Lease Ingredients +8California · Real Estate · English

No particular words or form are required, but the words must: (1) evidence intent to create a landlord-tenant relationship, (2) identify the parties, (3) describe the premises, (4) specify the time, amount, and manner of rental payments, and (5) establish a definite term.

• ✓A lease must evidence intent to create a landlord-tenant relationship
• ✓A lease must identify parties, describe premises, specify rent, and establish a definite term
• ✓No particular words or form are required

With an exclusive agency or exclusive right to sell, the broker need not necessarily meet the performance requirements applicable to other listing types. If the broker is prevented from performing due to the owner's sale, a sale through another agent, or the owner's withdrawal of the property from the market, the broker is ordinarily entitled to a commission under the listing agreement.

• ✓Under exclusive agency or exclusive right to sell, the broker may recover if prevented from performing by owner's actions
• ✓Owner sale, sale through another agent, or withdrawal from the market ordinarily entitles the broker to a commission

Sometimes the only written promise to pay a commission is in the purchase contract (deposit receipt) between buyer and seller. To protect the right to a commission, the broker should obtain a separate commission agreement even if the listing terminates within hours of an offer. If the seller refuses, the broker must rely on the deposit receipt. Whether the seller has an enforceable obligation often depends on the wording of the commission clause. Business and Professions Code § 10147.5 requires the negotiability-of-commission notice to be provided to the principal when any agreement (listing or deposit receipt) establishes or alters commission rights.

• ✓A broker should obtain a separate commission agreement to protect the right to a commission
• ✓Enforceability of the seller's obligation depends on the wording of the commission clause in the deposit receipt
• ✓Any agreement establishing or altering commission rights must contain the B&P Code § 10147.5 negotiability notice

The broker's recovery of a commission is based upon the employment contract (listing). The execution of the contract to sell is significant because it evidences that the agent produced an offer acceptable to the owner.

• ✓Commission recovery is based on the employment contract (listing)
• ✓An executed sale contract evidences that the agent produced an acceptable offer

For income property, lenders rely on the security property's cash flow. NOI is calculated: Projected Gross Rents plus Other Income equals Total Gross Income; less Vacancy Factor equals Effective Gross Income; less Operating Expenses equals Net Operating Income. The Debt Coverage Ratio (DCR) equals annual NOI divided by annual mortgage debt service. An apartment lender may require 1.15:1.0; higher-risk commercial may require 1.25:1.0.

• ✓DCR equals annual NOI divided by annual mortgage debt service
• ✓A DCR of 1.15:1.0 means $1.15 of NOI for every dollar of debt service
• ✓Actual NOI (from long-term contract rents) prevails over economic/projected NOI when calculating DCR
• ✓Higher risk commercial properties may require a 1.25:1.0 DCR

Investment grade commercial loans use four analysis categories: Liquidity (current assets vs. current liabilities, 2:1 ratio acceptable), Leverage (debt-to-equity, rule of thumb 3:1 to 4:1), Activity (income to total asset ratio), and Profitability (return on net worth, yield analysis/IRR). Current assets include cash and receivables due within one year; current liabilities are debts due within one year.

• ✓A liquidity ratio of 2 to 1 (current assets twice liabilities) is acceptable to most lenders
• ✓The rule of thumb for debt-to-equity ratio is between 3:1 and 4:1
• ✓Yield analysis dividing total return by equity is the internal rate of return (IRR)
• ✓A break-even ratio is 1:1 where net operating income just covers fixed expenses

For owner-occupied income property, primary repayment is from the borrower's business, requiring a global cash flow analysis of business income and other sources versus expenses and personal debt. Business viability as a 'going concern' is essential for SBA-insured loans. Non-recourse single-tenant buildings evaluate the tenant's strength and long-term viability.

• ✓Owner-user income property underwriting uses a global cash flow analysis
• ✓Business viability as a going concern is essential for SBA-insured loan qualification

A Higher Cost/Priced Mortgage Loan is a consumer credit transaction secured by the borrower's principal dwelling with an APR exceeding the average prime offer rate for a comparable transaction. It applies if the rate exceeds the prime offer rate by 1.5+ percentage points for first-lien loans or by 3.5+ percentage points for subordinate-lien loans. The Federal Reserve H-15 release provides prime offer rates.

