“A lot of Americans think they got a
tax cut and they didn’t because their local Property tax went up, their excise
tax went up, their sales tax went up, and their prices went up, and everything
else because we failed to invest in some of these other things we ought to be
doing.”
-John Kerry, United States Secretary
of State
Isobel Crawley [about the village
hospital]: “Who funds it?”
Violet Crawley, Dowager Countess of
Grantham: “Oh, good, let’s talk about money.” VIDEO
-Downton Abbey (BBC-TV)
In the companion article "The Grand Bargain," we summarized and clarified the oral opinion presented by Federal Judge
Steven Rhodes on the Grand Bargain for bankruptcy settlement in the case of the
City of Detroit SUMMARY. In the wake of this decision, we turn to the recovery of the
city in this article.
Viewers of the BBC series Downton Abbey that is
shown on PBS will recognize the jewel of a house on an agricultural estate that
continues to struggle in order to pay its own way. We can draw a parallel
between this fictional estate and Detroit, “the Paris of the Midwest.”
Like
Detroit, one of the main productive resources of Downton Abbey is its real
estate. Where Lord Grantham depends upon agricultural production and rent from
tenants to keep afloat, the City of Detroit relies upon tax revenue from
properties within its jurisdiction in order to achieve this goal.
Therefore,
knowledge of the basics of Real-Estate Law and Economics is essential due to
their integral role in the process of generating the property-tax income that
is needed to support and regrow the infrastructure of Detroit.
Every attorney
and economist in this region should understand these matters because the
currently resolving Detroit bankruptcy may affect the work of attorneys and
others for whom Real Estate is not their specialty.
We
will discuss Real-Estate Economics and the concept of Real Estate, including
Titles and their attributes;
types of Tenancy and Properties;
Definition by
Measurement, using the Survey Township as the standard;
possession of a
property;
deeds and their conveyance from giver to receiver;
use of restrictions
imposed both privately and publicly;
and mortgages, both how they are
transferred and how they affect the larger financial markets.
Traditional
Definition
Let
us start with the field of Real Estate. How can we define it? The elemental
concept of real estate--the American tradition of property rights--is derived
largely from the Anglo-Saxon tradition.
Most directly, this concept of real
estate traces back to Nordic cosmology, early informal English tradition, Saxon
common law, and the English Magna Carta ARTICLE.
Real
estate involves the bundle of rights that we may have in respect to property.
This bundle of rights extends beyond the land and the structures built upon it.
It extends upward in the air, downward through the core, and outward to the
seas. Let us begin with a simple visualization of real estate by starting along
a shoreline. By doing this, we can experience four of the elements of
nature—sea, earth, air, and core.
We can visualize property by looking down a
beach at a point on the horizon. To one side, we view the sea and to the other
side the earth. Above, we observe the space taken by the air.
Focusing our
attention downward beneath the surface, we recognize the core. Where we stand
is the intersection of these four elements of nature.
Next,
let us face inland and imagine a horizon line. Above this line, we view the
sky, which aids us in determining air rights (the height of buildings, airplane
flight-paths, etc.).
Below the horizon line, we view the ground as the surface
of all of the earth, upon which we define land rights and use. Likewise, the
core below the ground helps us to define water, mineral, and other rights such
as those involving fracking.
Turning
180 degrees in the opposite direction, we face away from land and out to sea.
Again, we can mark a horizon line with the sky above and the sea below.
Standing on the shore on a clear day, we can recognize larger objects that
appear as far out to sea as twelve miles, due to the curvature of the earth.
The application of the principle commonly known as Line of Sight helps us to
define the delineation between sovereign states and international waters.
Titles
Now
that we have a general picture of real estate and its major elements in nature,
we turn to the bundle of legal rights and documents that we have developed in
most parts of the world. Let us begin with the concept of Titles and the
various documents related to it.
The Title equals the Estate minus the Tenancy.
Therefore, we can define Real-Estate Title as a bundle of rights that includes
the rights of Disposition, Use, Possession, and Exclusion.
Let
us begin our discussion of titles with the most common one known as a “Fee
Simple.” Generally, ownership of residential property is by Fee Simple.
The
Fee-Simple Title reflects a bundle of rights, including the right to 1)
“dispose” of the property by selling or giving it away; 2) “use” of the
property; 3) “possession” of that property, which is what the Title is about;
and 4) the ability and right to “exclude” others from using said property. We
can abbreviate these rights with the acronym DUPE.
