The Instruments of Real Estate Finance
IN beginning our discussion of the various legal instruments used in assembling funds for the purchase of rights in land and improvements, it will be well to note that, in the case of a fee, the estate purchased is in perpetuity. This affects the price, which is customarily paid in advance for the perpetual term, and contrasts sharply with transactions involving short-term estates, such as apartment or office leases. It is also the reason why most real estate financing problems arise out of transactions involving fees.
The difficulties accompanying payment in advance are multiplied by the infinite term of the rights conveyed and by the fact that funds for advance payment cannot be accumulated from accruing benefits. If the purchaser of a fee cannot provide the price from his own resources, he has to borrow and pledge the rights he acquires as security for the debt assumed. Thus, in effect, he is enabled to place himself in a position comparable to that of the tenant on a short-term lease, at least so far as paying for his rights out of funds accruing during their terms is concerned.
One other consideration is important. The probabilities of fluctuations of major size in the price of the services rendered by land and improvements increase with the length of the term of an agreement. The result is that, when funds are borrowed, the lender will ordinarily require some form of security to guarantee future payments.
The methods, instruments, and practices used in acquiring title to land and improvements are simplest when all of the purchase price can be provided at the time of transfer in cash or its equivalent from the purchaser's resources, that is, with "equity funds."1
On the other hand, when the purchaser's resources are inadequate, or in such a form that he thinks it inadvisable to concentrate____________________