• ✓First-lien: APR 1.5 or more percentage points above the average prime offer rate
• ✓Subordinate-lien: APR 3.5 or more percentage points above the average prime offer rate
• ✓The FRB weekly H-15 Statistical Release is a reference for prime offer rates
• ✓Also referred to in Section 35 of TILA (12 CFR 226.35, Financial Code 4995)

Before establishing an escrow account, the creditor/lender conducts an analysis so the lowest month-end target balance is zero. The creditor/lender may charge a cushion for unanticipated disbursements, but the cushion cannot exceed one-sixth (1/6) of estimated total annual payments from the escrow account. If loan documents provide lower cushion limits, those control.

• ✓The lowest month-end target balance projected for the computation year must be zero (-0-)
• ✓The cushion cannot exceed one-sixth (1/6) of estimated total annual escrow payments
• ✓If loan documents provide lower cushion limits, the loan documents control

Funds held in impound accounts must be retained in authorized California depository institutions and, if invested, invested only with California residences or businesses. When a lender makes/purchases a loan secured by 1-4 residential units and creates an impound account, a minimum of at least 2% simple interest per annum must be paid to the borrower. No maintenance/disbursement fees are allowed. Impound funds are trust funds.

• ✓Impound funds must be retained in authorized California depository institutions (Civil Code 2955)
• ✓A minimum of 2% simple interest per annum must be paid to the borrower on impound funds for 1-4 unit properties (Civil Code 2954.8)
• ✓No fees are allowed for maintenance or disbursements of impound monies received in advance
• ✓The 2% interest exemption for non-interest-bearing trust accounts does not apply to banks

The fifth RESPA-required disclosure is the Initial Escrow (Impound) Account Statement, describing an escrow account established by a creditor/lender for a federally related mortgage loan. Escrow accounts generally rely on monthly payment and disbursement calculations within a calendar year, modified for biweekly or other periodic payments.

• ✓The Initial Escrow Account Statement is the fifth RESPA-required disclosure
• ✓Escrow accounts rely on monthly payment/disbursement calculations within a calendar year
• ✓Biweekly or other periodic payment accounts must be modified accordingly

It is prohibited for a creditor/lender to extend a first-lien loan secured by a consumer's principal dwelling if the loan is a Higher Cost/Priced Mortgage Loan unless an escrow account is established for property taxes and insurance premiums. This applies to qualifying applications received on or after April 1, 2010.

• ✓An escrow account is required for Higher Cost/Priced first-lien loans on a principal dwelling
• ✓The requirement applies to applications received on or after April 1, 2010
• ✓The escrow covers property taxes and mortgage/property-related insurance premiums (12 CFR 226.35, 24 CFR 3500.17)

An escrow account need not be established for insurance unless the creditor/lender requires it (e.g., earthquake or debt-protection insurance are options, not requirements). No insurance escrow is required for loans secured by cooperative shares or condominium units where the owners' association maintains a master policy. However, an escrow for individually assessed property taxes on each condominium unit is still required. Manufactured housing escrow was not required until October 1, 2010.

• ✓No insurance escrow required unless the creditor/lender requires the coverage
• ✓No insurance escrow for co-op/condo units with an association master policy, but tax escrow is still required
• ✓Manufactured housing escrow was not required until October 1, 2010

The creditor/lender performs an initial escrow analysis and submits the statement at settlement or within 45 calendar days of settlement. It may be incorporated into the HUD-1/HUD-1A or delivered separately. The statement includes the total monthly mortgage payment, the portion for taxes and insurance, an itemization of estimated charges and disbursement dates, the cushion amount, and a trial running balance.