The
Differences between Real Estate and Real Property
Often,
we bandy about the formal terms Real Estate and Real Property and use them
interchangeably. In actuality, what we call Real Property exists as the
combination of the Real Estate and the Title (Real Property = Real Estate +
Title) and serves as the basis of Freehold Tenancy, the type of tenancy that
has an indefinite duration of time.
Freehold-Estate Tenancy ARTICLE may extend
perpetually and can be passed from one party (one generation) to another. Most
commonly, the Freehold tends to possess a Fee-Simple Title.
Alternately,
the tenancy may be a Life Estate for which someone has the right to remain on a
property (in a house) until s/he passes away. After this event, property is
turned over to another party by prearranged agreement. This second party is
referred to as the Remainder Man (Person).
A
Non-Freehold extends for a limited duration, the length of time that a person
may hold it. Therefore, it is Non-Freehold. Generally, we refer to this type of
hold as a Leasehold, which requires a lease-contract that specifies a set
duration of time.
This
Leasehold resembles the Fee-Simple Title, except that one of the four property
rights in the bundle of rights is excluded. This excluded right is the one to
dispose of the property--to sell or give it away. However, the rights to use,
to possess, and to exclude others from using it still apply under this
Leasehold.
The
Non-Freeholder enjoys the property for a limited duration of time because the
Leasehold excludes the right of disposition. In summary, Leasehold rights
differ from a Freehold bundle of rights, which include disposition, use,
possession, and exclusion. Therefore, the Freehold Estate equals the Title,
which in turn equals this bundle of rights to the property.
Tenancy
Next,
let us consider types of Tenancy along with types of properties. Tenancy in
Severalty involves a number of people. Commonly, it includes a legal
partnership or a married couple and specified heirs for that tenancy.
Typically, this tenancy constitutes Joint Estate for which there is the Right of
Survivors. Anyone included in this tenancy who survives has the right to
continue the tenancy and to enjoy its Fee-Simple Title with its four-fold
rights of property. Similarly, in the related Tenancy by Entireties, the Right
of Survivors is the same.
Properties
Types
of property include Business, Residential, and Agricultural Property. Business Property may be service sector,
industrial (generally manufacturing), or commercial (both wholesale and
retail). Residential Properties are defined as properties of four or less units
or vacant land that is zoned for residential use.
Also, this type of property
includes ten or less acres of agricultural land. Commonly, acreage that is this
small lacks the natural conditions to provide a sustainable working farm. Agricultural
Property is defined as land that may be an operating farm or undeveloped land
not zoned for any economically higher use.
Survey-Township
Measurement
To
define Real Estate by measurement in the United States, we use the Survey
Township as our basic standard. With exceptions that are based upon surveys
under alternate systems, we have used this definition since the early
nineteenth century.
The standard Survey Township ARTICLE measures six miles by six
miles square (thirty-six square miles encompassing 23,040 acres).
To
measure large tracts of land by township, we start by establishing a baseline
and a meridian line, striving to center the intersection of the two lines. For
example, the Michigan Meridian, which extends southward from Sault Sainte Marie
through Ohio, was established in 1815.
For the Michigan survey, the baseline
that extends across the state to Lake Michigan (Baseline Road or Eight-Mile
Road) was established eight miles north of Detroit, which was then the state
capital ARTICLE.
However,
if we inspect a map of Detroit, we can see two major anomalies. The first
occurs on the east side of the city and along much of the riverfront.
This land
was originally surveyed by the “French-lot” system (strip farms) when the
region was a colony of France. The original deeds for these surveyed properties
were established at that time of development ARTICLE.
The second anomaly appears as a
rectangle of streets offset on an angle that follows Woodward Avenue from the
city center. Known as the Ten-Thousand Acre Tract EBOOK, it was granted to the city
by Congress (before statehood) after the fire of 1805.
Michigan attained
statehood in 1837. Not long after, the survey and platting (mapping and coding)
of the regions to the north and west of these anomalies were completed under the
Public-Lands Survey in the 1840s.
The
Survey Township (six miles by six miles, thirty-six square miles containing
23,040 acres of Property) serves as our standard unit of measurement ARTICLE.
In order
to understand how the Real-Estate Market works, we need to discuss the process
of Subdivision. Therefore, let us consider how we further subdivide a Township.
The first level of Subdivision produces thirty-six square-mile sections. As a
result, each section is one square mile and includes 640 acres.
The State of Michigan
established a system of roads based on these sections. The system of east-west
mile roads and north-south roads set a mile apart from one another serves as
the primary surface-road system within the city and beyond ARTICLE.
