Chapter 5

TWO BASIC  FORMS OF OWNERSHIP.  

One person or one organization may own property in severalty, or two or more persons or organizations may own it concurrently. Organizations include corporations, partnership and trusts, which are used for business, tax shelter, syndication and estate planning.

Severalty Ownership.         

When title to property is held by one person or more organization, it is said to be held in severalty or sole ownership, as distinguished from a tenancy in common or a joint tenancy. The severalty owner's interest is severed, or separated, from the interest of all others. The sole owner may exercise all incidents of ownership without the consent or any other person or entity. Ownership by an individual, a corporation, a partnership or a trust is severalty ownership.

CONCURRENT OWNERSHIP

Simultaneous ownership by two or more persons or organizations is known as co- ownership or concurrent  ownership.  The three major forms of co-ownership are:            

1. joint tenancy,                                                                        

2. tenancy in common and                                                          

3. tenancy by the entirety.                 

As with freehold and non-freehold estates, the law regarding concurrent ownership is derived from common law. The various forms of concurrent  ownership are discussed in this chapter.

JOINT TENANCY              

A  joint tenancy is an interest in land owned by two or more persons with equal rights of possession under a title created by a single will or transfer which expressly declares the interest to be a joint ownership. The outstanding feature of joint tenancy is the right of survivorship by which the interest of a deceased joint tenant (owner) passes to the surviving joint owner. Joint tenancies were created to make certain that the ultimate survivor would become the sole owner of the property. Grantors often used this form of ownership when deeding or bequeathing property jointly to their children or family. For example, William died, leaving his property to his two sons, John and Paul, as joint tenants. Paul married and had three children . When Paul died, John became the sole owner of the property by right of survivorship. Paul's wife and children were entitled to nothing of Paul's interest in the property.

Four Unities. Four conditions (unities) are required to create a joint tenancy:               

1. Time.  All joint tenants must acquire title simultaneously.        

2. Title. Title must  be acquired by one instrument, such as a deed or will.        

3. Interest. All joint tenants must have equal shares in the property.        

4. Possession. All joint tenants must have equal rights of possession.

The deed must contain affirmative language, which clearly indicates the intent of the grantor. For example, the words "To John Buyer and Bill Medlor as joint tenants and not as tenants in common, "are sufficient to create a joint tenancy.

Effect of a Transfer of Joint Tenant's Interest. Under common law, a joint tenancy could not be terminated by the actions of the joint owners. A joint owner's interest could be transferred only to one of the other joint owners. This resulted in certain hardships, since a joint owner's interest could not conveyed or bequeathed to his or her spouse or children. To avoid such situations, the common law was modified by statute. Now, joint owners may transfer their interest to third persons that become tenants in common with the remaining joint tenant(s). For example, Peter, Edwin, and Donald own property as joint tenants. Peter sells his share to Ted, who becomes a tenant in common with Edwin and Donald who remain as joint tenants.

TENANCY  IN COMMON.   

Ownership of property by two or more persons without the right of survivorship creates a tenancy in common. Each tenant (owner) in common owns a separate, but undivided, interest in the land, and all have an equal right of possession of the land. Only one unity, namely that of possession, need be present. One owner in common may own an undivided half interest, another a fourth interest and two others an eight interest each. 

The interest of a tenant in common may be conveyed by deed or will, or may be granted to a trust without the consent of the co-owners. The interest of a common owner who dies intestate will pass to his or her heirs.

TENANCY BY THE ENTIRETY.       

A tenancy by the entirely is a form of co-ownership, which exists only for married couples. It is based on the old common law concept that a husband and wife are one person, the wife's rights being merged with her husband's. A tenancy by the entirety may exist only between husband and wife and must be created during the marriage. Ownership may not be divided by a court action, i.e. petition to partition, nor may the interest of either party be sold separately. Upon the death of a spouse, the surviving spouse becomes the sole owner of the property in fee simple. Upon divorce, tenancy by the entirely is terminated and the parties become tenants in common. Usually, the property is sold and the proceeds divided according to a court approved settlement agreement.

Under common law, a husband and wife could share property ownership only as tenants by the entirely. They are now permitted to own property in nay of the three concurrent forms of ownership. However, most attorneys recommend tenancy by the entirety for the couple's residence. Also, a tenancy by the entirety will provide some protection from creditors seeking to attach the couple's home for the payment of a debt of one of the spouses.

Terminating Co-Ownership.       

