1 NYS Department of State brokers

The Department of State is primarily responsible for Once an individual obtains their NYS real estate issuing real estate , pocket cards, and handing salespersons license, they must do the following to obtain down disciplinary action. a brokers license:

Article 12-A of the NYS outlines the - Have at least two years of experience as a real estate roles/duties of the Department of State salesperson.

Attorney General - Be at least 20 years of age.

According to Article 12-A (NYS Real ), the - Complete the 45-hour NYS real estate broker’s course Attorney General shall prosecute criminal actions for (120 hours of total coursework including the 75-hour violations of the Real Property Law. real estate salespersons course).

New York Court of Appeals - Pass the State real estate broker’s exam.

The New York Court of Appeals is the highest court in A brokers license must be renewed every 2 years. New York State. Associate broker Misdemeanor Associate real estate brokers must fulfill the same According to section 442-e of the NYS Real Property Law: requirements as a broker (they must obtain their brokers license), but their status in the firm is the same as that of “Any person who violates any provision of this article a salesperson. shall be guilty of a misdemeanor. The commission of a single act prohibited by this article shall constitute a Pocket Card violation hereof.” The Department of State issues a real estate license and a Violations of the Real Property Law pocket card.

The Department of State may suspend or revoke a real The salesperson’s license is held with their sponsoring estate salesperson or broker’s license for violations of the broker. Real Property Law. The salesperson must carry their pocket card at all times The DOS may also impose a fine not to exceed $1,000. when doing business and show it on demand.

Real Estate License Requirements Suspension or Revocation of Sponsor's License

Real estate salespersons license If a broker’s license is suspended or revoked, each real estate salesperson working under that broker shall also A real estate salesperson must be at least 18 years old. have their licenses suspended.

A real estate salespersons license is valid for 2 years. In this case, the State deems the salesperson’s license as a ‘discontinuance of association with the broker being Every 2 years, the salesperson must renew their license suspended’. online through eAccessNY. License Exemptions Before renewing a license, the salesperson must complete 22.5-hours of Continuing Education. - Attorneys admitted to the NY State Bar are exempt from obtaining a license if they represent a client. If an If a real estate salesperson fails to renew their license attorney wants to employ salespersons, they then must within 2 years, their license is considered expired. obtain a broker’s license. The salesperson must retake the State exam and reapply - Public officers are exempt when performing official for their license. duties. Real estate salespersons may perform acts that a broker - Persons under the judgement or order of a court. is authorized to perform, but they do so on behalf of a broker with whom they are associated. 2 It is important to note that if a licensed attorney wants to Special Agent have salespersons working under them (the attorney acts as their sponsoring broker), the attorney must obtain a An agent with limited authority to act on behalf of the broker’s license. principal, such as created by a listing.

Advertising Example: Real Estate Agent / Real Estate Broker

According to section 175.25 of Article 12-A of the NY Real Universal Agent Property Law: A universal agent has complete authority over any "All advertisements placed by a broker must indicate that activity of the principal. the advertiser is a broker or give the name of the broker Example: Power of Attorney and his telephone number. Agent / Client Relationships All advertisements placed by a broker which state that property is in the vicinity of a geographical area or The buyer and/or seller is known as the Principal or territorial subdivision must indicate as part of such Client. advertisement the name of the geographical area or territorial subdivision in which such property is actually The broker is known as the Agent. located.” The salesperson is a Sub-agent of their broker. Blind Advertising Buyer Agency / Buyer Brokerage All ads by a licensee must indicate that the advertiser is a broker and give the name and telephone number of the Buyer agency occurs when a purchaser/renter hires a broker. broker to represent them.

Ads that do not contain this information are called blind The purchaser/renter employs a broker to locate a ads. property. In this relationship, the buyer is the principal and the broker is the agent. Blind ads are illegal in New York State. A Buyer Representation Form should be signed between Stigmatized Property Disclosure the buyer and broker.

According to Article 443-a of the NY Real Property Law, Fiduciary Duties sellers and seller agents do not have to disclose the following facts when selling or leasing residential The real estate agent serves as a fiduciary to the client. property: A fiduciary relationship implies great confidence and 1) Occupants who have AIDS or other illnesses not trust. transmitted through occupancy. As a fiduciary, the agent is in a position of great trust by 2) Properties that were a site of death due to natural the client. causes, accidents, suicide, homicide, crime and other reasons. Use the acronym OLD CAR to remember the agent’s fiduciary duties to their client. Record Keeping Obedience – Agent shall follow the legal instructions of Brokers must maintain records of all transactions for at their client. least 3 years. Loyalty – Agent shall work in the best interests of their Types of Agency client.

General Agent Disclosure of Information (Full Disclosure) – Agent shall promptly communicate all information about the Someone authorized to transact every kind of business transaction to their client. This includes presenting all for the principal. offers to the client.

Example: Property Manager Confidentiality – Agent shall not reveal confidential information about the client to prospective buyers, 3 without the express consent from the client. Such Dual agency occurs when a broker represents both the confidential information may harm the client. buyer and seller in a transaction.

Accountability – (refers to financial accountability) the Dual agency is permitted in New York State; however, agent must account for and promptly remit all money or advanced informed consent by BOTH parties is required. property entrusted to the agent. Dual agency inherently puts the agents fiduciary duty of Reasonable Care and Duty to Account – Agent shall loyalty at risk. possess the necessary skills and training to perform their requested services. Undisclosed Dual Agency is illegal in New York State.

Agency Disclosure Form Instead, the agent should notify both parties and have them sign the Agency Disclosure form, which states that The Agency Disclosure Form is a written explanation, to the agent is acting as a dual agent. This is known as be signed by a prospective buyer or seller of real estate, Advance Consent to Dual Agency. explaining to the client the role that the broker plays in the transaction. Dual Agency with Designated Agents

This Agency Disclosure Form is known as the ‘New York A broker may elect to have designated agents within State Disclosure Form for Buyer and Seller’. his/her office to represent both sides in the transaction.

The Agency Disclosure Form outlines the following: In this case, one designated agent will represent the seller and another designated agent will represent the – The agent’s duties to the client. buyer.

– Explains that an agent owes a fiduciary duty to the This helps reduce the broker’s risk of violating their client. fiduciary duties to the client.

– Allows for advance consent to dual agency. Estoppel

The Agency Disclosure Form is not required for the sale An agency by estoppel exists when a principal does not of vacant land. stop an individual from representing his or her interests, thus creating an agency relationship between the two. According to Section 443 of the NYS Real Property Law, licensees must present a written Agency Disclosure Form Listing that details consumer choices about representation at the first substantive contact. A listing is created between a seller and a broker (NOT a salesperson). If a seller or buyer refuses to sign the Agency Disclosure Form, the agent should do the following: The listing agreement creates an express agency relationship. - Document the names and time, date, and reasons for refusal to sign the disclosure form. The following listing contracts are the most used by brokers: - Complete the declaration form stating the facts, have it acknowledged, and retain a copy for their records for at Exclusive Right to Sell Agreement: least 3 years. This listing contract offers the most security to the - The declaration form should say the following: broker. The seller must work exclusively with the broker to sell their property. The broker is entitled to a “Although I indicated to the buyer/seller that New York commission even if the seller finds a buyer themselves. State Law required that I request that he/she sign to acknowledge receipt of the disclosure notice, he/she Exclusive Agency Agreement: refused to sign the acknowledgement to the disclosure form when presented. The reason given for this refusal The seller must work exclusively with the broker to sell their property, BUT the seller does not have to pay the was as follows ” … broker a commission if they find a buyer themselves. Dual Agency Open Listing Contract: 4 The seller is allowed to work with any broker who brings - Compensation is not based on hours worked (a them a buyer. Only the broker who brings a buyer is salesperson can make their own hours). entitled to a commission. This is the riskiest type of listing contract for a broker. - A salesperson is not required to work in a specific location (a salesperson can work from home if they An open listing contract is an example of a unilateral choose). contract. - A salesperson can have outside employment. Net Listing - Brokers can provide office facilities and supplies, but A net listing is not technically a listing agreement, but a salespersons are responsible for their own expenses method of establishing the listing broker’s commission as (transportation, cell phone, clothing). all money above a specified net amount to the seller. - The broker supervises the salesperson, but does not Net listings are illegal in New York direct or control their activity.