• ✓Must be submitted at settlement or within 45 calendar days of settlement/close of escrow
• ✓May be incorporated into the HUD-1/HUD-1A or delivered as a separate document
• ✓Must include monthly payment breakdown, itemized estimated charges, cushion amount, and trial running balance

At the end of each escrow computation year, the creditor/lender conducts an analysis to determine surplus, shortage, or deficiency and prepares an annual escrow account statement. Items billed longer than annually (e.g., flood insurance every three years) are collected as equal monthly amounts (36 for triennial). When servicing is transferred and payment/accounting methods change, the new servicer must provide an initial escrow statement within 60 days of transfer.

• ✓An escrow analysis must be conducted at the completion of each escrow computation year
• ✓Triennial flood insurance is collected as 36 equal monthly amounts
• ✓A new servicer changing payment/accounting methods must provide an initial statement within 60 days of transfer

Under the UCC, a properly filed Financing Statement perfects a security interest. Absent filing, subsequent purchasers without actual knowledge may take free of the prior security interest. A secured party who files is generally protected against subsequent purchasers. Records are indexed by the debtor's true name.

• ✓A properly filed Financing Statement perfects a security interest
• ✓Without a filed statement, subsequent purchasers without actual knowledge may take property free of the prior interest
• ✓UCC records are indexed by the true name of the debtor

The proper place to perfect a security interest depends on the collateral type: consumer goods with the county recorder of the debtor's residence; crops, timber, minerals, oil/gas or certain accounts where a real estate mortgage would be recorded; and in all other cases with the Secretary of State.

• ✓Consumer goods: file in the office of the county recorder in the county of the debtor's residence
• ✓Crops, timber, minerals (including oil and gas), or certain accounts: file where a mortgage on the real estate would be recorded
• ✓All other cases: file in the office of the Secretary of State
• ✓A fixture filing is filed where a mortgage on the real estate would be recorded; residence of an organization is its place of business (or chief executive office if more than one)

A Financing Statement is effective for five years from the date of filing. To extend it, the secured party must file a Continuation Statement within the six-month period preceding expiration; succeeding Continuation Statements may be filed the same way.

• ✓A Financing Statement is effective for five years from the date of filing
• ✓A Continuation Statement must be filed within the six-month period preceding expiration to extend effectiveness
• ✓Filing occurs upon presentation of the statement, tender of the filing fee, and acceptance by the officer

UCC Article 9 gives lien rights to providers and installers of fixtures. The secured creditor who files first generally has priority regardless of when the claim arose, but purchase money security interests receive special priority when perfected within 10 days of the purchaser receiving possession.

• ✓A provider's perfected security interest in fixtures has priority over conflicting interests of owners and subsequent encumbrancers (Section 9313(4))
• ✓The first to make a proper filing has priority regardless of when the claim arose
• ✓Purchase money security interests get special priority when perfected within 10 days of the purchaser receiving possession (Sections 9301(2), 9312(4))

Division 9 (Secured Transactions, Sale of Accounts, Contract Rights and Chattel Paper) provides a unified, comprehensive scheme for regulating the sale, creation, and priority of liens and security interests in personal property. It gives the secured party the right to foreclose and apply sale proceeds if the debtor defaults.

• ✓Covers any transaction intended to create a security interest in personal property—goods, documents, chattel paper, accounts, contract rights
• ✓The purpose is to provide a simple, unified structure for the variety of secured financing transactions
• ✓The security interest allows foreclosure and application of sale proceeds toward the secured obligation upon default

A good-faith filing made in an improper place, or not in all required places, is still effective for collateral where it complied and against anyone with knowledge of its contents. A filing made in the proper place remains effective even if the debtor's residence, place of business, or collateral location later changes.

• ✓A good-faith filing in an improper place is effective for compliant collateral and against persons with knowledge of the contents
• ✓A proper filing remains effective despite a later change in debtor's residence, place of business, or collateral location
• ✓Subsequent filings (Continuation, Termination, Release, Assignment, Amendment) must be filed in the same location as the original

Standard forms UCC-1 (Financing Statement) and UCC-2 (Termination) are used; the filing officer notes the file number, date, and hour and returns an acknowledged copy. The Secretary of State furnishes certificates of effective Financing Statements upon request using the UCC-3 Request for Information or Copies form.