If we subdivide each square mile into
quarter-sections, each of these quarter-sections measures one quarter of a
square mile and contain 160 acres.
Another system of narrower and less
commercial roads has been set at the half-mile points within the mile-road
system that bounds the Sections. The boundaries of these quarter-sections are
one-half mile by one-half mile.
The
process of further subdivision of the quarter sections has occurred under the
authority of local governments. The next standard subsection is a sixteenth of
a section, a sixteenth of a square mile and 40 acres in size.
Traditionally,
this has been considered as the size of a workable family farm. In urbanized
areas, developers have subdivided the quarter sections into forty-acre
sixteenth sections for residential- and business-Property development ARTICLE.
The
placement of streets and the size of individual residential and business lots
within the subsections have varied in size at the discretion of developers.
Possession
of Property
Matthew
Crawley: “Downton is being mismanaged and something must be done. The thing is,
how do I do it without putting people’s noses out of joint?”
-Downton
Abbey (BBC-TV)
Possession
of property is one of the four basics rights in the Bundle of Rights. In
discussing this right, we need to address the transfer issue of Voluntary
Alienation, the giving up of the right to possess land voluntarily.
This action
is accomplished through an instrument of conveyance (transfer) of these rights
through a deed or will.
Conversely, Involuntary Alienation occurs when a person
dies without a will. In such cases, the property goes to probate and the court
determines ownership.
In some cases, a person dies without a will and without
heirs. In this kind of case, which is referred to as Escheat ARTICLE, the property is
deeded over to the State Government.
Involuntary Alienation also can include
situations involving Eminent Domain and Condemnation by Eminent Domain ARTICLE in which
a government may take over a property if it pays a fair value for the property.
The government may do this regardless of whether or not the present owner wants
to keep the property. Usually, an Eminent-Domain action is taken for some
larger public purpose, such as the construction of an expressway.
Our
next transfer issue is Adverse Possession, which may be Open or Hostile
Possession without permission. This may include matters of taxation. If taxes
on the property are in arrears, the county or municipality of jurisdiction can
take over the property and sell it.
In Wayne County and the City of Detroit,
this type of Adverse Possession has left both governmental bodies with an
excessive quantity of unproductive properties in respect to tax revenue.
This
remains the major post-bankruptcy issue for Detroit, an issue that affects the
county as well.
Currently, both governments hold a large number of seized
properties as well as properties that are in active tax foreclosure or are in
arrears. Due to this fact, these governments are unable to collect their major
traditional source of operational revenue.
Clear
Adverse Possession may occur if there is a legitimate claim on the title.
Flagrant Possession can occur by a party moving in and occupying the land.
However, it may be that a property exists where there is no apparent claim.
In
such cases, if a person resides at that property for seven years (squatter’s
rights by common law), then that person may claim ownership to what otherwise
would be considered an abandoned property.
“OR” and “EE”
Let
us return to Voluntary Alienation. In order for the transfer to occur, this
alienation requires an instrument of conveyance in the form of a deed or
sometimes in the conveyance of a title. Before we move more deeply into this
matter of transfer, let us clarify the names and roles of the two principal
parties.
The giver represents “the origin;” therefore, his/her name ends with
“OR.” The receiver is “the end-recipient;” therefore, his/her name ends with
“EE.” The instrument of the title or deed is given by a Grantor to a receiver,
who is known as the Grantee.
Lien
vs. Title Theory
Two
different theories of Title Rights exist throughout the United States.
Depending on the individual State, we see the application of one of these
theories--Lien Theory or Title Theory MAP.
Generally, the specific theory indicates
which of the two parties has the predominant right over the property.
In a
Lien-Theory State, the Grantee (the Mortgagor or buyer of the Property)
maintains legal control. In a Title-Theory State, the Mortgagee (the lender)
maintains that control. Half of the States (including Michigan) adheres to
Title Theory.
Deeds
and Their Conveyance
The
Deed is an instrument of conveyance for the transfer between two parties. One
party is the giver, the other the receiver.
The giver who is the Grantor (most
likely the seller) gives the Deed to the Grantee (who is the buyer).
For
example, the transaction may involve a Sale-by-Owner property. In such a case,
that For-Sale-by-Owner gives the Deed or Title (or both) to the borrower, who
is the receiver.
The
Deed is a recorded Constructive Notice. Therefore, a Constructive Notice is a
written document that is filed as a public record.