Commissions - Either party can terminate the relationship at any time.

Real Estate Salespersons/Agents DO NOT collect money or commissions. If a salesperson is not deemed an independent contractor Any commissions earned are paid to the salesperson’s under their sponsoring broker (the actions of the broker broker, who in turn, pays the salesperson his/her portion or salesperson instead suggest an employer/employee of the commission. relationship), the broker is responsible for withholding income taxes. Commissions are determined between the client and broker and are always negotiable (there is no ‘standard’ If this occurs, the salesperson cannot file a Schedule C of commission rate). the federal income tax Form 1040 and deduct expenses incurred during the year Commissions are typically calculated as a percentage of the sales price (not the listing price). Salespersons should track their expenses and file yearly federal and State tax returns. Commissions between the broker and salesperson are always negotiable. The sponsoring broker must prepare and file IRS Form 1099-MISC for any salespersons who earn $600 or more A commission is technically earned when the agent finds in a year. a “ready, willing and able buyer” for the seller. Vicarious Liability Independent Contractor Relationship Vicarious liability is a situation in which one party is held A salesperson must work under a sponsoring broker. partly responsible for the unlawful actions of a third Their relationship must be that of an independent party. contractor. According to Section 442-c of the New York Real It is important that salespersons maintain their Property Law, a broker is vicariously liable for a independent contractor status in the eyes of the Internal salesperson’s actions only when “the broker had actual Revenue Service (IRS). Otherwise, if the salesperson is knowledge of such violations or if the broker retains the considered an employee, the sponsoring broker will be benefits from the transaction after he knows that the required to withhold income taxes and pay for health salesperson has engaged in some wrongdoing”. insurance. Sherman Anti-Trust Act To maintain an independent contractor relationship, the following rules must be met: The Sherman Anti-Trust Act made the following actions illegal: - The broker shall not withhold income taxes. The salesperson must pay their own taxes on commissions. 1) Price fixing

- The salesperson is responsible for paying social security 2) Group boycotts taxes and self-employment taxes. 3) Market allocation 5 4) Tie-in arrangements - chandelier

Misrepresentation - custom book shelves

Misrepresentation means making an intentionally false - wall-to-wall carpeting statement to induce someone to contract. - plumbing fixtures Misrepresentation consists of: Trade Fixtures 1) A false representation of a material fact. Trade fixtures are items of that a 2) A person making the false representation knew or business operator installs in rented building space. should have known it to be false. Unlike a typical , a trade fixture is considered 3) A person acts or does not act based on the personal property of the business owner. It is assumed misrepresentation. the business owner will take the trade fixtures with them when moving out of the rented space. 4) A person who relies on the misrepresentation in acting or not acting. A display case is a common example of a trade fixture.

Positive misrepresentation means the broker concealed a material defect from the buyer. Fee simple absolute provides the most complete form of Self-dealing is another example of positive ownership. misrepresentation. Absolute ownership of real property; a person has this Unintentional misrepresentation occurs when the broker type of estate where the person is entitled to the entire makes a false statement to the buyer about the property property with unconditional power of disposition during and the broker does not know whether the statement is the person’s life and descending to the person’s heirs or true or false. distributees.

Property Condition Disclosure Statement Most properties in New York have a Fee Simple Absolute , unless specified otherwise! The Property Condition Disclosure Act requires the seller to submit to the buyer, a Property Condition Disclosure Ownership in Severalty Statement, prior to signing the contract of sale. If the statement is not signed, the buyer shall receive a $500 When title to real estate is in the name of only one person credit against the purchase price of the property. or entity, it is an estate (ownership) in severalty.

Most seller attorneys advise their clients NOT to sign the Think of it as a single individual owns real estate, statement, as it opens them up to a vast amount of therefore, the ownership is ‘severed’ from all others. liability. Co-ownership Real Property vs Personal Property Joint tenancy: Real property is the land and improvements, and all legal Joint tenancy is a form of co-ownership by two or more rights, powers, and privileges of real estate ownership. persons, each of whom has an undivided interest WITH Real property includes the bundle of rights. the “right of survivorship”. Everything that is not real property is personal property. Tenancy in common: Personal property is also known as chattel. Tenancy is common is a form of co-ownership by two or Fixtures more persons, each of whom has an undivided interest, WITHOUT the “right of survivorship”. A fixture is personal property that attaches permanently Remember: the difference between joint tenancy and to the land or improvements and becomes part of the real ​ property. tenancy in common is the “right of survivorship”.

A few typical examples of a fixture include: 6 A tenancy in common does NOT include the “right of A periodic lease automatically renews itself for another survivorship”. period at the end of each period unless one party gives notice to the other party at a time specified in the lease Tenancy by the entirety: before the lease ends.

This form of co-ownership is limited to married couples. Estate at Will:

4 Unities of Co-ownership The duration of an estate at will is for an unknown period of time. This is an open-ended estate. The 4 possible unities include: Water Rights 1) Time Littoral Rights = Lake 2) Title Littoral rights apply to property bordering a stationary 3) Interest body of water. 4) Possession Riparian Rights = River (stream)

Life Estates Riparian rights belong to the owner of a property A is ownership, possession, and control of a bordering a flowing body of water. property for someone’s lifetime. Supply and Demand For example: Real estate values are driven by the concept of supply Joe will grant ownership of his property to Sarah until and demand. the death of Nancy. When demand (the number of buyers in the market) is Once Nancy passes away, the ownership of the property greater than supply (the amount of available homes to will revert back to Joe (or Joe’s heirs). purchase), prices will increase.

A life estate is a form of fee simple estate. When supply is greater than demand, prices will decrease. A life estate may be formed when a couple owns property as a tenancy by the entirety. If one spouse dies, the other spouse gains full ownership of the property. An easement is the right to cross or otherwise use When the remaining spouse dies, the property is someone else’s property for a specified purpose. transferred to the children. An easement is a nonpossessory interest in land owned Leasehold Estates by another.

A is a non-freehold of limited duration, The common term for an easement is “right-of-way”. providing the right of possession and control but not “run with the land”. title. It is important to know the following types of easements: There are a few types of leasehold estates you should be familiar with: Easement in gross

Estate for years: A right of use in the land of another without the requirement that the holder of the right own adjoining An estate for years exists for a fixed period of time. It land. can be as short as a day and as long as many years. Once the term of the lease ends, the rental agreement is Also known as a commercial easement in gross. automatically terminated. This type of easement is commonly used by utility Most residential leases are an estate for years. companies.

