What is real estate?

• Estate: an inventory of possessions

• Real: as opposed to personal
• Land and (immobile) structures
• Fixtures go with the structure. Immobile stuff.
An interesting asset class
• Immobile- cannot be taken from place to place. Therefore location
matters a lot.
• A real asset: Use takes place
• Heterogeneous – real estate units are each unique (location, if
nothing else).
• Durable
• Expensive – so credit markets are important
Land is what matters
• https://www.youtube.com/watch?v=YSOYTFw0JaA
• https://www.youtube.com/watch?v=WCOzqP9Dt9E
But also what you do with it…
Two major spaces
• Residential: homes purchased by the occupant
• Single family
• Multi-family (condos)
• Trailer parks and other structure-only
Commercial (income producing)

• Residential
• SF rentals
• MF rentals
• Apartments
• Student housing
• Elderly housing
• Special needs housing
• Office
• Business services
• Government
• Medical
• Retail
• Anchorless strip mall
• Anchored strip mall
• Power/Lifestyle/Regional center
• Outlet
• Is retail dead? (Hint: not really)
• Industrial
• Production
• Warehouse
• Distribution
• Self-storage
• Mixed use
• Mixes residential with other uses.
Real Estate Transactions
• Property rights- these are the essence of real estate transactions
• Right to “quiet enjoyment” to exclusion of others
• Right to income
• Right to transfer rights (disposition)
These rights can be unbundled
• Freehold
• Fee simple
• Conditional?
• Life estate
• Leasehold
• For years (specified)
• For a period (informal)
• At will
• At sufferance
 CONVENTION FOR THE EXTENSION OF HONGKONG, 1898
(Signed at Peking, 9th June 1898.)
Whereas it has for many years past been recognised that an extension of Hongkong territory is necessary for the proper defence and protection of the Colony:
It has now been agreed between the Governments of Great Britain and China that the limits of British territory shall be enlarged under lease to the extent indicated generally
on the annexed map. The exact boundaries shall be hereafter fixed when proper surveys have been made by officials appointed by the two Governments. The term of this lease shall
be ninety-nine years. It is at the same time agreed that within the city of Kowloon the Chinese officials now stationed there shall continue to exercise jurisdiction except so far as may
be inconsistent with the military requirements for the defence of Hongkong. Within the remainder of the newly-leased territory Great Britain shall have sole jurisdiction. Chinese
officials and people shall be allowed as heretofore to use the road from Kowloon to Hsinan.
It is further agreed that the existing landing place near Kowloon city shall be reserved for the convenience of Chinese men-of-war, merchant and passenger vessels, which may
come and go and lie there at their pleasure; and for the convenience of movement of the officials and people within the city.
When hereafter China constructs a railway to the boundary of the Kowloon territory under British control, arrangements shall be discussed.
It is further understood that there will be no expropriation or expulsion of the inhabitants of the district included within the extension, and that if land is required for public
offices, fortifications, or the like official purposes, it shall be bought at a fair price.
If cases of extradition of criminals occur, they shall be dealt with in accordance with the existing Treaties between Great Britain and China and the Hongkong Regulations.
The area leased to Great Britain as shown on the annexed map includes the waters of Mirs Bay and Deep Bay, but it is agreed that Chinese vessels of war, whether neutral or
otherwise, shall retain the right to use those waters.
This Convention shall come into force on the first day of July, eighteen hundred and ninety-eight, being the thirteenth day of the fifth moon of the twenty-fourth year of Kuang
Hsü. It shall be ratified by the Sovereigns of the two countries, and the ratifications shall be exchanged in London as soon as possible.
In witness whereof the undersigned, duly authorized thereto by their respective Governments, have signed the present Agreement.
Done at Peking in quadruplicate (four copies in English and four in Chinese) the ninth day of June in the year of Our Lord eighteen hundred and ninety-eight, being the twenty-
first day of the fourth moon of the twenty-fourth year of Kuang Hsü.
Giglio, Stefano, Matteo Maggiori, and Johannes Stroebel. "Very long-run
discount rates." The Quarterly Journal of Economics

N 80–99 100–124 125–200 700+ Freehold

Houses

438,598 0.002 0.003 0.002 0.03 0.96

2013
UK leases

Lease length remaining (percentage discount from freehold)

80–99 −0.176***
years (0.007)
100–124 −0.110***
years (0.008)
125–149 −0.089***
years (0.008)
150–300 −0.033***
years (0.010)
700+ −0.003
years (0.007)
Commercial leases
• Rent
• Base rent
BASE RENTAL. 2 5.,BASE RENTAL.,Tenant hereby agrees to pay a base annual rental (herein called the “Base Rental”) of $226,290 at the
rate of $19.85 per square foot of Rentable Area.,T

