The Bank Trust For Ownership of Residential Property in Coastal or Border Areas
Ownership of real estate in Mexico is different from what we have become accustomed to in many other parts of the world. It is not necessarily better or worse…. just different! It makes sense to understand some of the basics when considering a purchase.
Article 27 of the Mexican Constitution of 1917 prohibits foreigners from owning residential real estate within thirty miles (50km.) of any coastline or sixty miles (100 km.) of either border. This area is known as the “restricted” zone.
In 1973, recognizing that many foreigners would enjoy owning a retirement or vacation home in Mexico, and would bring needed dollars to the country through such ownership, the Mexican bank trust, the fideicomiso, was established and approved for the purchase of real estate located in the restricted zone. For the first time since 1917, a non-Mexican could invest in a recreation or retirement home and feel safe that his or her investment was secure.
Under the bank trust, legal title is placed in the name of a Mexican bank, in trust, under a permit from the Secretary of Foreign Relations. The Mexican bank holds the title to the vacation or retirement home for the buyer/beneficiary of the trust, the non-Mexican who purchased the trust rights in the property. The bank administrates the property in accordance with the instructions of the buyer/beneficiary. The buyer/beneficiary enjoys the same rights of ownership as does a Mexican national. He may build on the property, tear down existing buildings, modify them, rent, lease or sell at anytime conforming only to internal bank regulations for this type of trust and to the general laws of the country established for all persons. Additionally, the beneficiary may finance the purchase and instruct the trustee bank to enter into the security agreement with the lender.
The trustee bank may not, without express written consent from the beneficiary, sell, transfer or encumber the property.
The beneficiary may name the parties he or she selects as co-beneficiaries and may name substitute beneficiaries upon death of the primary beneficiaries, thus avoiding probate in Mexico. Care must be taken however, in establishing the wording and terminology used in the succession of rights in conformance with applicable Mexican law.
A permit to establish a Mexican bank trust (fideicomiso) can now be obtained for a term of fifty years and can be renewed. In acquiring a property with an existing trust, the seller may assign the rights in the existing trust and the new buyer will enjoy the term established in the original trust permit. In other words, a trust established in 1995 will expire in 2045. Prior to 1993, the term of the trust was thirty years. Thus a trust established in 1990 would expire in 2010, unless extended or the original trust permit extinguished and a new permit obtained for fifty years.
The cost for the permit issued by the Secretary of Foreign Relations is currently about $ 1,000.00 U.S. dlls. and bank trust administration fees generally range from $200. U.S. to $750. U.S. annually. There are other expenses involved in the acquisition of a property, however, and it is wise to request a written estimate prior to beginning the transfer process.
THE MEXICAN CORPORATION AS A VEHICLE FOR ACQUISITION OF REAL PROPERTY. Under the 1993 Foreign Investment Law, a corporation established in Mexico is considered as Mexican under the law, even if all the shareholders are foreigners. Thus a Mexican corporation with 100% foreign ownership can acquire real property in fee simple ownership, even in the “restricted” zone. This, however, is ONLY for non-residential property: a hotel, a restaurant or other type of commercial use property. Not only is it a violation of the foreign investment law to place a retirement or vacation home in the name of a Mexican corporation, but also it is generally more costly than through a trust due to the requirement for periodic tax declarations and taxes on corporate assets.
TITLE INVESTIGATIONS and THE PUBLIC REGISTRY. The Public Registry system in Mexico is not unlike that of the United States and Canada in that title, whether in trust or in fee simple ownership, must be registered in order to give notice to third parties as to the interest in the property. A certificate can be obtained from the Public Registry in the municipality where the property is located. This will provide information as to encumbrances on title. Title insurance is now also available in many parts of Mexico.
To date there is no licensing law for real estate or escrow agents in Mexico and no bar association which regulates the ethics and practices of attorneys. Thus the person who offers a property for sale may or may not be qualified to offer professional advice on the acquisition of the property. As a foreigner considering the purchase of ANY property in Mexico, whether for personal and private use, such as a retirement or vacation home or personal residence, or for business purposes, it may make sense to consider the following guidelines:
1. Do not buy on impulse. Visit the area several times to determine if it will serve your long-term needs and goals. Some of the questions that should be asked: Is the community desirable? Are there services? Will you be able to communicate with your neighbors? Will you be able to obtain clear title to the property? What will be the cost to live in the community? What kind of medical facilities are available in case of emergency?