A tenancy in common and a joint tenancy may be voluntary terminated by a conveyance or by agreement of the owners. In the event of a disagreement, a suit partition in common may terminated a tenancy. A partition of the land operates to sever the ownership of the tenancy in common and divide the interests so that each co-owner may enjoy his or her part of the land in severalty. A joint tenancy and a tenancy by the entirety may not be partitioned. A tenancy by the entirety terminates upon divorce.

OWNERSHIP OF REAL ESTATE BY BUSINESS ORGANIZATIONS

There are special reason why business organizations should be used to own real estate. In the case of a corporation, for example, ownership exists independent of the people who are members of the business entity, and the arrangement make it possible for many people to have an interest in the same parcel of real estate.

Some of the goals to be achieved through business organizations are:                                                 

1. limited liability,

2. tax shelter,                      

3. centralized management,               

4. easy transferability of interest                      

5. a source of financing and      

6. syndication and joint ventures. 

 The three major forms of business organizations are:       

1. corporations,       

2. partnership and        

3. trusts

CORPORATION       

A corporation is an artificial person, a legal entity, chartered by the state. A board of directors elected by the stockholders it, and bylaws and articles of organization limit its activities. In most states, only one person who is the sole stockholder may organize a corporation. Corporate ownership is ownership in severalty.                                   

 Advantages of Corporate Ownership:                

1. Avoidance of personal liability for corporation debts and obligations.

2. Continuity of life. Death of one or all stockholders does not end the business.         

3. Centralized management, i.e. board of directors.       

4. Ease in transferability of interest by stock sale.

Disadvantages  of Corporate Ownership:       

1. Income may be subject to double taxation. The corporation pays a tax on its profit, and the stockholders pay a tax on the dividends.

2. Dividends are not deductible as a corporate expense to offset taxable income. Excessive officer salaries may be treated as dividends resulting in double taxation. Double taxation can be avoided through a Sub-Chapter S corporation.

3. Depreciation may be taken only by the corporation and is not passed through to the stockholders, as is the case of a partnership.

PARTNERSHIP.        

A partnership is an association of two or more persons to carry on a business and to share in the profits and losses. Under the Uniform Partnership Act, a partnership can hold title to real estate. The partners share the profits and are personally accountable for the losses. One advantage is that the partnership pays no income tax. All profits are taxed to the partners in their own individual brackets. Partners may be classified as either general or limited. 

General Partners.                                                                                              

General partners are responsible for the day-to-day operation and decision-making policy of the partnership.  General partners are personally liable for partnership debts, which may exceed their personal contribution.

Limited Partners.       

Limited partners do not participate in management. They share in the profits according to their percentage of capital invested and are not responsible  for losses, which exceed their cash investment. Thus, when the partnership fails, the limited partners stand to lose only their cash invested.

TRUST.                                                                                                      

A trust is created when legal title to real or personal property is transferred by the grantor  (trustor) to a trustee.  The property is held in trust, and managed for the benefit of the named beneficiary who has equitable title. The trustee has a fiduciary obligation to manage the trust property for the best interests of the beneficiary in accordance with the terms of the trust.

Business  Trust.                                                                                       

This is a trust with transferable shares similar to a corporation. By an instrument known as a  "declaration of trust",  a grantor may transfer property to a trust, naming him/herself both the trustee and the beneficiary. The  declaration of trust and deed are recorded, but the names of the trustee and beneficiaries do not have to be made public. In Massachusetts, a business trust, which owns real estate, is treated as a partnership. For federal tax purposes a business trust is treated as a corporation.

Estate Planning Trusts.         

Estate planners as a way of limiting estate  and inheritance taxes use trusts. An inter vivos (living) trust permits the grantor to receive the income from the trust for life, and takes advantage of the federal estate tax exemptions. A testamentary trust takes effect at death.

SYNDICATION.              

A  syndicate consists of a group, an association or a combination of individuals who join together to pool funds and to conduct a common venture to acquire real estate investments.  It is used to raise venture capital, minimize the risks and provide attractive tax shelters to potential investors.  Syndication allows many small investors to share in the purchasing power of a large investment organization. Syndications usually takes the form of  corporations, limited partnerships, or real estate investment trusts (REITS).  For tax advantages of syndicated ownership,  see Chapter 19.

CONDOMINIUMS,  COOPERATIVES AND TIME-SHARES 

CONDOMINIUMS AND  COOPERATIVES.                          