• ✓UCC-1 is the Financing Statement and UCC-2 is the Termination Statement
• ✓A UCC-3 Request for Information or Copies form is filed with the Secretary of State to obtain filing information
• ✓The Secretary of State's certificate shows effective statements, filing dates/hours, and secured party names and addresses

If a Financing Statement is not filed, subsequent purchasers and secured parties without actual knowledge take free of the prior interest, though Section 9201 keeps the unperfected security agreement valid between debtor and secured party. A Financing Statement may be filed early—before the agreement is made or the interest attaches—as often done in escrow to perfect a seller's purchase money interest.

• ✓Without filing, subsequent purchasers/secured parties without actual knowledge take free of the prior interest, but Section 9201 keeps the agreement valid between the parties
• ✓A Financing Statement may be filed before the security agreement is made or before the interest attaches
• ✓In escrow, an escrow holder may file early to perfect a seller's purchase money interest; if escrow fails, a UCC-2 Termination Statement removes the UCC-1

A security interest in fixtures can be created either by specific provisions in a trust deed/mortgage or by a fixture filing in the form of a Financing Statement; both must be recorded in the county where the real property is located. Ordinary building materials to be incorporated into a building are not deemed fixtures.

• ✓A fixture filing may be created by a trust deed/mortgage provision or by a Financing Statement, both recorded in the county where the property is located
• ✓A fixture filing must contain: a description of the goods, a legal description of the real property, a statement the goods are/will be fixtures, and an assertion it will be recorded in the property's county
• ✓Ordinary building materials to be incorporated into a building are not deemed fixtures

A fixture filing as a Financing Statement is a lien for 5 years unless extended by a Continuation Statement for another 5 years; a fixture filing in a trust deed or mortgage lasts as long as that instrument remains a lien. Enforcement options differ depending on the form used.

• ✓A fixture-filing Financing Statement is a lien for 5 years, extendable another 5 years via Continuation Statement
• ✓A fixture filing in a trust deed/mortgage is effective as long as that instrument remains a lien
• ✓A Financing Statement fixture filing is enforced under UCC personal property provisions; a trust deed/mortgage fixture filing may be enforced under the UCC or by foreclosure on both real and personal property
• ✓A copy of a security agreement signed by the debtor suffices as a Financing Statement if it contains all information required by Section 9402

REITs are categorized as equity trusts, mortgage trusts (short-term or long-term), or hybrid trusts. An equity REIT is most common and earns money mostly from rents collected on its real estate; unlike other real estate companies, it must acquire and develop property primarily to operate rather than resell. It may buy or construct buildings, develop projects, lease for rental income, and place mortgages. A mortgage REIT lends money directly to owners and invests in existing mortgages secured by real property, deriving income from mortgage interest (similar to a bond mutual fund). A hybrid REIT combines both by owning/operating income property and investing in mortgages.

• ✓Equity REIT: most common, earns income from rents; must operate rather than resell properties
• ✓Mortgage REIT: lends to owners and invests in mortgages, earns interest income (similar to bond mutual funds)
• ✓Hybrid REIT: combines equity and mortgage REIT characteristics

REITs can be publicly traded or non-exchange traded; both are filed with the SEC, but only publicly traded REITs have shares traded on national stock exchanges. Private REITs are not freely traded and are not registered with the SEC. Investors pay a fixed price per unit and anticipate regular dividends from rents or mortgage interest. Private REITs typically trade only during certain redemption windows on terms set by the issuer, may suspend redemptions, lack the disclosure requirements of other REITs, and often have no public or independent performance data.

• ✓Publicly traded and non-exchange traded REITs both file with the SEC; only publicly traded ones trade on national exchanges
• ✓Private REITs are not registered with the SEC and are not freely traded
• ✓Private REITs may suspend redemptions and lack disclosure requirements and independent performance data

An equity trust's internal sources of growth capital are refinancing of its mortgage debt and retaining capital gains when property is sold. External sources are the public sale of its securities, acquisition of properties in exchange for its securities, and short-term bank loans.

