CAN FOREIGNERS REALLY OWN
PROPERTY IN MEXICO?
Yes, Americans
and other foreigners may obtain direct ownership
of property in the interior of Mexico. However,
under Mexican law, foreigners cannot own property
outright within the restricted zone. Instead, a
real estate trust must be set up to hold title
for the foreigner. Since foreigners are not able
to enter into contracts in buy real estate, they
must have a bank act on their behalf, much as a
trust is use to hold property for minors because
they also can not contract. The following is a
brief outline of the law regarding such trust,
known as "fideicomisos", but potential
buyers should always get advice and have all real
estate transactions overview by a licensed Mexican
attorney.
WHO'S INVOLVED IN REAL ESTATE TRANSACTIONS
IN MEXICO?
Normally, there are three to four players involved
in any real estate transaction in the restricted
zone:
- A real estate company
- The buyer's lawyer
- A bank
- A public notary
All four are helpful in their respective areas in assisting
with real estate transactions. Transactions outside of
the restricted zone do not involve a bank since it is
not necessary to establish a real estate trust in those
areas. Otherwise the transactions are much the same.
Because of the similarities of real estate transactions
in general, it is easy to assume that the basic terms
and principles which are familiar in the United States
also hold true in Mexico. This assumption becomes easier
to make when United States real estate terminology is
adopted for transactions in Mexico. Much of the paperwork
is similar, if not exactly the same, as that used in
the US. Although, there are many aspects of Mexican real
estate transactions that are identical to procedures
carried out in the United States, there are many aspects
that are completely different. As a rule, a foreigner
should assume nothing.
Mexican real estate transactions are not carried
out in the same manner as United States real estate
transactions. The buyer must retain professionals
to assist in the transaction. Mexico has yet to
regulate real estate transactions. Real estate
agents and brokers are not legally licensed in
Mexico. Consequently, a foreign buyer cannot always
depend on the normal safeguards that would be applied
to real estate transactions in the United States.
The old saying "let the buyer beware" is very appropriate.
Anyone can set up a real estate company in Mexico.
There are no special requirements or brokerage
licenses to obtain. A would-be real estate agent
merely has to establish a Mexican corporation,
obtain a work visa, and he is in business.
There are good reasons why the real estate industry in
the United States is highly regulated. Until the real
estate industry is regulated in Mexico, there will always
be some real estate companies who prefer that buyers
know as little as possible about real estate transactions.
After all, a buyer cannot ask questions if he does not
have any knowledge of the laws.
Currently there is nothing similar to a Real Estate Commissioner
or a Department of Real Estate in Mexico. Some states
are beginning to look at some kind of real estate legislation,
but it might be some time before this is a reality. The
American Embassy and the American consulates in Mexico
are good places to start when trying to determine if
a real estate company is reputable. Some of the real
estate companies have established quite a reputation
for themselves at some of the Consulates.
A Mexican attorney should be involved to draw up
contracts and to review the conditions and terms
of sale. Additionally, an attorney can do a title
search and point out any problems or alternatives
a buyer may have. The buyer should always have
his or her own attorney rather than using the attorney
of the seller or some attorney used by a real estate
company free of charge. As the old saying goes,
you get what you pay for, and usually if someone's
services are offered free of charge you are probably
paying for them in some other way. Legally, only
a licensed Mexican attorney should provide advice
on the law. If an attorney is licensed in Mexico
he should be able to produce a "cédula
profesional." This document is a registered license
to practice law in Mexico and includes a photo
of the attorney and his signature. To be sure that
an attorney is licensed in Mexico, a foreign buyer
should ask to see the attorney's license, or have
the attorney's license number included in a retainer
agreement before employing any services.
American attorneys are not licensed to practice law in
Mexico and should not give advice on Mexican Law. I should
clarify, here, that I am referring to individuals who
are licensed to practice law in the United States, and
not merely individuals who are citizens of that country.
There are currently very few Americans who are licensed
to practice law in Mexico. The fact that a person is
licensed to practice law in the United States in no way
allows him or her to practice law in Mexico: Mexican
or United States law.
Besides formalizing your real estate transaction, an
attorney can be very helpful in saving you money. This
is because attorneys are involved in many different transactions
and have contacts with banks, notaries, and the Mexican
government on a regular basis. Because of this they are
aware of the most competitive cost and fees involved
in a transaction and can make sure that the buyer is
given the best possible prices. An attorney can also
inform the buyer regarding his or her legal options and
by doing so can make sure that no opportunities are missed:
tax planning considerations, closing costs which should
be paid by the seller, and ways of taking title to the
trust rights which make sense for the particular circumstances
of a specific buyer. Very often one piece of good advice
can save the buyer thousands of dollars in tax savings
or other savings when the buyer eventually sells the
property.