Both are forms of ownership, but differ in the manner in which they are created and owned. Condominium owners purchase their own units in exactly  the same manner as they would a detached residence. Unit owners share the ownership of the common areas and each pays a monthly fee for the maintenance of the areas owned in common.  In a cooperative, the occupants do not purchase their own units. They buy a share in the cooperative association,  which entitles them to a long-term lease of one of the apartments.  Note: Acquiring property through a "cooperative" involves purchase of stock shares.

COOPERATIVE OWNERSHIP

A cooperative apartment building is a multi-unit dwelling in which each resident has a stock interest in the corporation (partnership or trust) owning the building, as well as a lease entitling occupancy of a particular apartment within the building. In essence, the cooperative owner is a shareholder in an entity whose principal asset is a building. In return for the purchase of stock in the corporation, the owner receives a proprietary lease granting occupancy of a specific unit. As stockholders, the residents participate, through the election of a board of directors,  in the operation and management of the cooperative. The board of directors has the sole responsibility for management decisions and for governing the cooperative.

Financing Cooperative Ownership.         

The cooperative corporation borrows money for the purchase or construction of the building and is solely responsible to the lender. The shareholders or occupants buy a portion of the equity (interest over the mortgage indebtedness) and agree to pay a share of  the principal and interest based upon their percentage of ownership. The purchase of a cooperative usually requires a larger down payment than that of a single family home or condominium. Consequently, a cooperative developer may take back a second mortgage (share loan) on the buyer's stock as security for the loan for the equity purchase.

Cooperative  Owner's Monthly Cost.                   

Co-op owners pay a monthly fee, which includes maintenance, real estate taxes, insurance,  and principal and interest on the co-op mortgage. The co-op owner's share of the mortgage  interest and taxes may be taken as a tax deduction.

Selling a  Cooperative Unit.      

A shareholder's interest may be sold in accordance with a transfer value and rules set forth  in the bylaws of the cooperative. The sale is frequently subject to the right of first refusal or approval by the board of directors. Until 1984 bank financing was difficult to obtain since  stock is personal property and could not be used as collateral for a loan. Since then, the Federal National Mortgage Association has agreed to purchase co-op blanket mortgages and share loans written on co-op units, making it easier to obtain bank financing.

Main Disadvantage of Cooperatives.          

The co-op has a single mortgage and there is one tax assessment covering the entire property. If some tenant-owners fail to pay their share of the property taxes or mortgage debt service, the corporation or trust may face the possibility of foreclosure unless the others make up the difference. The other problem is that under the bylaws, any equity build-up due to property appreciation may accrue to the co-op and the continuing tenant-owners. Thus, a tenant-owner, upon deciding to leave the co-op, may only recover the initial equity investment plus equity build-up due to mortgage amortization during the period of ownership.

CONDOMINIUM OWNERSHIP

In a condominium form of ownership a purchaser receives title to a specified unit together with a membership in a community association, and an undivided interest in and rights to use a common area. The purchaser holds the specified unit in fee simple, subject to declared restrictive covenants and conditions. Each unit is like a cubicle in space, which is why it is sometimes referred to as "horizontal ownership." The boundaries, which are described in the condominium plan, include the interior surfaces of the perimeter walls, floors, windows and doors. The ceilings, supporting walls, utility installations, central heating, etc. are common property to be shared by all of the unit owners. Note: Condominium ownership is most commonly represented by a deed.

Common Property                                

The common elements include the supporting walls,  ceilings, hallways, elevators, stairways, roof, lawns and recreational facilities, such as swimming pools, clubhouses, tennis courts and golf courses. Parking space may be a common element or may be purchased or rented in addition to the living unit.

FORMATION OF A CONDOMINIUM.           

The formation of a condominium project requires:

1. the public recording of a master deed or declaration of intent,

2. the formation of an association of unit owners

3. a set of bylaws, and

4. unit deeds

Master Deed or Declaration.    

The declaration or master deed is a recorded statement of the owner's intent to make a site a condominium project or to convert an existing building to condominiums. The master deed describes the site, buildings, and common areas and includes floor plans showing the layout,  location, number and dimensions of the individual units. The master deed contains a statement of the purposes for which the building and each of the units are intended and restrictions, if any, as to their use. The master deed must designate the proportion that each unit represents to the entire project. This percentage determines the unit's share of the monthly maintenance fee and the number of votes it has in the association. Note: The rights of a condominium owner are defined by the condominium declaration and the master deed.

Association of Unit Owners.                                                                                      

The master deed must contain the name and description of the association, which is responsible for the operation of the condominiums. The governing body can be in the form of a corporation, trust, or association with provisions for annual meetings and duly elected officers, trustees, and directors. Officers can be held individually liable to the members for their failure to act properly in accordance with the regulations and bylaws. 