• ✓Internal capital sources: refinancing mortgage debt and retaining capital gains from property sales
• ✓External capital sources: public sale of securities, property acquisition in exchange for securities, and short-term bank loans

Like other investments, REITs carry the risk of loss of investment and can be a complicated investment product. Many technical provisions are spelled out in federal law, IRS rulings, and California Corporations Commissioner's regulations. Tax rules can be complex, so licensees should contact the IRS for the most current tax laws and consult all relevant sources to be properly informed.

• ✓REITs carry risk of loss and are complex investment products
• ✓Governing rules come from federal law, IRS rulings, and California Corporations Commissioner regulations
• ✓Licensees should contact the IRS for current REIT tax laws and consult all relevant sources

Market Value is the most probable price a property should bring in a competitive open market under conditions of a fair sale, with prudent knowledgeable parties, and no undue stimulus. Five conditions must be met including typical motivation, exposure time, and cash-equivalent payment.

• ✓Buyer and seller are typically motivated and well informed
• ✓A reasonable time is allowed for market exposure
• ✓Payment is in cash or comparable financial terms
• ✓Price is unaffected by special/creative financing or sales concessions

Cost is the amount required to create/produce/obtain a property (fact or estimate). Price is the amount asked, offered, or paid (a fact once stated). Value is the monetary relationship between properties and buyers/sellers (always an opinion, never a fact). Brokers focus on price.

• ✓Cost = amount required to create/produce/obtain a property
• ✓Price = amount asked, offered, or paid; once stated it is a fact
• ✓Value = always an opinion, never a fact, and must always be qualified
• ✓Brokers/salespersons focus on price (list, offer, contract, BPO)

Four essential elements: Utility, Scarcity, Demand (with purchasing power), and Transferability. All must be present to create value; none alone will create value.

• ✓Four elements: Utility, Scarcity, Demand (with financial ability), and Transferability
• ✓All four must be present to achieve value; none alone creates value
• ✓Demand must be implemented by purchasing power to be effective

Utility Value is directed toward a particular use (subjective value). Market Value is the amount in money for which a property can be sold in prevailing conditions (objective value). Types of value include Liquidation, Market, Investment, and Assessed Value.

• ✓Utility Value = subjective value for a specific use or person
• ✓Market Value = objective value, based on willing buyer/willing seller
• ✓Types include Liquidation, Market, Investment, and Assessed Value

Under California Code of Civil Procedure Section 1263.320, Fair Market Value is the highest price on the date of valuation agreed by a willing (but not obliged) seller and a ready, willing, able (but not obliged) buyer, each with full knowledge of uses and purposes.

• ✓Defined in California Code of Civil Procedure Section 1263.320
• ✓Fair Market Value is the highest price on the date of valuation
• ✓Neither party is under particular or urgent necessity to sell or buy

USPAP defines the client as the party who engages the appraiser. The Confidentiality Section of the Ethics Rule requires appraisers to protect the confidential nature of the appraiser-client relationship and not disclose results to anyone other than the client or authorized parties.

• ✓Client = party who engages the appraiser by employment or contract
• ✓Appraiser must not disclose confidential info except to client or authorized parties
• ✓State appraiser regulatory agencies and parties authorized by law may obtain the info
• ✓Appraiser cannot provide copies to agents/borrowers unless they are the client

Under Sections 75 et seq. (since 1983), assessors appraise property at full cash value upon change in ownership or completion of new construction as of the event date. Added taxes become due on the event date via a supplemental assessment added to a supplemental tax roll.

• ✓Triggered by change in ownership or completed new construction
• ✓Value determined becomes the new base year value
• ✓Reassessment between Jan 1 and May 31 generates two supplemental assessments (two bills)
• ✓Reassessment between June 1 and Dec 31 generates one supplemental assessment
• ✓Each occurrence generates its own supplemental assessment

Under Section 75.12, new construction is excluded from supplemental assessment if the owner will not occupy but intends to market the improvement and notifies the assessor in writing before or within 30 days of commencement of construction. Assessment is made when the improvement is transferred, leased, or rented.