Periodic Estate: Easement by necessity: 7 Used when a property owner is landlocked and needs to Mortgage : cross an adjacent property to get access to their property. This is the most common type of lien. Easement by prescription: When a homeowner obtains a mortgage, they are Obtained by use of land without the owner’s permission granting the lender a mortgage lien on their property. If for a legally prescribed length of time. the mortgage is not paid, the lender may exercise the mortgage lien and demand full payment of the loan In New York, the use must be open and obvious, and through the sale of the property (also known as must continue uninterrupted for 10 years. foreclosure)

Easement by implication: A mortgage lien is another example of a voluntary, specific lien. This type of easement arises by implication from the conduct of the parties. Tax Lien:

For example, if a landowner sells to a When a taxpayer is delinquent in paying property taxes, a company, that company has an easement by implication tax lien attaches against the property. to go onto the property to do mining A tax lien takes the highest priority among other Encroachments (even higher than a mortgage lien).

An encroachment is a building, part of a building, or obstruction which intrudes upon the property of another. A deed is also called an instrument of conveyance. In other words, a part of one’s property crosses over the property line of an adjoining property - The Grantor is the Seller (conveys the deed).

Common encroachments include: - The Grantee is the Buyer (receives the deed).

- a fence that was partially built onto the neighbor’s - The grantor of a deed must be at least 18 years old and property. mentally competent.

- a tree that has grown to cantilever over the property Essential Elements of a Deed: line. - Must be in-writing (according to the Statute of Frauds). - a deck that was built slightly over the property line. - Include a grantor (the person conveying title to the - a garage or shed, part of which was built over the property). neighbor’s property line. - Include a grantee (the person receiving title). Liens - Contain a granting clause, which includes words of A lien is a claim or charge against the property of conveyance. another. - Provide of consideration (something of value). It is important to know the following types of liens: - Include a legal description of the property. Mechanic’s Lien: - Include an habendum clause (this clause begins with the This type of lien applies to individuals or companies who words “to have and to hold”). have “supplied labor or materials that improve a property”. - Include limitations and subject-to clause (any deed restrictions or easements must be noted). For example, if a roofing contractor does not get paid for work performed on a person’s property, they may file a - The signature of the grantor (the grantee is not required mechanic’s lien against the property. to sign the deed).

A mechanic’s liens is a type of an involuntary, specific - Acknowledgement/recording (the deed must be lien. notarized and recorded). 8 - Delivery and acceptance (a valid deed must be delivered The Full and Warranty deed includes the to the grantee). following covenants:

Conveyance 1) Covenant of seisin – assures the grantee that the grantor holds the title specified in the deed. The transfer of the title of land from one to another. The means or medium by which title of real estate is 2) Covenant of right to convey – assures the grantee that transferred. the grantor has the legal capacity to convey the title and has the title to convey. A deed is a document used to convey title legally to real property. 3) Covenant against encumbrances – assures the grantee that no encumbrances against the title except those set A deed is also called an instrument of conveyance. forth in the deed itself exist.

Conveyance after death: Intestate succession 4) Covenant of quiet enjoyment – assures the grantee that they will have quiet enjoyment and possession of the When a person dies and leaves no valid will, the of property. intestacy determine the order in which the property is distributed to the heirs. 5) Covenant for further assurances

The heirs take title by descent, or the way they are 6) Covenant of warranty related to the decedent (deceased person). Deed Restrictions The typical order of descent is spouse, children, parents, and siblings, followed by relatives who are more distant. Deed restrictions are a form of encumbrance on real property. According to law, the person appointed by a court to distribute the intestate decedent’s property is an A deed restriction is an imposed restriction in a deed for administrator or administratrix. the purpose of limiting the use of real property, such as:

Legal description 1) A restriction against the sale of liquor on a property.

The deed must contain an adequate formal legal 2) A restriction as to the size, type, value or placement of description. improvements that may be erected on the property.

The legal description describes where the property is Deed restrictions are in the form of restrictive covenants located and the size of the lot. and/or conditions (CC&R’s).

There are 3 acceptable types of property descriptions: Title

1) Metes and bounds Title is evidence of the right to own property.

2) Description by reference, lot and block

3) Monuments Chain of title

Survey Chain of title refers to the sequence of historical transfers of title to a property. A survey is a drawing prepared by a licensed surveyor, which shows the exact dimensions of a property and any It runs from the present owner all the way back to the improvements located on the property (including a original owner of the property. garage, deck, fend, driveway).

A survey is drawn using the metes and bounds method. Abstract of title Full Covenant and Warranty Deed An abstract of title is a condensed history of title. The Full Covenant and Warranty deed contains the broadest form of guarantee of title of any type of deed It is a summary of all links in the chain of title. and provides the greatest protection to the grantee.

9 Using the old deed referred to as a binder, good faith deposit, and escrow deposit. The seller’s attorney uses the old deed to prepare a new deed for the closing. An earnest money deposit is usually binding.

Contract Requirements Proration

– In New York State, an individual must be at least 18 The division of certain settlement costs between buyer years of age to enter into a contract. and seller.

– Minors (less than 18 years old) CANNOT enter into a These items can include real estate taxes, fuel, a survey, contract. The contract is voidable if signed by a minor. water and sewer charges, rent, and security deposits.

– In New York State, an individual must be mentally and Proration ensures fair apportionment of expenses emotionally capable to enter into a contract. between buyer and seller.

Signing the Sales Contract Discharge of Contracts

Generally, the purchaser signs the contract of sale first A contract may be discharged or terminated in the because the purchaser is the party making the offer. following ways:

The purchaser is stating the purchase price he/she wants 1) Agreement of the parties ​ to offer and the terms If both parties agree to terminate the contract, a release Bi-lateral vs Uni-lateral Contracts of contract can be performed.

A bi-lateral contract includes two parties. Novation: ​ Most contracts in real estate are bi-lateral. This is the act of either:

A few common examples include listing contracts, sales 1) replacing an obligation to perform with a new contracts, buyer representation agreements and obligation; or independent contractor agreements. 2) adding an obligation to perform; or A uni-lateral contract is an “open contract” where one party promises to pay another party if the other party 3) replacing a party to an agreement with a new party. performs a specific action. 2) Full performance An open listing contract is an example of a uni-lateral When the duties of the contract are performed by both contract. parties, full performance is achieved. This is the most Down payment common and desirable way to discharge a contract.

The down payment is the portion of a property’s 3) Impossibility of performance purchase price that is paid in cash and is not part of the If there is a change in the law which makes full mortgage loan. performance of the contract illegal, the contract may be The down payment must be placed in a separate escrow discharged due to impossibility of performance. account. In another example, if a property is destroyed by fire, the The following people generally hold the deposit/down listing contract between the owner and broker may be payment: discharged due to 'impossibility of performance'.