Historically, an actual
notice is oral. By tradition, a person would stand in the middle of a village
while all of his/her neighbors would gather about. Then, s/he would proclaim,
“I now own [a specified piece of] property” and describe it to the townsfolk.
This kind of notice is neither written nor filed. Therefore, an actual notice
is an informal notice.
A
number of different types of deeds exist. The following are some of those that
we encounter most often:
Bargain-and-Sale
Deed for conveying real property without covenants. This is a deed for which
the Grantor implies to have or have had an interest in the property but offers
no warranties of Title to the Grantee.
Quit-Claim
Deed, in which the owner/grantor terminates (“quits”) any right and claim to
the property but does so without Title Covenant or warranty.
Special-Warranty
Deed, in which the seller warrants or guarantees the Title only against defects
arising during the period of his/her tenure or ownership of the property.
General-Warranty
Deed conveys the property with certain (standard) covenants and warranties. The
Grantor is bound legally by these warranties, whether written expressly into
the deed or implied by statutory language.
Free-and-Clear
Deed, which warranties that the property is free of liens, encumbrances, and
legal questions as to ownership.
Essentially,
these instruments are what the names suggest. Deed requirements state that
there must be a premise. In other words, there must be a grantor and a grantee
and some interchange between them.
In addition, there is what has come to be
known as the Habendum Clause or the Seisin Clause (a term that traces back to
the Middle Ages) DEFINED. This clause means to have and to hold the property with some
consideration of value given.
In summary, a valid deed must be signed by the
grantor along with two witnesses, offered voluntarily by the grantor and
accepted voluntarily by the grantee.
Encumbrances
(or the Lack Thereof)
As
this term emerges repeatedly, let us consider the matter of Encumbrances. If no
encumbrances exist, then the property (i.e. the deed) is free and clear.
This
means that there are no liens upon it, such that no financial obligation
remains when the property is sold. Therefore, no party can claim a portion of
the sale price in order to pay off a lien.
As an example, a home has an
accumulated past-due water bill. When the seller receives payment for the house
at sale, the water department may step in and make its claim for reimbursement.
Deed
Conveyance
As
we have seen, a deed is an instrument of conveyance between two parties, the
giver and the receiver. Let us look at the transaction that occurs between
giver and receiver.
The giver is a grantor and also the seller. In contrast,
the receiver is the grantee and the buyer of the property. Therefore, the giver
tenders a note to the receiver, the borrower.
By doing this, there exists
recognition of entitlement for the basic rights of disposition, use,
possession, and exclusion.
For example, if a buyer makes the winning bid on a
city-owned property at a city auction, the city is the grantor and the buyer is
the grantee. The grantee would now own the piece of real estate and have the
obligation to pay the semi-annual taxes on it.
Furthermore,
there are conditions of a title that need to be considered.
We refer to the
first condition as the Chain of the Title, a path that sometimes traces back to
an original land grant. An uninterrupted chain must be established for the
title passed from one party to the next.
This assurance is made through a Title
Search, summarized in a document known as the Abstract of Title. The abstract
is accompanied by an Opinion document as to the quality of the search in
respect to the cleanliness of the deed and the passage of the title.
Title
Insurance
Title
Insurance plays an important role in all of this business because it protects
the buyer and the lender. For buyers, the insurance protects them for the
amount of the purchase price.
For lenders, it protects them in terms of the
loan amount. Title Insurance protects both parties in cases of forgeries that
may have occurred in the present day or the distant past in respect to both the
deed and the title.
Restrictions
Restrictions
of Use for a property may be either public or private. The private restriction
may exist in the form of a Deed Restriction that is written into the deed or
some restrictive covenant that is added to it.
For example, there may be a
restriction placed in terms of the type and number of structures that may be
built upon the property.
Government
restrictions may involve zoning laws that determine how a property may be used. For example, a local restriction may prevent a person from giving piano lessons
in his/her home.
In addition, government actions include the right to tax
property as well as the right of Eminent Domain. Such actions place
restrictions on a piece of real property. If a deed-holder does not pay the
property taxes, s/he may forfeit this property to the government.
Encroachment
and Easement BOOK
Encroachment
and Easement involve adjacent properties and the rights of the
adjacent-property owners. Encroachment occurs when one person uses a property
belonging to someone else, such as moving a fence onto that property without
the expressed permission of the owner.
An Easement is just the opposite. Here
is an example: You open your car door in
a driveway and gets out onto a strip of lawn that belongs to a next-door
neighbor. The neighbor, screaming “Get off my property,” turns a hose on you.