When looking for an attorney it is important to remember
that any Mexican attorney can normally handle a real
estate transaction. The buyer is not limited to only
the local attorneys where the property is located. All
real estate transactions involving a trust are governed
by federal law. This means that all such transactions
are carried out the same way regardless if the property
is in Cancun or Los Cabos.
THE RESTRICTED ZONE AND "FIDEICOMISOS"
The law declares that the Mexican nation has original
ownership to all land and water in Mexico, as well as
minerals, salts, ore deposits, natural gas and oil; but
that such ownership may be assigned to individuals.
The Mexican Constitution prohibits direct ownership
of real estate by foreigners in what has come to
be known as the "restricted zone." The restricted zone encompasses
all land located within 100 kilometers (about 62 miles)
of any Mexican border, and within 50 kilometers (about
31 miles) of any Mexican coastline. However, in order
to permit foreign investment in these areas, the Mexican
government created the "fideicomiso," (FEE-DAY-E-CO-ME-SO)
which is, roughly translated, a real estate trust. Essentially,
this type of trust is similar to trusts set up in the
United States, but a Mexican bank must be designated
as the trustee and, as such, has title to the property
and is the owner of record. The Mexican Government created
the "fideicomiso" to reconcile the problems involved
in developing the restricted zone and to attract
foreign capital. This enabled foreigners, as beneficiaries
of the trusts, to enjoy unrestricted use of land
located in the restricted zone without violating
the law.
A "fideicomiso" is a trust agreement created for
the benefit of a foreign buyer, executed between
a Mexican bank and the seller of property in the
restricted zone. Foreign buyers cannot own real
estate in the restricted zone due to Constitutional
restrictions. The bank acts on behalf of the foreign
buyer, taking title to real property. The bank,
as trustee, buys the property for the foreigner,
then has a fiduciary obligation to follow instructions
given by the foreigner who is the trust beneficiary.
The trust beneficiary retains and enjoys all the
rights of ownership while the bank holds title
to the property. The foreigner is entitled to use,
enjoy, and even sell the property that is held
in trust at its market value to any eligible buyer.
In order to allow foreigners to enter into the agreement
contained in the Calvo Clause, Mexico requires all foreigners
to apply for and obtain a permit from the Ministry of
Foreign Affairs prior to contracting to acquire real
estate in Mexico. This is currently done by the trustee/bank
at the time a real estate trust is set-up.
Given the changes made for 1997 in the foreign investment
Law, and the fact that a buyer can now apply for and
obtain a trust permit in a matter of days, it is always
better to secure the trust permit from the Ministry of
Foreign Affairs before entering into any contract.
The bank, as trustee, must get a permit from the Ministry
of Foreign Affairs to establish a real estate trust and
acquire rights on real property located within the restricted
zone. The purpose of the trust is to allow the trust's
beneficiary the use and exploitation of the property
without constituting real property rights. The beneficiaries
of the trust (fideicomisarios) may be:
- Mexican corporations with foreign investment
- Foreign individuals or legal entities
The law defines "use" and "exploitation" as
the right to use or possess the property, including
its fruits, products, or any revenue that results
from its operation and exploitation by third parties
or from the bank/trustee.
The law does not clarify how trust permits will be
issued. Article 14 of the law states that the Ministry
shall decide on issuing the permits "...considering the economic
and social benefit, which the realization of such operations
imply for the nation." The basic criteria used to determine
such benefits are likely to change somewhat with the
publication of the new foreign investment regulations.
However, it is reasonable to anticipate that some of
the unwritten rules used by the Mexican government in
the area of real estate trusts will be included in the
new foreign investment regulations. It is also possible
that some of the confusing elements will be eliminated.
It is important to understand the application of the
current regulations, even if they are going to be replaced,
as well as some of the unwritten policies the government
has used in the past, to better understand what criteria
will be used by the Ministry in the future.
The Ministry of Foreign Affairs must grant any petition
for a trust permit that complies with the stipulated
requirements within 5 working days following the date
of its presentation to the Ministry's central office
in Mexico City. It must be granted in 30 days if the
application is submitted to one of the Ministry's state
offices. The Ministry of Foreign Affairs must confirm
the registration of any property acquired by foreign-owned
Mexican corporations a maximum period of 15 days following
the filing of the petition. In both cases, if the maximum
period passes with no action by the Ministry, the trust
permit or registration are considered authorized.
There is a common misconception among foreigners investing
in Mexico that once the trust expires, the beneficiary
loses all rights and benefits of the sale of the property
held in trust. This is not the case. On the contrary,
the beneficiary has a contractual right under the trust
agreement with the Mexican bank to all benefits that
may result from the use or sale of that property, even
though he does not hold title to the property. Under
Mexican Law, the bank, as trustee, has a fiduciary obligation
to respect the rights of the beneficiary.
A real estate trust is not a
lease. The beneficiary can instruct the bank to sell
or lease the property at any time. The beneficiary can
develop and use the property to his liking and benefit,
within the provisions of the law. Generally, the law
allows most activities engaged in by foreigners.
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