- Listing agent (seller’s broker) 4) Operation of law

- Seller’s attorney This includes the statue of limitations

Earnest money deposit Contract Remedies

A deposit that a buyer makes at the time of submitting an The following contract remedies may be pursued by the offer to demonstrate the true intent of the purchase; also non-breaching party. 10 1) Specific performance: There are 2 types of eviction: ​ This is an order from the court requiring specific Actual eviction: performance means that the contract is to be completed as the parties originally agreed. Actual eviction occurs when the landlord removes the tenant from the property without aid or control of the 2) Compensatory damages: court system. ​ Compensatory damages equal the amount of money Actual eviction is wrongful use of self-help. actually lost due to the breach of contract. Constructive Eviction 3) Liquidated damages: ​ This occurs when the tenant is prevented from the quiet Liquidated damages are damages agreed to be paid in the enjoyment of the property. contract. In other words, the landlord deliberately renders the 4) Reformation: property unfit or unsuitable to live in. ​ A doctrine that permits the court to rewrite a contract. An example may be refusing to repair a broken toilet or bathtub. Right of first refusal Mortgagor / Mortgagee The right of first refusal may be added to a sales contract or a lease. Mortgagor is the borrower (typically the person buying the house) It allows the holder to purchase (or lease) a property if the seller decides to sell or another purchaser (or lessee) Mortgagee is the lender or bank who provides a loan to comes along. the borrower or homeowner.

The holder of the right of first refusal can match the offer This may seem counter-intuitive. Many students think of from the third party or forfeit their claim to purchase or the bank as the ‘mortgagor’ since people always say “I’m lease the property. taking out a mortgage”. But in fact, the homeowner gives the bank a mortgage. A mortgage is really a legal Leases document that allows the lender to foreclose on the property if the borrower defaults on the loan. The Use Provisions in a Lease borrower gives the mortgage to the lender, and in return The ‘use provisions’ is a clause in a lease that requires a for this security, the lender gives the borrower a loan. tenant reasonably use the space for its intended use. Types of Loans For example, a tenant cannot continuously throw loud, There are a few common types of loans you should be late-night parties, which disturb the other tenants in the aware of: building. Fixed-Rate Mortgage / Fully Amortized Loan vs. Sub-Lease This is the most common type of loan. The borrower In an assignment, the assignee is responsible for paying makes installment payments (usually once a month). the rent directly to the landlord. The assignee takes Over time the balance on the loan decreases. At the end responsibility of the lease. of the term of the loan (30 years for examples), the loan In a sublease, the original tenant is still responsible to the balance reaches $0 and the loan is paid in full. landlord for the lease payments under the lease contract. In a fixed-rate mortgage, the borrower pays both In a sublease arrangement, the sub-lessee pays the rent principal and interest with each mortgage payment. to the tenant (lessee) and the tenant pays the landlord. Straight Loan (also known as a Term Loan)

Eviction This is an interest-only loan. The balance of the loan Eviction is a legal proceeding by a landlord to recover always remains the same. At the end of the term of the possession of real property. loan, the borrower must pay the full balance back. 11 Adjustable Rate Mortgage (ARM) A construction mortgage is a form of interim, or temporary, short-term financing for creating In this type of loan, the monthly payment fluctuates improvements or buildings on a property based on a standard index. These are considered high-risk loans for borrowers because the monthly Negative Amortization payment may increase to an amount the borrower cannot afford. Occurs when the monthly payment is less than full interest and does not pay any principal. The interest that Blanket Mortgage is unpaid accrues and the principal balance owed increases A blanket mortgage is a type of commercial mortgage in which two or more parcels of real estate are pledged as Conventional vs. Government Loan security for payment of the mortgage debt. Conventional A blanket mortgage usually contains a release clause, which allows certain parcels of property to be removed Conventional loans are loans issued by commercial from the mortgage lien when the loan balance is reduced lenders without any participation by an agency of the by a certain amount. federal government.

Purchase Money Mortgage Conventional loans with an loan-to-value ratio greater than 80% need to obtain private mortgage insurance A purchase money mortgage is a type of seller financing (PMI). in which a mortgage is given by the buyer to the seller to cover part of the purchase price. Government Loans

In this type of loan, the seller becomes the mortgagee and Government loans involve some kind of participation by the buyer becomes the mortgagor. a government agency.

Wraparound Mortgage The most common type of government loan is an FHA-insured loan. A wraparound mortgage is another type of seller financing. The seller extends to the buyer a junior Mortgage insurance premium (MIP) is paid upfront when mortgage, which wraps around the existing in addition to obtaining an FHA-insured loan. any superior mortgages already secured by the property VA-guaranteed loans are another example of government Swing/Bridge Loan loans. These loans are offered to Veterans

A type of short-term loan, typically taken out for a period Prepayment Penalty Clause of 2 weeks to 3 years. A pre-payment penalty clause states that the borrower A bridge loan is a type of gap mortgage in which funds cannot pay off the loan at any time before expiration of are provided over and above an already existing loan the full mortgage term without a financial penalty for until more permanent financing is in place. early payoff.

A bridge loan allows a buyer to obtain a new property Primary vs. Secondary Mortgage Markets without having to sell his/her current property. The primary mortgage market is where lending Graduated Payment Mortgage (GPM) institutions originate mortgages.

In a graduated payment mortgage, the monthly payments Example: Bank of America gives a loan to the home are lower in the early years of the mortgage term, but buyer. increase at specific intervals until the payment amount is The secondary mortgage market is where the loans sufficient to amortize the loan over the remaining term. originated in the primary mortgage market are bought The monthly payments are low in the early years because and sold. the borrower does not pay all of the interest that is then Real Estate Settlement Procedures Act (RESPA) added to the principal balance. A consumer protection statute, first passed in 1974. Also Construction Mortgage known as Regulation X. 12 The purpose of RESPA is: Usury Laws

1) To help consumers become better shoppers for Usury laws govern the amount of interest that can be settlement services and charged on a loan.

2) To eliminate kickbacks and referral fees that The Economy - Inflation unnecessarily increase the costs of certain settlement services. Inflation occurs when there is an increase in money and credit relative to available goods, resulting in higher Truth in Lending Act (TILA) / Regulation Z prices.

The Truth in Lending Act of 1968 is United States federal Zoning law designated to promote the informed use of consumer credit, by requiring disclosures about its terms and cost Zoning determines the usage allowed for a building or to standardize the manner in which costs associated with subdivision. borrowing are calculated and disclosed. Zoning also determines the ‘bulk’ of a house or building, TILA requires four main disclosures: meaning the maximum size of the structure (height, square footage, size of floor plate). 1) Annual percentage rate Zoning Board of Appeals 2) Finance charge The Zoning Board of Appeals is a local appointed Board 3) Amount financed that has the power to review administrative rulings made by the Planning Board or another legislative body. 4) Total amount of money to be paid toward the mortgage in principal and interest payments One of the main duties of a Zoning Board of Appeals is to maintain the essential character of neighborhoods. With regards to advertisements, the only specific item that may be stated in an advertisement, without making a It is the interpreter of the zoning ordinance. full disclosure is the annual percentage rate. The Zoning Board of Appeals is also responsible for Loan to Value Ratio (LTV) granting variances.

LTV is a financial term used by lenders to express the Non-Conforming Use ratio of a loan to value of an asset (property) purchased. A non-conforming use is a preexisting use of a property LTV compares the amount financed to the purchase that no longer complies with the current zoning price. regulations. The non-conforming use is “grandfathered” in. For example: For example, a property owner has been using his If a property is being purchased for $500,000 and the building as a manufacturing facility for the past 30 years; buyer obtains a $400,000 mortgage, the LTV will be 80%. however, the neighborhood has since been re-zoned for residential use. $400,000 is 80% of $500,000 (400,000/500,000 = 0.80). The owner is generally allowed to continue the Points and Buydowns non-conforming use. When the property is sold, the 1 point equals 1% of the loan amount. non-conforming use must be terminated and comply with the current zoning laws. For example: Variance If a lender charges 1-1/2 points as a loan origination fee, the fee will equal 1.5% of the loan amount. Variance is the authorization to improve or develop a particular property in a manner not authorized by the A buydown allows the borrower to obtain a lower local zoning code. interest rate by paying additional points upfront to the lender. There are use variances and area variances.

