Property and Ownership Laws Study Guide for the Real Estate License Exam

Other Real Estate Regulations

Other regulations that relate to real estate include developing and subdividing, financing, dealing with third-party vendors or management associations, and environmental regulations.

Subdivision

A subdivision is created when a parcel of land is divided into two or more lots or sites for the immediate—or future—sale or building development. Steps to creating a subdivision include putting together a comprehensive plan and obtaining any rezoning, submitting final development plans to the municipality, obtaining permits and inspection approvals, having buildings inspected,and receiving certificates of occupancy for construction.

Development

Real estate development is a building process. It can include a number of activities such as building new construction, renovating and releasing existing construction, and subdividing raw land into buildable lots or parcels. Real estate developers generally take on the most risk, but also receive the greatest awards, because in one sense they are creating something that did not exist before they developed it.

Zoning and Other Restrictions

Zoning ordinances are restrictions on how property in a certain area can be used. Residential single family, multi family, industrial, retail, and office are some examples of real property use directed by zoning restrictions. Restrictions can also apply to things such as lot size, density of units or houses, how tall the buildings are and where they can be placed on an individual lot.

Other Considerations

Developers also take into consideration numerous other factors that will maximize the value and use of the property they are developing. Some of these factors include the amount of parking, ease of ingress and egress from major streets, landscaping appeal, the amount of common area space, street front visibility, the building aesthetics, and how the developed property contributes to the municipality’s master or general plan.

Financial Considerations

Real estate project financing consists of two distincts items: cash flow generated from leasing and the value of the building or asset being developed, separate from the cash flow that the buildings generate with rental income.

Leasing

Leasing to tenants is how a real estate development project generates cash flow. Leasing rates should be high enough to cover the operating expenses and upkeep of the property, the mortgage, plus provide a profit return to the owner or developer.

Types of Financing and Lenders

Real estate development generally involves three types of financing and lenders. An acquisition or development loan is used to purchase and pay for pre-construction costs of the property. Then, a construction loan is used to pay for the cost of building the project. Finally, if the property is being held as an income-producing investment, a long-term investment loan is used to pay off the first two loans while the owner makes monthly payments on the longer term loan out of the cash flow that the development is generating. Short term lenders willing to accept more risk in exchange for a larger down payment and higher interest rate fund acquisition and construction loans, while traditional lenders such as banks and insurance companies fund longer term loans.

The Loan Process

The loan application and process to develop real estate includes several points: describing the site and development concept, existing zoning and any needed changes, resumes of key development staff, costs and feasibility, projected income, and project development timelines.

Financing Construction

Construction loans are short-term loans used to develop real property. Payments to the developer are often periodically released by the lender in stages as the project progresses. Because construction financing is risky, interest rates are usually higher and the loan-to-value ratio is lower, meaning that the developer has to put more of its own money into the project.

Using Contractors

Real estate developers normally don’t do their own construction. Instead, they use different contractors to handle the detail work and different parts of the project. Often, a developer will hire a general contractor to oversee the entire project. Then, the general contractor will hire subcontractors to work on specific parts of the development—for example, surveyors, architects, builders, electrical and plumbing contractors, and landscaping contractors. Experienced developers choose general contractors with proven success with projects similar to the one they are developing.

Condominiums and Cooperatives

In addition to property for lease, developers may also build fee simple property for sale, condominiums—which are a combination of fee simple and tenants in common ownership—and cooperatives, where owners receive a share of stock in the corporation that owns the building along with the right to use a specific unit. The type of project a developer creates depends on several factors, including market demand, availability of financing, and how much density a city will permit.

Due Diligence with Property

Conducting due diligence on a property involves investigating physical and intangible factors. Viewing the property, ordering a land and environmental survey, and having the property professionally inspected are all parts of physical due diligence. Intangible items include examining the seller’s financial reports if buying a income property, investigating potential legal and regulatory violations from the current owner, and ordering a title report to identify existing liens, encumbrances, and easements.

Environmental Issues

Environmental issues can affect any real estate transaction—from basic residential leasing all the way up to commercial and industrial transactions, and new property development. Managing risks when and if they are discovered is usually possible. But sometimes the biggest challenge—and the largest area of risk—is failing to identify existing and former environmental issues.

Liability

Mold, radon, lead based paint, and asbestos are easy to detect and remediate. The bigger environmental risks in a real estate transaction are with land and water contamination. There are numerous government agencies at the state and federal level that enforce environmental laws. If a contamination is discovered and clean up required, the government will look to the current owner for a remedy—even if that owner had nothing to do with the pollution—then follow the chain of title back to its beginning.

Activities

Developers will create an environmental impact statement or study to analyze the effect of a project on the surrounding environment and ways to mitigate any negative items. Where flood water goes after a heavy rain, increased pollution from car traffic, closeness to a wetland, and nearby plant and animal life are just a few of the many items an environmental impact study looks at.

Contamination

Contamination can occur a number of different ways: Asbestos, brownfields (sites with hazardous waste), building-related illness, electromagnetic fields (from power lines), lead, radon gas, solid and radioactive waste, underground storage tanks (UST), carbon monoxide, mold, polluted water, waste disposal, and urea formaldehyde (UFI).

Detection

If someone involved in a real estate transaction suspects the presence of hazardous material, an environmental engineer should be hired to conduct an environmental assessment. A Phase 1 environmental assessment is used to conduct a general survey. If additional research is needed, Phase 2, 3, and 4 reports may be ordered from the engineer. Lenders on commercial property often require a Phase 1 report (and possibly subsequent reports) to help ensure that the loan they are making is secure.