Real Asset Classification & Real Property Considerations

The BASIN Core Benefits of Natural Capital and RealValue were built based on the process and supporting materials found in this Appendix.

Real Assets represent a broad spectrum of tangible resources that are foundational to economic activity. These assets possess both intrinsic value, simply due to their existence, and economic value due to their physical utility to produce goods and services. Classified primarily as Real Estate, Infrastructure, Commodities, and Natural Resources, these assets serve as the backbone of the global economy.

By combining insights from institutional investors, economic classifications, and legal frameworks, Real Asset classes and types serve as a tool for natural capital investment and ecosystem restoration and conservation initiatives.

Primary Classifications of Real Assets:

Real Estate

Land and commercial properties including apartments, offices, warehouses, malls, etc. It involves various real property rights, particularly the “bundle of rights”, for its valuation and income generation.

Infrastructure

Assets and networks used to transport, store and distribute goods, energy, people, and information, such as toll roads, pipelines, airports, and cellphone towers. These are often regulated by long-term contracts or user fees under specific property rights including public private partnerships.

Commodities

Basic goods such as oil, natural gas, precious metals, gold, corn, and soybeans. These often hold long-term value and may involve mining or harvesting rights.

Natural Resources

Includes energy and the extraction of oil & gas, timber, agriculture, mining as commodities. Rights to access and use these resources are essential for their valuation.

Economists' & other Classification

Durable & nondurable real assets

Economists often distinguish between durable and nondurable real assets. Durable assets are those employed in wealth production but not consumed in the process. Financial assets, such as stocks, debt, or derivatives, represent claims to the income and value derived from real assets by legal rights.

RWA: Real World Assets

In the context of crypto and blockchain, RWA's signify the tokenization and integration of tangible, physical assets into the digital DeFi (Decentralized Finance) ecosystems. This process allows these assets to be managed, traded, and leveraged on blockchain platforms, marrying traditional financial assets with the blockchain's efficiency, transparency, and accessibility. Examples include tokenized real estate enabling fractional ownership, commodities like metals and agricultural products made easily tradable without physical handling, and blockchain-based funding or management of infrastructure and natural resources projects. RWAs aim to broaden blockchain utility, bringing liquidity, innovation, and inclusivity to diverse assets.

Real Property Law & the Bundle of Rights

Depending on jurisdiction and type, real assets are subject to real property law and associated rights, including what's commonly referred to as the "bundle of rights."

The bundle of rights concept outlines various privileges, entitlements, and legal capacities related to real estate ownership. This "bundle" comprises:

• Right to Possess: Ownership and the authority to occupy the property.

• Right to Use and Enjoy: Utilizing the property for personal or economic benefits such as leasing.

• Right to Control and Manage: Determining how the property is used or managed, including the right to income derived from it.

• Right to Dispose or Transmissibility**: The power to sell, lease, or otherwise transfer the property, including bequeathal after death.

• Right to Exclude: Preventing others from entering the property or prohibiting specific uses.

These rights are often subject to limitations like local laws, HOAs, or specific agreements such as deed restrictions and conservation easements.

Additional Real Property Rights

While the bundle of rights covers a broad spectrum of legal entitlements, it is not exhaustive. Other specific types of rights related to natural resources, such as water rights, mineral rights, and air rights, also play significant roles in real asset classifications:

• Air Rights: These are often categorized as "development rights," allowing the owner of a parcel of land to control, occupy, or use the vertical space above the property. These rights can be sold or leased independently of the land itself. They are particularly relevant in urban settings where vertical development is common.

• Water Rights: These are generally "use rights" that permit the owner or leaseholder to use water from a specific source, be it a river, stream, or underground aquifer, for specified purposes such as irrigation, industrial processes, or consumption. These rights can be particularly complex, as they can vary by jurisdiction and may be subject to local, state, or federal regulations.

• Mineral Rights: These are typically "exploitation or extraction rights," granting the owner or lessee the exclusive right to mine, extract, sell, or lease minerals that exist beneath the surface of the property. These rights can be sold or leased separately from the property itself.