A buydown may also be referred to as discount points. 13 - A use variance allows a homeowner to use their Balloon framing is an alternative to platform framing; property in a way that is not currently permitted by the however, it is considered illegal in New York State. local zoning code. Building Elements For example: convert an existing structure into a medical office where the zoning only permits residential use for Footing the property. A footing is a horizontal concrete member, set in the soil, - An area variance allows the property owner to expand which supports a building’s foundation wall. the building on their property to a size larger than is The footing is located at the bottom of the foundation permitted by zoning. This can include total square footage of the building as well as size and height of the wall. building. The footing is the lowest structural member in a house/building. For example: add an additional story to a building, which will make the building taller than is permitted by zoning. Sill Plate

Building Codes The sill plate is a horizontal wood member that sits on The primary purpose of building codes is to ensure a top of the house’s foundation. safe, properly functioning environment for the It is used as a nailing surface for the floor system. occupants. A sill plate is considered the lowest horizontal beam and The New York State Building code provides minimum wood member in the frame of a house. standards for all buildings in New York. If the Federal or City building code is more stringent on a particular issue, Studs the more stringent Code will supersede the State code. Studs are vertical wood members used to construct walls. Joists If a property owner dies intestate (without having a valid will), the decedent’s property is distributed to their heirs. Joists are horizontal beams or timbers that support a floor. If the deceased property owner does not have any heirs, the property reverts to the State. This is known as Roof Components: escheat. Eave – the lowest part of the roof that projects beyond Eminent Domain / Condemnation the wall of the structure.

Eminent domain is the right of the government to acquire Soffit – The area under the roof extension. private property for necessary public use. The property owner must receive fair compensation. Fascia – The area of material facing the outer edge of the soffit Condemnation is the act of taking private property for public use. Pitch

Remember: eminent domain is the RIGHT to take private Also known as the slope. property, while condemnation is the actual ACT of doing Typically used in describing the slope of a roof, driveway, so. sidewalk, etc.

Percolation The slope of the roof is known as the 'pitch of the roof'.

Percolation is the movement of water through soil. Flashing

Building Construction Flashing is added at joints/bends/corners on the exterior Wood Framing of a house (typically made of metal and/or rubber materials), which prevents water from entering the Platform framing is the most common type of framing house. used in residential construction. 14 For example, flashing is added around the base of a Specifications / Blueprints chimney (where the chimney meets the roof). Specifications – A document provided by Architects that Sheathing describes the quality of construction.

Sheathing refers to panels that span between wall studs Blueprints – Architectural drawings that describe the and cover the exterior wall or interior walls. layout and construction of a house. These drawings describe the quantities used in construction Sheathing is typically made of plywood on the exterior of the building, and gypsum board on interior walls. Forced Warm Air System

Sheathing on the exterior wall is typically covered with A forced warm air system consists of a furnace that by wood, vinyl, or aluminum siding, or bricks. contains a fan, a heat source such as gas or oil, and filters. The system extracts cool air from in and out doors and Sheathing on interiors walls (gypsum board) is painted. passes this cool air through the heat sources. The warmed air flows through ducts to the rooms. Siding A forced warm air system provides cooling as well as Siding materials on buildings can be metal (such as heating through the same ducts. aluminum), wood or vinyl. Behind the siding is a layer of sheathing. Fuse

Urea Formaldehyde Foam Insulation (UFFI) A device used in electrical systems to protect against excessive current. Urea Formaldehyde Foam Insulation (UFFI) is a type of foamed in-place insulation that releases formaldehyde The fuse melts and opens the circuit, causing electric gas. power to stop when overheating occurs.

UFFI contains large amounts of formaldehyde, which is Circuit Breakers why it has rarely been used by building contractors since the 1980s. Circuit breakers perform a similar function but are more convenient and safer than fuses.

Circuit breakers trip; that is, they switch off the electric power for a given circuit when the current increases beyond the system’s capacity. R-Value Environmental Issues R-value is a measurement of the ability of insulation to slow the transfer of heat or cold. CFCs

In other words, it is the degree of resistance to heat CFCs are synthetic chemical substances used in transfer of a wall. refrigerators and air conditioners, Styrofoam products, aerosol dispensers, and cleaning agents. The higher the R-value, the greater the insulating power. CFCs have been shown to lead to the depletion of the Generally, the higher the R-value, the thicker the ozone layer. insulation. Most home air conditioning units use HCFCs, known as

Freon.

Polychlorinated bihpenyls (PCBs)

BTU Ratings PCBs were widely used as dielectric and coolant fluids, BTU stands for British Thermal Unit. for example in transformers, capacitors, and electric motors. BTU is a measure of heat energy. It measures the amount of heat required to raise the temperature of one pound of PCBs have been known to leak in to the ground from water by one degree Fahrenheit. electrical transformers. PCBs appear in groundwater and soil. 15 Radon A CMA is a property evaluation that determines property value by comparing other properties currently on the Radon is a colorless, odorless gas that is emitted from market, properties that have recently sold, and expired soils, rocks and water as a result of radioactive decay. listings.

Radon from surrounding soil enters a home through In other words, a CMA is an analysis of the competition in small spaces such as cracks in concrete, floor drains, the marketplace that a property will face upon sale sump pump openings, wall and floor joints in basements, attempts. and pores in hollow block walls. A CMA is NOT an appraisal. Instead, it is an opinion of Remember: radon typically enters the house through the value. basement or cracks in the foundation. A CMA is typically prepared by a real estate agent. Asbestos Residential Market Analysis Asbestos is a naturally occurring mineral fiber sometimes found in older homes. Residential market analysis is a study of the property being listed. It is hazardous to health when a possibility exists of exposure to inhalable fibers (also known as friable The analysis views the property in light of the conditions asbestos). in the marketplace.

If friable asbestos is present, an asbestos professional These conditions determine how the agent should must be used to remove the asbestos. market the property.

Asbestos was commonly used in insulation (around A residential market analysis will analyze the following: boilers, ducts, pipes, sheeting, and fireplaces), floor tiles, ceiling tiles, roof shingles and flashing. 1) Recently sold properties

Asbestos can lead to asbestosis, which is a chronic lung 2) Current competing properties disease caused by inhaling asbestos fibers. 3) Recently expired properties Lead 4) Buyer appeal Lead can be present in drinking water (from lead pipes), interior and exterior paint (from lead-based paint), dust 5) Market position within a home, and soil around a home. 6) Positives and negatives of the property being marketed The Residential Lead-Based Paint Hazard Reduction Act of 1992 sets forth the procedures in disclosing the 7) Area market conditions presence of lead-based paint for sales of properties built before 1978. 8) Recommended terms Remember: “Lead-based paint 1978” ​ 9) Market value range Appraisals Market Value

An appraisal is an estimate of a property’s value by an Market value is the most probable price that a property appraiser who is usually presumed to be an expert in should bring if exposed for sale in the open market for a his/her work. reasonable period of time, with both the buyer and seller aware of current market conditions, neither being under An appraisal is specific to a certain date in time. duress.