Who is right in this case? Generally, you would be, because a one-foot Easement
is allowed.
More
on Mortgages
Let
us look at mortgages in a little more depth. A mortgage tells us that the
Mortgagor, the buyer, provides the lender with a guarantee for the full
repayment of the loan.
For the two parties involved in such transactions, we
again have a giver and a receiver. One party gives a Promissory Note and
mortgage to the Mortgagee, the lender that often is a bank. This second party
is the note-holder, who gives loan money to the note-giver, the party that is
the buyer.
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The
monthly payment for a piece of property usually is a fixed amount. Of this
amount, part of the payment is principle and part of it is interest.
At the
beginning of a mortgage, most of this monthly payment is interest. Very little
of the payment reduces the principle and pays down the balance of the mortgage
loan. As we proceed to the years near the end of the mortgage, most of that
fixed payment then becomes principle.
A
mortgage is made up of different payments. Together, the principle and the
interest are referred to as to as Debt Service.
However, in most mortgages,
there are taxes that are paid along with property insurance. Both items are
paid by the borrower into an impounded fund called an Escrow Account. Drawn
from this account, these items are included as part of the time payment.
They are
held in escrow and then dispersed to the Mortgagee.
Therefore,
the mortgage payments include Debt Service and Escrow-Impound Payments.
Together, these two items comprise the total amount that is paid over time.
Commonly, this total is referred to by the acronym PiTI (pronounced “pity”). It
includes Principal, (i)nterest, Taxes, and Insurance.
A
promissory note (an obligation to pay) is signed by the Mortgagor, who borrows
money with the promise of paying it back. The mortgage is recorded and becomes
a security instrument in respect to the property.
The
mortgage is a Voluntary Lien that ensures that the lender will get paid. It is
signed by the Mortgagor, the borrower. As a document, it can facilitate the act
of foreclosure.
When mortgages enter the financial market in clusters, they
often get bundled into other financial instruments that can be resold multiple
times, creating a nightmare of confusion as to the identity of the legitimate
lender. Careful tracking of these documents has become increasingly critical.
Over the past decade, this document-tracking has been widely abused. This has
led to many people losing their homes and businesses unjustly.
In
the first decade of the 21st Century, lenders turned to the issuance of
sub-prime mortgages (high-risk mortgages with very little security) to a large
degree. Potentially, these sub-prime mortgages can earn a higher amount of
interest because of the risk.
However, most of these Mortgaged-Back Securities
collapsed, causing the downfall of Lehman Brothers along with deep problems for
other Wall Street firms in September 2008.
Due to the number of sub-primes made
in Detroit, this collapse contributed to pushing the city into bankruptcy.
A
Farewell to ARMs?
Traditionally,
Prime Mortgages have been the conservative instrument of choice for banks.
Lenders tend to like this standard mortgage because of the low risk.
However,
Prime Mortgages do not carry the highest rate of interest. Therefore, in terms
of the gamble involved, these mortgages are not desirable for investors in the
realm of Hedge Funds and other less-conservative investments.
With a shift to
these higher-risk instruments, Adjustable-Rate Mortgages (ARMs) appeared ARTICLE. With
ARMs, the interest rate on a mortgage rises or falls with prevailing
baseline-interest rates that are set in accord with the London Inter-Bank Offer
Rate (LIBOR).
As a result, ARMs have the potential to put borrowers below water
(such that the value of the property is decreased to below what is owed on the
Property) as the interest rates on their mortgages increase. Under these
circumstances, there has been a greater tendency for buyers to abandon their
properties.
In
Summary
Tom
Branson: “Sometimes a hard sacrifice must be made for a future worth having.”
-Downton
Abbey (BBC-TV)
In
this column, we have discussed the field of Real Estate and its
relation to the tax base of Wayne County and the City of Detroit.
We looked at
titles and the attributes of these documents and the types of tenancy and
properties.
We defined and measured property in terms of the unit of the Survey
Township.
We discussed possession of property by different means and looked at
deeds and their conveyance from giver to receiver.
We discussed the
restrictions of use of property.
Finally, we addressed mortgages and the role
that they play in the wider financial market.
The loss of private ownership
through abandonment or otherwise translates into a loss of tax revenue, the
primary income of a city. Without this income, Detroit cannot support itself
and survive.
We hope that our readership of attorneys, economists, and others
are better equipped with the methodology of Real Estate for application in
their professional practices as well as the knowledge to carry on informed
discussions.
