  • Green Initiatives (cont.)
  • Everyday Green Living
  • Suggestions? Ideas?
  • The Real Estate Professional
  • NAR Green Designation
  • Becoming an expert in your community

89
24 Real Estate Investment
  • Learning Objectives
  • Explain the advantages and disadvantages of
    investing in real estate
  • Describe major components of the investment
    decision
  • Property appreciation
  • Income potential
  • Use of leverage and pyramiding

90
24 Real Estate Investment
  • Learning Objectives (cont.)
  • Identify the key tax benefits of investing in
    real estate
  • Distinguish the types of real estate investment
    syndicates and/or trusts

91
24 Real Estate Investment
  • Investing in Real Estate
  • Real Estate Assets
  • Real Estate Securities

92
24 Real Estate Investment
  • Considerations for Prospective Investors
  • Pros
  • Above-average rate of return (usually)
  • Tax benefits
  • Hedge against inflation
  • Leverage of funds
  • Equity buildup

93
24 Real Estate Investment
  • Considerations for Prospective Investors (cont.)
  • Cons
  • Illiquidity
  • Risk
  • Change in laws
  • Possibility of negative cash flow
  • Requires personal attention of investor
  • Expert advice needed

94
24 Real Estate Investment
  • Investment Purposes
  • Appreciation
  • Inflation
  • Intrinsic value
  • Income
  • Cash flow and cash flow management
  • Tax Shelter
  • Deductibility of interest and other expenses
  • Depreciation

95
24 Real Estate Investment
  • Leverage
  • Use of Borrowed funds
  • Make a small down payment
  • Get the lowest interest rate
  • Obtain the longest mortgage term
  • Equity Buildup
  • Repayment of principal
  • Appreciation in property value
  • Equity can decrease

96
24 Real Estate Investment
  • Leverage (cont.)
  • Pyramiding through Refinancing
  • Refinance one property
  • Released equity used to buy more property

97
24 Real Estate Investment
  • Tax Benefits
  • Capital gains tax
  • Basis Initial cost
  • Adjusted Basis Cost improvements
    depreciation taken as a tax deduction
  • Capital Gain Selling price Selling expenses
    Adjusted basis Capital Gain
  • Depreciation
  • Income tax deduction
  • Recover cost of investment

98
24 Real Estate Investment
  • Tax Benefits (cont.)
  • Installment sales
  • Receive payment in installments over 2 or more
    years
  • Pay income tax each year based on amount received
    in that year
  • Tax Credits
  • Direct reduction in tax due
  • Generally low-income housing projects and
    historic properties

99
24 Real Estate Investment
  • Tax Benefits (cont.)
  • 1031 Exchanges
  • Taxes deferred not eliminated
  • Like-kind properties
  • Boot
  • Net debt relief
  • Old property Relinquished property
  • New property Replacement property

100
24 Real Estate Investment
  • 1031 Exchanges (cont.)
  • 3 Methods
  • Direct, Simultaneous Exchange ? ?
  • ? Delayed Exchange ? ?
  • ? Reverse Exchange ? ?

101
24 Real Estate Investment
  • 1031 Exchanges (cont.)
  • ? Direct, Simultaneous Exchange
  • Two people trade properties in one transaction
  • Cannot occur if old and new properties are not
    both identified at the same time

102
24 Real Estate Investment
  • 1031 Exchanges (cont.)
  • ? Delayed Exchange
  • Old property is sold then new property is found
  • The Identification Rule 45 days to find
    possible replacement properties
  • Three-Property Rule
  • 200 Rule
  • 95 Rule
  • The 180-Day Rule Time limit to close on new
  • All funds must pass through a third-party
    qualified intermediary

103
24 Real Estate Investment
  • 1031 Exchanges (cont.)
  • ? Delayed Exchange (cont.)
  • Requires
  • Title Names on title on new property must match
    names on old property
  • Reinvestment To avoid capital gains taxes
  • New property must have equal or higher value than
    old and
  • All equity must be reinvested in new property and
  • New property must have equal or more debt than old

104
24 Real Estate Investment
  • 1031 Exchanges (cont.)
  • ? Reverse Exchange
  • New property is found then old property is sold
  • Exchange Accommodation Titleholder required
  • Rules are more complicated than for Delayed
    Exchange!!!
  • Careful planning is crucial in a 1031 exchange!
  • Enter into it only with professional assistance!

105
24 Real Estate Investment
  • The Tax Reform Act of 1986
  • Limits deductibility of losses from rental
    property
  • 2 categories of investor
  • Active
  • Personally manages the day-to-day or
  • Makes management decisions, hiring others to
    provide services
  • Passive
  • Contributes investment money
  • Has no voice in management operations

106
24 Real Estate Investment
  • The Tax Reform Act of 1986 (cont.)
  • Active Investor may deduct
  • Up to 25,000 of loss to offset income from any
    source
  • 100,000 maximum taxable income (before rental
    loss deduction is taken) to be eligible for full
    deduction
  • Passive investor
  • Offset investment losses only against investment
    income

107
24 Real Estate Investment
  • The Tax Reform Act of 1986 (cont.)
  • Real estate professionals not subject to passive
    loss limitations if
  • Materially participates in activities
  • Spends at least 750 hours in real property
    businesses
  • Performs more than 50 percent of personal
    services in real property businesses

108
24 Real Estate Investment
  • Investment Syndicates
  • Pool resources to own property
  • Tenancy in common, partnership, corporation,
    trust
  • Private syndication versus Public syndication
  • Blue-sky laws
  • Securities laws

109
24 Real Estate Investment
  • Real Estate Investment Trust (REIT)
  • No corporate income tax if
  • 90 percent of income distributed
  • 100 or more investors
  • 75 of assets in real estate or related assets
  • 3 investment vehicles ? ? ?

110
24 Real Estate Investment
  • Real Estate Investment Trust (REIT)
  • 3 Investment Vehicles
  • Equity REIT Buys/sells large scale investment
    properties
  • Mortgage REIT Buys/sells mortgages
  • Combination REIT Invests in properties and
    mortgages

111
24 Real Estate Investment
  • Real Estate Mortgage Investment Conduits (REMIC)
  • Tax device allowing cash flows from a block of
    commercial mortgages to be passed directly to
    investors
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