An appraisal may be used to help determine the market Market value applies to an “arm’s length transaction”. value of a property. Also known as ‘Fair Market Value’. Residential properties are typically appraised using the sales comparison approach. Market value is driven by supply and demand in the competitive marketplace. Comparative Market Analysis (CMA) 16 Market Price The Housing and Community Development Act of 1974 added sex as a protected class to the Fair Housing Act. Market price refers to the actual selling price of a property. 1988 Amendment to the Civil Rights Act

Remember: market value is the probable price, while The 1988 Amendment to the Civil Rights Act added two market price is the actual selling price. new protected classes:

Direct vs Indirect Costs – Persons with mental or physical disabilities

There are two types of costs associated with – Familial status construction: Types of Discrimination 1) Direct costs: also known as hard costs, they include the ​ cost of labor and materials. Blockbusting

2) Indirect costs: costs that create and support the The practice of inducing homeowners in a particular ​ project. These include architectural and engineering neighborhood to sell their homes quickly, often at below fees, attorney fees, and financing costs, among others. market prices, by creating the fear that the entry of a minority group or groups into the neighborhood will Obsolescence cause a precipitous decline in property values.

One of the causes of depreciation. It is the loss of Steering: desirability and usefulness caused by new inventions, changes in design, and improved processes for The practice in which real estate brokers guide production, or from the influence of external factors. prospective home buyers towards (or away) from certain Obsolescence may be either economic or functional. neighborhoods based on their race.

Functional Obsolescence can be an outdated design or Redlining floor plan. The refusal to lend money within a specific area for Civil Rights Act of 1866 various reasons. This practice is illegal.

The Civil Rights Act of 1866 has no exemptions and Before the Fair Housing Act, some lenders circled certain contains the blanket statement that ‘citizens have the local areas with a red line on the map, refusing to make same rights to inherit, buy, sell, or lease real and personal loans within the circled areas based on some property. characteristic of property owners in the area.

The Civil Rights Act of 1866 is primarily interpreted to Testers prohibit racial discrimination. Testers are volunteers, employees of federal programs, Civil Rights Act of 1968 and people from civil rights groups who visit real estate offices posing as prospective home buyers to see if race The Fair Housing Act was included as part of the Civil influences the information or services that the broker or Rights Act of 1968. salesperson offers.

The initial protected classes under the Fair Housing Act Areas ​ included: 1 side x 1 side = area of a square - Race width x depth = area of a rectangle - Color ½ base x height = area of a triangle (remember a triangle - Religion is equal to ½ of a rectangle)

- National origin In order to determine the area of an irregularly shaped lot, you must simply break down the lot into squares, The Housing and Community Development Act of 1974 rectangles, and triangles and add the areas of each together 17 Acres For example:

1 Acre = 43,560 square feet If an investor purchased a property for $1,200,000 with a down payment of 25%, what is the cash-on-cash return if 1 Hectare = 2.47 Acres the property produces a monthly cash flow of $5,000?

Debt-to-Income Ratio First, you must determine the investor’s down payment. To determine this, simply multiple $1,200,000 by 25%. The percentage of a consumer’s monthly gross income that goes towards paying debts. $1,200,000 x 0.25 = $300,000

Formula: Recurring Monthly Debt / Gross Monthly Next, determine the annual cash flow. Since the cash flow Income is stated as monthly cash flow, you will have to multiple $5,000 by 12. Commissions $5,000 x 12 - $60,000 Commissions are typically calculated as a percentage of the sales price (not the listing price). Finally, divide the annual cash flow by the down payment: For example: $60,000 / $300,000 = 0.20 or 20% The broker and client agree to a 6% commission. Calculating Interest If the property was listed for $355,000, but the final sales price is only $330,000, the commission will be calculated You may be asked to calculate the amount paid in as followed: monthly interest on a loan.

$330,000 x 0.06 = $19,800 For example:

You may be asked to calculate the final sales price of A borrower has a $230,000 loan with an interest rate of property based on the commission given and the net 5%. What is the amount paid in interest each month? amount the seller receives (after paying the commission). To find the answer, first multiply $230,000 x 5%: For example: $230,000 x 0.05 = $11,500 If a seller nets $213,750 (amount they receive after paying the broker their commission) from the sale of Since the 5% interest rate is an annual interest rate, their house, what was the final sales price if they paid the $11,500 is what the borrower pays each years in interest. broker a 5% commission? For this reason, you simply have to divide $11,500 by 12 to determine the amount of interest paid each month. To answer this type of question, divide the net received by the seller by difference between the 100% and the $11,500 / 12 = $958.33 commission rate: Building Department $213,750 / 0.95 (100% minus 5% commission) = $225,000 The Building Department is responsible for enforcing the building code and issuing building/construction permits. Cash on Cash Return In order to begin construction or renovation on a Cash on cash return (COC) is a percentage return on property, the property owner must first submit money invested in a property by an investor. construction drawings for approval. Once the construction drawings are approved, a building permit The formula to determine COC is: may be issued, which allows the building contractor to commence work on the property. Annual Cash Flow / Down Payment = Cash on Cash Return

Remember: you must use the ANNUAL cash flow. If a Architectural Review Boards question only states the monthly cash flow, you must multiple that number by 12 months. 18 Oversees and upholds the quality and aesthetics of a – Estimate the costs of paving, sewers and sidewalks, and neighborhood, town, or city. other public works projects.

The following are functions of the Architectural Review – Supervise streets and other public works activities Board: – Issue permits to private contractors for street openings – promotes the orderly and harmonious development of and curb and gutter construction. the municipality. – Assume responsibility for sewage, water supply, – protects a municipality’s cultural heritage. distribution systems.

Planning Board NYS Department of Health

A local elected or appointed government board charged The NYS Department of Health performs the following with recommending to the local town or city council the basic functions: boundaries of the various zoning districts and appropriate regulations to be enforced therein. – Drinking water safety, including standards for private and community well construction and well water safety The following are functions of the planning board: and regulation.

– prepare and amend a master plan for the community. – Septic tank approval.

– implement the master plan through site plan and – Certain wastewater treatment approval. subdivision ordinances and recommendations to other agencies. Homeowners Policies

– make investigations, maps and reports, and There are a few Homeowners Insurance Policies you recommendations that relate to the planning and should know: development of the municipality. HO-1: Basic Policy - This is a basic policy that insures the – recommend amendments to the zoning ordinance or home and its contents against perils, including fire, theft, map. or vandalism. An HO-1 policy does not cover falling objects. Historic Preservation / Landmark Commissions HO-3: Special Form Policy – The most widely used and Established to review proposed projects within historic recommended homeowners policy. It covers the home districts for compliance with standards established for for all risks or physical loss except damage caused by new development or alteration or improvement of flood, earthquake, war, or nuclear accident. historic buildings and landmarks. HO-4: Tenants or Cooperative Owners Policies – The following are functions of the Historic Preservation / Commonly referred to as renters insurance, regardless if Landmark Commission: you are renting a home, condo, or apartment. This policy also covers cooperative owners since they hold a – recommend to the municipality the adoption of proprietary lease (not real property) ordinances preserving historic districts, landmarks, and historic sites. HO-6: Unit Owners Policies – Insure against damage to the contents of an apartment, – review and approve application for construction, cooperative, or condominium. alteration, demolition, and relocation of a historical property. Umbrella Policy

– recognize sub-districts within a preservation district. Insurance policy that covers amounts above those Allows the commission to adopt guidelines regulating covered under one or more other primary policies, and properties in the sub-district. which does not pay until the losses exceed a certain sum.

Municipal Engineer’s Office - Also called excess insurance.