2. Carefully select the real estate broker who is going to represent you. He or she should be a member of the Mexican Association of Real Estate Professionals (AMPI). AMPI members operate under a code of ethics, and are affiliated with the (U.S.) National Association of Realtors (NAR) and the Canadian Association of Realtors (CREA). Many AMPI members are also certified by PROFECO, the Mexican Consumer Protection Agency. Ask to see your broker’s PROFECO certificate and confirm that he or she is an active member of AMPI. Check references and track records with others who have dealt with the person who is offering these services.
3. Be wary of EJIDAL (e-HEE-dal) land offerings. Ejidal land was established as a result of the Mexican revolution of 1917 and is NOT private property. It is government land which is permitted to be used by members of the ejidal community, much like Indian lands in the United States and Canada. More than 50% of all the land in Mexico falls into the ejidal category. Certain provisions in the law now permit this land to be converted to private property. Nonetheless, until the conversion process is complete, foreigners are not permitted to acquire it in the “restricted” zone and it may be risky to do so also in the interior of the country. While ejidal land offerings may be very attractively priced, the risks can be great and a specialist in land use and Mexican property law should be consulted before making a firm commitment.
4. Confirm that the value to be registered in your deed is the full amount you paid for the property. In many communities, it is customary to use an appraised value, rather than full value as the basis for cost. Since appraisal values can often be 40% to 60% of true commercial value, the buyer will save money at the onset in both acquisition taxes (2% of the declared value) and in property taxes by declaring only appraisal value. Nonetheless, using a value less than full purchase price is illegal and, furthermore, can be very costly when selling the property since the capital gains tax paid on the sale of the property will be based upon the value declared in the deed at the time of original purchase. Thus a seller may end up paying a hefty capital gains tax on a fictitious book value. Better to declare it correctly at the beginning than be stuck with unwelcome taxes when it is later sold.
5. Insist that title to the property, whether in trust (fideicomiso) or in fee simple, be recorded in the Public Registry of Property where the property is located. Some attorneys in Mexico still insist that it is not necessary that trust rights be registered. This is an error! Should a lien attach, correctly or incorrectly, to the trusted property, no buyer/beneficiary may transfer his or her rights in the property unless they have been registered in his or her name prior to the attachment of a lien.
6. Select a neutral third party to handle the transfer of your title. While a real estate broker or a seller may be able to guide you in your transfer of title, both will have a vested interest in the transfer and may not be able to provide the objective and professional advice you will require. A Notary Public in Mexico can provide this service but most are unwilling to devote the time necessary to obtain the appraisals, permits, title investigations and the certificates required. Additionally a notary public does not normally choose to hold or receive purchase funds. Escrow companies operate under Articles 193 to 208 of the Mexican Commercial Code, and perform services as neutral third parties and/or consultants in the transfer of titles. Since there is no licensing for these companies either, it is prudent to insist upon references and an examination of track records in much the same way you would in selecting the real estate agent to represent you.
7. Spend the money necessary to research title and obtain a valid transfer of title. Unfortunately, sometimes agents or real estate developers overlook a discussion of the importance of a registered title. Closing costs can range from 3% to 20% of the cost of the property. A less expensive property will cost more, percentage-wise, to transfer with the percentage decreasing as the price increases. It is of utmost importance to budget money for a correct transfer in order to protect your interest in your property, in your investment.
Select the ideal property, obtain professional counsel, enjoy! Owning a retirement or vacation home in Mexico can be fulfilling, a joy and the gateway to a whole world of new and exciting experiences. It is important, however, that you ask questions, insist upon getting the right answers and understand what you are acquiring.
Linda Neil is founder and CEO of the settlement company®, consultants and land use professionals specializing in legal and tax matters affecting real properties in Mexico. The company provides escrow services as requested and supervises the transfer of titles on Mexican properties located anywhere in the country. Ms. Neil is a real estate broker, licensed in California with thirty years of experience in Mexican real estate. She is a member of AMPI, NAR, FIABCI and holds PROFECO certificate 00065/96. For further information on these subjects, tel. 01 (114)-2-20-06 ; fax: 01 (114) 2-20-16 and e-mail: firstname.lastname@example.org.