• Escalations

• Percentage rent
In addition to the payment of Base Rent, Tenant shall pay to Landlord for each Lease Year during the Term of this Lease, as Percentage Rent a sum equal to the
amount by which 8% of the Gross Sales for such Lease Year exceeds the Base Rent which is payable for such Lease Year equal to the quotient obtained by
dividing the annual fixed rate for such Lease year by the percentage rate. Gross Sales shall mean all box office receipts, sales of goods, merchandise, beverages,
food, vending machines and video games .
Percentage rent is additional rent, based on a percentage of gross revenues above a certain point. The “natural” threshold is that which
would cover the base rent. So if base rent is $17,000/month and the percentage is 8%, the natural threshold is 17000/.08=212,500.
Utilities, Insurance, Property Taxes
• Who pays for:
• Common area maintenance
• Tenant specific maintenance
• HVAC
• Security
• Insurance
• Property taxes
• Etc.
• Net leases vs Gross
• Single net – property taxes
• Double net – property taxes and insurance
• Triple net – tenant pays for pretty much anything, including maintenance
• Agency problems
• Comparison with residential
Debt
• A loan to purchase real estate is a mortgage
• The obligations and rights of the borrower are outlined in a note
(interest rate, schedule of payments, etc.)
• Describes what happens in default (nonpayment), etc. The loan is
secured, because the real estate is collateral
• Also lays out taxes and insurance escrow
Liens
• Claims against the property for non-fulfillment of note
• Tax liens
• Senior lien is usually the original lender
• Junior lien is usually the second mortgage lender
• Government has a lien in the event of nonpayment of property tax
• Even HOAs have liens (super-senior in some states)
Foreclosure
• Limitations on rights
• Spelled out in the deed
• Easements
• From government
• Certain things you can’t do.
• Zoning
• Why zoning? Maximization of total property values by minimizing spillovers.
• Building codes
• Eminent domain
• From private agencies
• HOAs, CCRs, BIDs and lease provisions
• Again avoiding spillover effects.
Easements
• Adjoining land parcels have conflicts with each other
• Driveways
• Utilities
• Easement versus license
Why is zoning important
• Seems obvious that you don’t want a chemical plant near a pre-
school. But there is more to it.
• The general rule is that land should be devoted to its “highest and
best use”.
• This usually happens, because the buyer who has the highest and best use in
mind is willing to pay the most for it.
• But:
• This depends on the sequence of land use decisions that went before
• We want the highest and best use for society, not for particular individuals
• 10 homes surround a vacant field
• They like it vacant! Value the view at $100,000 each
• Developer wants to put an office building. Stands to make $2 million.
• What is “correct” decision?
• What if the office value is only $500,000?
• What is the role of zoning?
FARs
• Floor-area ratio.
• Limitations on height of building
• A FAR of .25 would limit the floor space on a 1000 sq.ft lot to be 4000
sq ft. If the building footprint is 400 sq ft then a max of 10 stories.
• Lots of exceptions for environmental enhancements.
• A kind of zoning
• Tradeable “air rights”
• Homeowners’ associations
• Private entities that govern use within a housing development
• Like zoning, but more of a two-edged sword
• Accept limitations on own use of land in exchange for limitations placed on others’
• Again, the principle is maximization of total property value
From a California HOA
• ARTICLE V
• ARCHITECTURAL COMMITTEE
• Section 1 Architectural Committee. No building, fence, wall, antenna, pole, standard,
tower, or other structure shall be installed, erected or maintained upon any of the
subject Properties nor shall any exterior addition to or change or material alteration to
front yard landscaping herein be made until the plans and specifications showing the
nature, kind, shape, height, exterior color change, materials and location of the same
shall have been submitted to and approved in writing as to harmony of external design
and location in relation to surrounding structures and topography by the Board of
Directors
• Section 2. The Architectural Committee shall function in an advisory capacity to the
Board, and no Owner shall make any alteration, addition or modification to the exterior
portion of the Unit or to the Common Area without prior written approval by the Board,
which approval shall be deemed also to constitute approval of the Architectural
Committee. The Board shall have authority by majority vote to reject, in whole or in part,
the recommendations of the Architectural Committee, in its absolute discretion.
• Section I 1. Yule Lighting, No wiring, insulation, air-conditioning or other machinery or equipment, other
than that originally installed or approved by the Association, shall be constructed, erected or maintained on
or within the Common Area. However, the temporary erection of lighting customarily used to decorate the
exterior of homes during the Yule Season is acceptable, provided that:
• (a) The materials used are not excessive or offensive;
• (b) No puncture of any exterior surface other than wood is made;
• (c)The smallest feasible size and number of nails or screws is used; and,
• (e) The installation of such lighting shall not occur prior to the first day of December and all material used for
the project shall be completely removed not later Om the fifth day of January of the following year.
• Section 12, Fences, No fences, awnings, ornamental screens, sunshades or walls of any nature shall be
erected or maintained on or around any portion of any structure or on or around any part or portion of the
Common Area, nor shall any objects be placed or maintained on the exterior of any building within the
Project, except such as are installed, placed or maintained in accordance with the original construction of
the Project, and any replacement thereof, or as are authorized and approved by the Association.
Eminent domain
• Government takes away your property rights by force of law with
“just compensation”.
• Normally this is for roads and other public goods.
• Kelo decision
• http://ij.org/case/kelo/
• http://www.elpasotimes.com/story/news/immigration/2017/10/04/b
ill-would-ban-eminent-domain-border-wall/731314001/

http://reason.com/volokh/2017/12/14/how-using-eminent-
domain-to-seize-land-f