The Municipal Engineer performs the following basic Flood insurance functions: 19 Flood insurance is often not covered in a homeowner’s Real estate offices should be equipped with security insurance plan. It may be purchased separately. cameras in order to record possible break-ins.

Homeowners in Special Flood Hazard Areas (SFHA) Lighting should obtain flood coverage. Parking lots outside of real estate offices should have The Federal Emergency Management Agency (FEMA) adequate lighting. administers the National Flood Insurance Program (NFIP), which helps homeowners in SFHA obtain flood Assessed Value vs Market Value coverage. Market value is the amount a property would sell under Liability Insurance normal conditions.

Liability insurance is an example of a monoline policy. The assessed value is a percentage of the market value. The assessed value is used to calculate property taxes. It protects against claims alleging that one’s negligence or inappropriate action resulted in bodily injury or The assessor applies a level of assessment (LOA) to the property damage. market value of each property in a city, town, or county to determine the assessment roll Commercial General Liability Insurance (CGL) For example: Commercial general liability insurance is a basic business liability policy that covers four forms of injury: bodily If a town chooses to assess properties at 30% of market injury that results in actual physical damage or loss, value, a property with a market value of $200,000 will property damage that results in actual physical damage have an assessed value of $60,000. or loss, personal injury, and advertising injury. Ad Valorem CGL may be purchased by landlords for their Property is taxed on an ad valorem basis, that is, rental/income properties. according to value. Actual Cash Value vs Replacement Cost In New York, the real property tax is based on the fair - Actual cash value means that the insured is reimbursed market value of real property. for the replacement cost minus the physical depreciation The Role of the Assessor of the lost or damaged property. The assessor is an elected or appointed local official who - Replacement cost means that the insured is covered and reimbursed for the actual cost of replacing the damaged has the legal authority to independently estimate the value of real property in an assessing unit. property. In other words, the assessor determines assessed values For example, if a refrigerator is destroyed in a fire, the replacement cost will be the cost of buying another of property, which are ultimately used to determine how much one pays in property taxes. refrigerator.

New York Property Insurance Underwriting Association Protesting Assessments (NYPIUA) Property owners can protest the assessed value of their property. The NYPIUA is a pool of all insurance companies writing fire insurance in New York. Their grievances are heard by the Board of Assessment It offers fire and extended coverage as well as coverage Review. for vandalism, malicious mischief, and sprinkler leakage The property must make a case that the assessor’s to consumers who are unable to purchase this type of assessment of their property is wrong. insurance from individual insurance companies. For that reason, the burden of proof is on the property Liability Insurance owner to prove the assessor incorrect.

Real estate agents must carry liability insurance. The law presumes that the assessor is correct. Security Cameras 20 The four grounds for review in New York are unequal are considered real property. assessment, excessive assessment, unlawful assessment, and misclassification. For that reason, condo owners receive a deed a closing.

Exempt Propertie - Condominiums are considered freehold estates.

Properties owned by religious organizations and - For tax purposes, a condominium is classified as a government-owned properties are exempt tax residence. assessments. Cooperatives Special Assessments Cooperatives are NOT considered real property. Special assessments are assessments made against a The owner of a co-op receives a proprietary lease at property to pay for a public improvement by which the closing. assessed property is supposed to be especially benefit from. A proprietary lease is considered personal property.

A special assessment may be for such things as streets, - Co-ops are considered a leasehold estate. The leasehold sidewalks, sewers, rural drainage ditches and other estate gives the right to possession of an apartment and public improvements. use of the common areas.

The special assessment is a lien against the property until Condop paid. If the lien is not paid, the taxing unit may execute on the lien. A condop is a building that includes condominium and cooperative ownership in the same structure. Homestead vs Non-Homestead Properties In other words, the building is part condo, part co-op. Tax Assessing Units may elect to establish separate tax rates for homestead and non-homestead properties. Board of Directors

Homestead properties include: The Board of Directors manages a cooperative.

– 1-3 family houses The Board oversees the maintenance, finances, and policy decisions of the cooperative. – Condominiums House Rules – Mixed-use properties when they are mostly residential Rules in a cooperative that cover common issues – Mobile homes including garbage disposal, maintenance, noise, and conflict resolution. – Vacant land under 10 acres House rules are generally more detailed than items in the – Farm land / farm dwellings proprietary lease and deal with the day-to-day behavior Non-homestead includes everything else: of tenants and general operations.

– Commercial By-laws

– Industrial The by-laws are the owner’s rights and obligations for a condominium. – Special franchise The by-laws may include: – Utility properties - The powers and duties of the Board of Managers In summary: - Sublet provisions Homestead = Residential - Restrictions on the use of units and common spaces Non-homestead = Commercial - Pet restrictions Condominiums 21 Remember: House rules are associated with The CPS-1 period lasts 120 days from the date of cooperatives, while by-laws are associated with acceptance of the CPS-1 statement by the Attorney condominiums. General, but can extend up to an additional 60 days. During this period, developers can advertise and take Board Package names of people who are interested, but cannot take deposits or sell the properties. They can talk about price If a prospective buyer is looking to purchase a unit in a ranges, but nothing specific. cooperative, the Board of Directors will most likely want the buyer to submit a board package. Types of Leases

The board package includes mostly financial documents. Gross Lease

The Board of Directors will review the buyer’s board In a gross lease, the landlord pays all expenses. These package and use it help determine if they will approve include property taxes, insurance and maintenance. the buyer’s application or not. If the buyer’s application is not approved, they cannot purchase a unit in the The residential lease is a common example of a gross cooperative. lease.

Right of First Refusal Net Lease

Condominium contracts typically contain a ‘Right of First In a net lease, the tenant pays some or all of the expenses. Refusal’ clause. The clause allows the condominium association the first opportunity to purchase the For example, in a triple net lease, the tenant pays all of condominium when it goes up for sale. the expenses in addition to the rent.

Offering Plan A net lease, in particular a triple net lease, is commonly used by commercial tenants. The developer of a new condominium or cooperative building (or the conversion of a building into a A large company may have a triple net lease and rent an condo/coop) must file an Offering Plan with the NY entire office building. Attorney General’s office. Percentage Lease The first part of the Attorney General’s review is called the preliminary prospectus or “red herring”. the A lease of property in which the rent is based upon the Attorney General can suggest any changes to the project. percentage of the volume of sales made upon the leased premises, usually provides for minimal rent. Once the Attorney General accepts the prospectus, it is known as a black book or offering plan. A percentage lease is typically used with retail tenants.

Although the Attorney General does not regulate price, Ground Lease proper disclosure of price must be accepted by the Attorney General. If the developer of a new A ground lease is a long-term lease of unimproved land, condominium building is changing the prices of all (or a usually for construction purposes. group) apartment, he/she must file the changes with the Attorney General for acceptance. For example, a lessee may be given a 99-year ground lease for a large vacant property. The lessee will build a CPS-1 large multi-family building on the property.

CPS-1 stands for Cooperative Policy Statement. At the end of the 99-year lease, the lessor (the original land owner) will take back the land and any It is used by real estate developers to test the market improvements on the land (including the multi-family before building a condominium or cooperative building. building).

The CPS-1 must be filed with the Attorney General. A ground lease is also known as a land lease.

The CPS-1 statement includes rules on how the Loft Lease development may be advertised. The developer cannot declare a firm price. A loft lease is for the rental of floor space this is not generally divided into rooms. 22 A loft lease is typically for an open, unfinished space. Debt is what the investor owes.