Bylaws.          

The association must have a complete set of bylaws, which, among other things, must provide for the following:          

1. The method of providing for the necessary work of maintenance, repair and replacement of the common areas and facilities.

2. The manner of collecting unit owner's share of the common expenses.

3. The procedure for hiring personnel, such as a manager.

4. The method of adopting and amending administrative rules and regulations governing the details of the operation and use of the common areas.

5. Any restrictions and requirements regarding the use and maintenance of the units and the common areas and facilities.

Unit Deeds.              

Title to individual units is conveyed by a unit deed. A facsimile of the purchase and sale agreement and the unit deed must be recorded with the master deed.

REAL ESTATE TAXES ON CONDOMINIUMS.          

Unit owners are responsible for the real estate taxes assessed to their units. The common area is not directly subject to real estate taxes, since the unit assessments include a percentage of it.

INSURANCE.               

Hazard and liability insurance on the entire building and common area is maintained by the condominium association. Unit owners are personally responsible for loss or damage to their personal property within their unit. Unit owners are also responsible for personal injuries and property damage to others as a result of their negligence. For complete protection, unit owner should maintain fire and theft insurance on their personal belongings, as well as casualty insurance for protection against claims of others for personal injury and property damage. For example, the hot water storage tank located in a condo unit rotted out and caused severe damage to the owner's unit and to the unit directly below. Because the owner did not have insurance, he was personally liable for the claims for damage to the building and for damage to the other unit owner's personal property.

GOVERNING THE  CONDOMINIUMS.                          

The owner's association holds regular meetings to elect officers and to vote upon administrative matters. Officers have special authority to hold executive meetings and to make decisions concerning matters, which require immediate attention for the best interests  of the members.

CONDOMINIUM FEES.                    

Unit owners are required to pay a monthly maintenance charge (condominium dues, association dues) to cover their pro-rata share of the common expenses. Common  expenses include the costs of building insurance, maintenance, fuel, water and utilities for common areas, management fees, reserves for replacements and repairs, fees for parking, pool, and other recreational facilities. Unit owners usually pay for their own gas and electricity.

PURCHASING A CONDOMINIUM - DOCUMENTS REQUIRED AT CLOSING.              

An attorney should always be consulted before any papers are signed. In original sales from the developer the buyer signs an offer or preliminary agreement, subject to review of the condominium bylaws, and subject to refund of deposit, if requested, within a week or two. Resales are treated as any other sale of a residence. At the closing, the purchaser receives a unit deed, a 6-D Certificate from the condo association certifying that there are no outstanding assessments or condos fees against the unit, and a certificate of insurance covering the common areas.

FINANCING THE  PURCHASE OF A CONDOMINIUM.          

The purchase of a condominium may be financed in the same manner as any other type of property. A default on the mortgage of one unit owner will not adversely affect the other unit owners. In case of foreclosure sale, the purchaser assumes the same responsibilities of the previous owner.

CONDOMINIUM CONVERSIONS.       

Because of the growing trend for converting apartment buildings to condominiums, there is a concern that needy and elderly tenants will suffer financial hardship if forced to vacate. To minimize this problem, many states have passed laws requiring owners to provide financial  assistance to cover a tenant's moving expenses and costs of finding comparable living accommodations.

Figure 5:1

CONDOMINIUM V. COOPERATIVE COMPARISON CHART

*Cooperative may impose transfer restrictions, provided they do not violate any state or federal laws against discrimination. Condo associations may not impose any restrictions on transfer of unit ownership, such as a right of first refusal.

TIME SHARING

Time-sharing or interval ownership is a modern concept of ownership, which is used primarily for the sale of vacation homes. The units are usually attached condominiums or converted motel or hotel rooms or suits. Multiple purchasers buy undivided interest in the unit with a right to use the facility for a fixed time period. For example, a developer may sell to each of fifteen buyers an undivided interest in a resort condominium unit with each owner being entitled to use the premises for a designated time period every year. The common expenses are prorated among the owners according to their use interval. The purchase price also varies according to the time of the year purchased. For example, a two-week period in the Bahamas in December might sell for more than two weeks in August. An attractive selling feature is the ability to swap a time period in one resort for a time period in another. For example, an owner of two weeks in December in a ski resort could exchange with an owner of two weeks in January in a tropical location. 

KEY WORDS AND PHRASES