Each of these types of rights can be legally distinct and can be sold, leased, or transferred independently of the other rights associated with the property. They are subject to regulation and may have different characteristics depending on the jurisdiction in which the property is located.

Emerging Rights

In the realm of nature-based solutions, natural capital, and conservation, an evolving set of rights is increasingly being leveraged to address climate change and protect biodiversity. These rights extend beyond traditional property and resource rights to facilitate restoration, carbon sequestration, and aesthetic preservation. Key types include:

• Carbon Rights: These pertain to the ownership and control over the carbon dioxide storage and sequestration capabilities of a property. Carbon rights enable landowners to generate and sell carbon credits, which in turn incentivize CO2-reducing activities like reforestation.

• Natural Asset Rights: Distinct from natural resource rights, which are often focused on extraction, Natural Asset Rights pertain to the restoration and conservation of ecosystems. These rights facilitate the creation and trading of biodiversity credits and contribute to habitat restoration initiatives.

• View Rights: Also known as viewsheds or view corridors, these rights are designed to protect the visual integrity and scenic beauty of a landscape. Often established through easements or zoning laws, view rights can impact property values and contribute to regional aesthetic and cultural preservation.

Both Carbon and Natural Asset Rights are instrumental in the development of emerging certification programs such as carbon and biodiversity credits. These novel rights serve to monetize environmental services, thereby making conservation and restoration activities more financially viable and investable.

Usufruct and Leasing

The modern concept of leasing has roots in the ancient legal principle of “usufruct”. Usufruct is a legal concept that originates from Roman law, which allows one individual to use and derive income or benefit (“fruit”) from someone else's property without altering the property itself. The property can be land, a building, or even resources like minerals, water, and timber.

Usufruct essentially allows a person to enjoy the "fruits" of a property, both natural (like crops) and civil (like rental income), without harming or diminishing the property. This notion has evolved over time to give rise to various forms of leasing and tenancy arrangements in contemporary law.

In modern leasing agreements, the lessee gains the right to use an asset for a specified period in return for making regular payments to the lessor. The underlying asset could be real property, such as a building or land, or personal property, like a car or equipment. While the lessor maintains the ownership of the asset, the lessee gains the right to use it, much like in usufruct.

Both concepts are fundamentally grounded in the principle of temporary possession and utilization of assets, where one party benefits from an asset that legally belongs to someone else.

Leases

Leasing is a contractual arrangement allowing one party (the lessee) to use another party's (the lessor's) property for a specified time and specific use, typically in exchange for a periodic payment. Types of leases include:

• Sub-Leasing: An arrangement where the original lessee sublets the property to a third party but still maintains a lease relationship with the original lessor. The sub-lessee pays rent to the lessee, who in turn continues to pay rent to the lessor.

• Master Lease Agreement: a pre-established contractual framework that outlines the terms and conditions between a lessor (property owner) and lessee (tenant). Designed to be applicable to future leasing transactions, it simplifies the process for leasing multiple properties or assets and allows for the streamlined sub-leasing of a single property to various sub-tenants. In this arrangement, the lessor's primary point of contact is the main lessee, reducing the administrative burden as the lessor does not have to engage directly with the sub-tenants. This setup creates operational efficiencies for both the lessor and the primary lessee.

• Ground Lease: A lease of the land only, often for long-term periods. The lessee may construct buildings or make other improvements to the land during the lease period. At the end of the lease term, all improvements generally revert to the landowner unless otherwise specified.

• Leasehold: A form of property tenure where a person holds rights to a property by virtue of a lease agreement. Unlike freehold or fee simple, leasehold properties are 'owned' for a fixed term but not in perpetuity. Long term leasehold arrangements are common in commercial real estate.

Conclusion

All types of real assets depend on real property law and real property rights to certain extents. The bundle of rights that is commonly known as real estate is a tool for understanding the rights and limitations associated with these types of real assets.

In the realms of natural capital, ecological assets, biodiversity credits, and payments for ecosystem services, the application of real property law is essential for achieving favorable outcomes. Though there is a significant need for, and ongoing efforts towards, real property law and land use reform in various regions, its astute utilization serves as a potent instrument for both immediate and long-term benefits.