The Analytical Framework
INTRODUCTION TO REAL ESTATE
PART 1: REAL ESTATE INDUSTRY OVERVIEW
A. The Real Estate Marketplace
Consists of a large number of separate markets differentiated by geographic location and type of real estate – it can
be said that an infinite number of markets exist
Analysis of the real estate: estimates the net operating income, deducts claims by lenders, government and others
that have priority over the equity claim, estimates the residual cash flow that belongs to the equity owner
B. Key Definitions
Property: refers to things and objects capable of ownership. That can be used, controlled, or disposed of by an owner
Real Estate: real property consists of physical land plus structures and other improvements that are permanently
attached. Refers to the legal rights, interests and benefits inherent in the ownership of real estate
Permanent attachment: personal property is moveable whereas real estate is not
Bundle of Rights:
Right of Possession P
Right of Control C
Right of Enjoyment E
Right of Disposition D
Right of Exclusion E
*Right of destroying or injuring property D
C. Features of Real Estate STUDY THIS
Unique Location (Heterogeneity) *externalities
Long Economic Life *buildings rarely fall down but usually torn down
Situs *interaction with surrounding land
High Unit Value
Government Intervention *taxation, incentives, etc
Perceptions *Investment > use because of tax policies and inflation. Changes expectations and psychic
income (non-pec uniary)
D. Real Estate Supply and Demand
Real Estate as a Consumer Good – sold directly to occupant-user
Real Estate as a Capital Good – income properties
Time – long construction periods
Place – new supply can only be created by construction or substitution at the particular location
Substitution – conversion, i.e. rental apartments to condominiums
PUBLIC POLICY RESTRAINTS
Government regulation can limit new supply i.e. environmental protection slows or prevents growth
E. Marketplace Individuals and Institutions
THE USERS – Owner-occupants and tenants that include individuals, private/public institutions, gov’t units
THE SUPPLIERS – Developers, surveyors, architects, and engineers. General contractors and subcontractors.
INVESTORS – Individuals, corporations, institutional lenders. Capital. FEDERAL, PROVINCIAL, LOCAL GOVERNMENT – Courts and administrative tribunals, infrastructure, police
powers, regulatory programs
i.e. attorneys, real estate appraisers, land planners, lenders, agents and brokers, etc.
PART 2: REGIONAL AND URBAN ECONOMICS
F. Regional and Urban Economics
How do cities grow?
Concentric Circle Theory by Ernest Burgess.
Clear CBD (central business district) typically containing large office buildings, well-established retail stores,
gov’t buildings, etc. Most valuable land in the city.
2 circular area called zone of transition with low-income dwelling units, nightclubs, manufacturing.
3 concentric circle called zone for worker homes for citizens working in the manufacturing in 2 circle as
well as CBD.
4 concentric zone included middle-class and some high-income units with single- and multifamily homes
and commercial/entertainment establishments.
5 circle commuter zone dwelling units for workers willing to commute for less urbanized living
Continuous migration. Wealthy move to new homes, less well-off move into their former neighbourhood
CBD. Same as Concentric Circle Theory, same zones. Difference is it’s not distance from CBD, but commuting
time. Clusters around access to transportation.
Explains residential clusters around CBD. Most expensive homes on the outside, less wealthy living inside the
city as they moved into the older homes.
Multiple Nuclei Theory
Mini-CBD’s developing in income clusters.
Patterns of Real Estate Values
- Real estate values tend to be higher near the CBD
- Access to transportation facilities tends to increase real estate values
- Major road intersections tend to have higher real estate values
Building cycles include/affected by: economic cycles, demographics, immigration, trade patterns, commuting
Neighbourhood Life Cycle – growth, maturity, decline, uncertainty, renewal/gentrification
G. Commercial Real Estate Structure
SHOPPING CENTRES, RIBBONS, SPECIALIZED AREAS
Agglomeration – the phenomenon of similar businesses close by. Car dealerships, etc.
Office Building Class Stratification
Class A Office: modern, high quality, prestigious, premium rents
Class B Office: acceptable, mid-quality, average rents
Class C Office: out-dated, below average rents
Types of Industrial Property
>Warehouse >Bulk Space >Flex Space
>Service Space >Tech/R&D
Types of Hotels
>Luxury Convention >Mid-rate Convention >Standard
>Economy Budget >Beverage
H. Location Quotient Analysis
Less than 1.00 – target area has LESS of an activity (or demographic profile) than the activity in the benchmark area
Equal to 1.00 – target area has an EQUAL level of an activity than the activity in the benchmark area
Greater than 1.00 – target area has MORE of an activity than the activity in the benchmark area
The Legal Environment A. TWO LEGAL SYSTEMS
English Common Law
Based on mixture of statutory law and court precedents. UK, USA, Canada.
Based mostly on statutory law – law is codified. Europe, South and Central America.
B. TYPES OF PROPERTY
Real vs personal property. When personal property like carpet is permanently attached to a building, it becomes a
fixture and part of the real property.
C. PHYSICAL INTERESTS study 3 kinds
Designated portion of the earth’s surface (surface rights) includes trees/water
Above-surface space or air rights air rights can be sold/leased/donated so that a building can be built taller than it
originally is allowed
Avignation Easements – restrictions for buildings in flight paths/airports
Subsurface space rights for water/minerals. In Canada, province owns it. Prior to 1913, Ontario land grants include
mineral rights. Texas is example where land grants include mineral rights.
*Riparian rights – rights of an owner whose land borders a river, stream or lake
*Prior appropriation – right to use natural water is controlled by government not landowner
*Littoral rights – exception of lands that border large lakes and oceans. Ownership permits use of waters
without restriction, title only extends to mean high-water mark, in Ontario, sometimes low water mark.
D. LEGAL INTERESTS
**Bundle of rights. PCEDED. Possession, control, enjoyment, disposition, exclusion, destroying/injuring.
Possession – mineral rights, family law, expropriation, easements
Exclusion – fire warden, building inspector, occupational health and safety inspector, police, easements
Disposition – spousal consent, registry act, land titles act
Control – can’t pollute, planning act, no loud noise/odours, pay property tax
Enjoyment – property tax, debts to workers, creditors can take land as payment
Destroying/Injuring – can’t pollute, occupational health and safety
Police power, taxation, eminent domain, escheat
E. ESTATES IN LAND STUDY 3 KINDS
Fee simple – when you own a house/condo, can give to anyone you want
Fee Simple Determinable – to x, his heirs, so long as they use property for Y purpose
Lasts forever, can be taken back at any time if broken
Fee on Condition Subsequent – to x, his heirs, unless land used for Y purpose, then z may take it
Lasts 21 years
Life Estates – life tenant grants to remainderman but must maintain property until death
Ordinary Life Estate – granting owner.
Legal Life Estates