Real estate is a vast term that encompasses anything permanently affixed to land, including structures like homes and office buildings but also natural resources such as minerals or water. It also covers what lies above and below ground, for example, the parking lot at a strip center.
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Purchasing land is one of the most significant investments people will ever make. Because of this, real estate is a highly sought-after commodity. However, many consumers don’t realize that real estate encompasses more than just the land. It also includes buildings and any other structures that are permanently attached to it. This can include everything from houses to garages. It even extends to resources like water and minerals. This definition makes it distinct from personal property, which includes items that aren’t permanently attached to the ground like cars or furniture.
Real estate can be used for residential, commercial or industrial purposes. Residential real estate refers to houses and other dwellings, such as condos, townhouses, duplexes and multifamily homes. Commercial real estate encompasses properties where products are sold, such as malls and strip malls, and properties that generate income, like hospitals, nail salons and apartment buildings. Industrial real estate focuses on facilities where products are manufactured, such as warehouses and factories.
There is also special-purpose real estate, which is unique in that it doesn’t fit into any of the other categories. Often, this type of real estate is found in redevelopment areas that are seeing increased interest in development.
Common Areas
In real estate, common areas are those parts of a building or project that are used by more than one tenant or occupant on a nonexclusive basis. They include hallways, lobbies, entranceways, corridors, staircases, elevators, parking lots and gardens. They also include recreational areas and service facilities such as clubhouses, gyms, laundry rooms and kitchens. In residential properties, well-maintained common areas enhance property values and help attract tenants. They’re often governed by strict rules set by the landlord or HOA to ensure fair access and prevent misuse.
In commercial and industrial real estate, they may include a yard or parking lot for businesses in a mall, or a lobby in an office building. In condominiums and homeowners associations, they can include things like a pool or basketball court.
In apartment complexes, the maintenance of common areas is a shared responsibility among all the owners with a stipulated fee charged on a monthly or yearly basis. These fees go towards operational expenditures for upkeep, insurance policies covering the area and equipment, such as washing machines in laundry facilities. In the event that such areas are damaged or destroyed, then such immovable property is considered to be owned in common by all apartment owners with their percentage share of undivided interest in such property.
Rights of Way
Rights of way are a type of easement that grants access to land belonging to someone else. They may be public or private, and they can have a variety of effects on real estate. For example, if a right of way passes through a desirable location, such as a lake or beachfront, it can increase the value of neighboring property. However, if a right of way crosses a private residence, it can create noise, nuisance, or property damage issues.
Easements and rights of way are typically spelled out in deeds, although they can also be established through agreements or other legal instruments. It’s important to be familiar with the terms of any agreement governing the use of rights of way, as this can help prevent misunderstandings and disputes down the road.
Disputes over rights of way are common, and they can be resolved in several ways, including negotiation, arbitration, or litigation. Alternative dispute resolution methods are also available, such as mediation and collaborative law, which offer an informal way to explore options and reach a solution. Regardless of the method, it’s important to seek expert advice when resolving rights of way issues. This can help avoid costly legal battles and ensure that all parties are treated fairly.
Leases
Leases are agreements in which the owner of a piece of property or assets, known as the lessor, lets someone else use them for a period of time in exchange for regular payments of money, called rent. Leases can be divided into two categories: real estate and equipment. The distinction matters because each type of lease requires a different strategy for accounting on a company’s balance sheet.
For example, residential lease contracts are often regulated by applicable state or city laws. These rules can supersede the terms of a lease contract and prevent landlords from increasing rent beyond certain rates. In contrast, commercial leases are freely negotiated between parties.
Another important distinction is that commercial real estate leases are usually much longer than residential ones. This is because commercial property investment involves more risk than residential real estate because it includes the sale or rental of a business that requires a lot of capital. As a result, investors need more certainty that the investment will return their initial capital plus a satisfactory rate of return. A long-term lease can ensure this.
Leasehold Improvements
Leasehold improvements are alterations made to a building by a tenant to customize the space for its operations. This can range from simple fixture installations to more substantial alterations like building additional spaces and ensuring compliance with regulations. These modifications can greatly impact landlord-tenant relationships as they directly affect lease agreements, negotiations, and financial responsibilities between the parties. They also carry significant accounting and tax implications. Under GAAP, leasehold improvements are capitalized and amortized over their useful life. They can also qualify for Section 179 or bonus depreciation benefits.
In the case of commercial real estate, leasehold improvements often transform generic retail shells into branded storefronts that reflect the tenant’s image or allow it to operate efficiently. They can include a variety of enhancements like walls, flooring, and electrical wiring. These enhancements add value for tenants and can help them negotiate favorable terms in their lease agreement.
However, defining what constitutes leasehold improvement and understanding their accounting treatment can be confusing. The best way to simplify these terms is to define the specific improvements, outline ownership and responsibilities between landlords and tenants, and clearly detail their accounting treatment and depreciation impacts in the lease agreement upfront. This will ensure that both parties understand the complexities of these investments and optimize costs, deductions, and depreciation benefits.
Personal Property
While real property refers to land and anything permanently attached to it, personal property includes movable items like furniture or equipment. It also encompasses intangible items such as stocks, bank accounts, intellectual property and collectibles.
The distinction between these two categories of property matters for a number of reasons. It affects taxation and it may influence what type of property is appropriate for a mortgage. It may even impact decisions about whether to impose an environmental hazard assessment or whether to take a physical inventory of all the equipment located on a property.
Classifying an item as real or personal property could also have a significant effect on the valuation of the asset. For example, buildings on leased land are generally considered to be real property. In such cases, a valuer should make a special effort to view the building and its equipment in order to arrive at an accurate valuation.
Another consideration is the ease with which an asset can be transferred. While a deed is typically required for the transfer of real estate, personal property can usually be transferred with fewer legal requirements. This flexibility can be important for business operations and investment strategies.