• ✓Builder must notify assessor in writing before or within 30 days of commencement of construction
• ✓Supplemental assessment deferred until improvement is transferred, leased, or rented

Section 480 requires anyone acquiring an interest in real property (or manufactured home taxed as real property) to file a change in ownership statement with the county recorder or assessor. Timing and penalties vary by circumstance.

• ✓File at time of recording, or within 45 days if not recorded
• ✓Failure to file within 45 days of assessor's written request: penalty of $100 or 10% of applicable taxes, whichever is greater
• ✓Death without probate: transferee has 150 days from date of death to file
• ✓Death with probate: file prior to or when inventory and appraisal are filed with court
• ✓Preliminary Change of Ownership Report - $20 additional recording fee if not filed concurrently

Section 532 and Section 75.11(d) provide statutes of limitations for enrolling escape and supplemental assessments, varying with concealment or non-filing, and fraud makes the period unlimited.

• ✓Standard: 4 years to enroll escape/supplemental assessments (Section 532, 75.11(d))
• ✓8 years in cases of concealment or non-filing for unrecorded change of ownership
• ✓Unlimited when change of ownership statement not filed for a recorded change / in cases of fraud
• ✓Fraud penalty: 75% of additional assessed value (Section 504)
• ✓Statute does not begin until July 1 of the assessment year in which the event occurred

In common interest subdivisions, purchasers own a separate interest plus an undivided/membership interest in common areas. The four types are condominiums, planned developments, stock cooperatives, and community apartment projects.

• ✓Four types: condominiums, planned developments, stock cooperatives, and community apartment projects
• ✓Purchasers own or lease a separate lot/unit/interest plus an undivided interest in common area
• ✓An association of owners normally manages the common area

A standard subdivision has no common areas. Subdivisions with reciprocal easements plus an HOA that can enforce assessment liens are not standard subdivisions.

• ✓A standard subdivision is a subdivision with no common areas
• ✓Subdivisions with reciprocal easements plus an HOA that can enforce an assessment lien under Civil Code Section 1367/1367.1 are NOT standard subdivisions

A condominium is an undivided interest in common in real property coupled with a separate interest in space called a unit whose boundaries are described on a recorded map or condominium plan.

• ✓The condominium owner typically owns fee simple air space plus an undivided common interest
• ✓A condominium may be an estate of inheritance/perpetual estate, an estate for life, or an estate for years (leasehold)
• ✓Boundaries are described on a recorded final map, parcel map, or condominium plan
• ✓An association and elected governing board perform management functions

A planned development has separately owned lots plus commonly owned areas. A stock cooperative is a corporation holding title where shareholders receive exclusive occupancy rights.

• ✓Planned development (Civil Code 1351(b),(k)): lots owned separately plus areas owned in common for lot owners
• ✓Stock cooperative (Civil Code 1351(m)): corporation holding title where shareholders receive exclusive occupancy transferable only with stock
• ✓In a stock cooperative, occupancy rights transfer only concurrently with transfer of the share of stock

In a community apartment project (Civil Code 1351(d)), a purchaser receives an undivided interest in the land coupled with the right of exclusive occupancy of an apartment located on it.

• ✓Purchaser receives an undivided interest in land plus exclusive occupancy of an apartment
• ✓The owners elect a governing board which operates and maintains the project

An undivided interest is a partial/fractional interest in an entire parcel where ownership, not the land itself, is divided. Creating five or more requires a public report.

• ✓The land is not divided, but its ownership is divided
• ✓Creating five or more undivided interests for sale/lease/financing constitutes a subdivision requiring a public report
• ✓Section 11000.1(b) exempts purchases by people related by blood/marriage or by ten or fewer informed persons not buying for resale who waive protections

A limited equity housing cooperative meets stock cooperative criteria plus Health and Safety Code Section 33007.5 conditions to provide housing for low and moderate income families.

• ✓Resale of a unit cannot exceed original consideration plus authorized improvement value plus an inflation increment not exceeding 10% per year
• ✓Management documents can be amended only by a vote of at least 2/3 of owners
• ✓Corporate equity can only be applied for the corporation's benefit or a charitable purpose
• ✓Section 11003.4(b) provides an exemption from the Subdivided Lands Law under specified conditions