Graduated Lease Equity is how much cash the investor has in the property.

A graduated lease is a lease in which the rent changes If a property is valued at $1,000,000, and the total debt is from period to period over the lease term. $600,000, then the debt ratio of 60%.

The lease contract specifies the change in rental amount, The equity ratio would be 40% ($1,000,000 - $600,000 = which is usually an increase in stair-step fashion. $400,000, which is 40% of $1,000,000).

Escalation Clause Net Operating Income (NOI)

An escalation clause allows landlords to raise rents The net operating income is equal to the gross income during the term of the lease. from a building minus operating expenses.

Lease escalation clauses call for the increased costs to the NOI is essentially the cash flow from a property before tenant for different reasons at specified times during the paying any debt service (mortgage payment) or taxes. lease term. These clauses protect the property owner against increases during the lease term. Capitalization Rate

Use Clause in a Commercial Lease The capitalization rate is the annual return that an investor expects to receive from a commercial property. A use clause defines how the tenant can and cannot use the space. The formula for Capitalization Rate is:

Rentable vs Usable Square Footage Net Operating Income / Value = Capitalization Rate

Usable square footage is the area contained within a For example: building that is actually occupied by a commercial tenant. If a property sold for $1,200,000, and the net operating Usable space typically does not include elevators, stairs, income is $60,000, what is the capitalization rate for the mechanical spaces, etc.. property?

Rentable square footage is the total area of a space, some $60,000 / $1,200,000 = 0.05 or 5% of which cannot be used. The Cap Rate equals 5% Rentable square footage equals the entire space, Return on Investment (ROI) / Cash-on-Cash Return including the usable square footage and the tenant’s pro (COC) rata share of the building’s common areas, such as the lobby, hallways, and restrooms. ROI is a percentage return on money invested in a property by an investor. ROI, like COC, is usually The difference between the rentable and usable area in a calculated on a yearly basis, meaning you must multiply commercial space is known as the loss factor. the monthly cash flow by 12 and divide it by the down Pro Forma payment.

A pro forma is an accounting statement that forecasts Formula: Cash Flow (on a yearly basis) / Down Payment income and expenses for a period of time, typically five or more years. Pro forma statements are typically used by Liquidity investors to estimate their rate of return for a particular Real estate is considered an illiquid asset because it property. cannot quickly or easily be sold.

Leverage Time value of money

Leverage is the use of borrowed capital (mortgage) to Time value of money is the idea that money available at increase the potential return of an investment. the present time is worth more than the same amount in the future due to its potential earning capacity. Leverage is also known as “other people’s money”. It is a process that calculates the value of an asset in the Debt to Equity Ratio past, present, or future. 23 It is based on the idea that the original investment or This may be an office building for a shopping mall, an principal increases in value over a certain time. apartment building for a tract of land, or an office building for an apartment building. Industrial Investment Properties Straight-Line Depreciation Industrial investment properties include the following: Depreciation is a paper loss required for estimated wear, – Heavy manufacturing tear, and obsolescence of a property.

– Light manufacturing The IRS allows real estate investors to depreciate their investment properties. – Multi-tenant Residential Properties – Owner Occupied Residential buildings and improvements are depreciable – Self Storage over 27.5 years using straight-line depreciation. – Special Purpose Commercial Properties

– Warehouse / Distribution Commercial buildings and improvements depreciate over Three Classifications of Income 39 years using straight-line depreciation

Active income – Money earned through salaries or in a Straight-line depreciation means that the portion ​ business in which the taxpayer actively participates. allocated to the building is divided by 27.5 to determine an equal amount of depreciation allowance each year. (Example: a typical full-time job). Adjusted Basis Passive income – Money earned from investing in a business venture or partnership. Adjusted basis is the original cost or other basis plus certain additions and minus certain deductions such as (Example: income earned from a rental property). depreciation and casualty losses.

Portfolio income – Money earned from Interest, Capital Gain annuities, dividends, and royalties. Capital gain is the realized from the sale of any (Example: income earned from investing in stocks, capital investment including real estate. bonds, mutual funds). Capital gain occurs when an investor sells the property Tax shelters for more than the adjusted basis

Any method of reducing taxable income resulting in a Capital Gain Tax Break reduction of the payments to tax collecting entities, including state and federal governments. A special exclusion in the IRS law gives home sellers a tax break on capitals gains when they are selling their home. One of the advantages that real estate offers to investors is a tax shelter, which allows investors to only pay Home sellers may be eligible to exclude up to $250,000 if income taxes on a portion of their properties cash flow single or up to $500,000 if married of the capital gain on (or pay no taxes at all). the sale of the residence.

Like-Kind Exchanges Permitted Tax Deductions

A 1031 tax-deferred exchange allows an individual to The IRS allows homeowners certain deductions on their defer capital gains taxes on real estate bought and sold income taxes. for investment purposes These include:

In order to qualify for a tax-deferred exchange (1031 1) Property taxes: this applies to property taxes paid on Exchange), the properties must be “like-kind”. a primary resident and second homes/vacation homes. For example, commercial properties must be exchanged 2) Mortgage interest for other commercial properties. 24 Non-Tax Deductible Closing Costs Preventative Maintenance:

The following closing costs are NOT tax deductible: Preventative maintenance involves keeping property and equipment in a good state of repair so as to minimize the 1) Appraisal fees need for more costly repair work or replacement.

2) Notary fees An example of preventative maintenance would include changing air filters in air conditioners and furnaces. 3) Preparation costs for the mortgage Management Agreement 4) Mortgage insurance premiums A management agreement is signed between the 5) VA funding fees property owner and the property manager.

Property Tax Exemptions This contract creates an agency relationship in which the Certain qualified individuals may be eligible for a partial owner is the principal and the property manager is the exemption in their property taxes. These include: agent for the purposes specified in the agreement.

– Veterans, Senior Citizens, Disabled The management agreement creates a general agency relationship between the owner and property manager. The STAR program allows qualified owner-occupied, primary residences to be exempt from school property Operating Statement taxes. The operating statement is used by property managers to NYS Department of Financial Services (formerly known project the net operating income for the property. as the NYS Banking Department) The operating statement defines all of the income and The NYS Department of Financial Services registers and expenses for the property. licenses all companies and individuals who conduct Stabilized Budget mortgage related services in New York. A stabilized budget is a forecast of income and expenses - This includes mortgage broker licenses. as may be reasonably projected over a short term, Dual Agency Disclosure under the Banking and New York typically five years. Real Property Laws Capital Reserve Budget When a mortgage broker representing the buyer is also Money set aside by a property owner for long-term the real estate broker representing the seller in the same capital expenditures to a property. Also known as a transaction, a dual agency is created. replacement reserve. The dual agency relationship must be disclosed at the Real Estate License Requirements first substantive contact between the mortgage broker and the prospective buyer. When a property manager works for only one owner, a real estate license is not required. The buyer/borrower and the seller must sign a Mortgage Broker Disclosure Form. However, when an individual (or company) serves as a property manager for more than one owner, at least a Types of Maintenance real estate salesperson license is required. Corrective Maintenance: – you do not need a real estate license to negotiate a A maintenance task performed to identify, isolate, and mortgage. rectify a problem with a property so that the property can be restored to an acceptable condition.

In other words, corrective maintenance does NOT involve major repairs or capital expenditures.

An example of corrective maintenance would include fixing a leaky faucet.