PURCHASING PROPERTY IN THE “RESTRICTED ZONE” OF MEXICO The Constitution of Mexico prohibits foreigners from purchasing or owning real estate within that area of land which is 100 kilometers (62 miles) inland from its borders or within 50 kilometers (31 miles) inland from its coasts. This area is defined as the “restricted zone.” Aware of the need to foster foreign investment along that area, the Mexican Government developed an instrument of ownership of real property within the “restricted zone” under which title could be held safely and securely by foreigners, and at the same time overcome and satisfy the nuances of the Mexican Constitution. This instrument, called a Fideicomiso (Bank Trust), allows ownership by foreigners of real property through a Mexican Property Trust. This trust agreement provides its beneficiary with all rights incidental to the ownership of real property. The mechanism by which this Trust is created is rather simple. The Mexican Foreign Ministry(Secretaria de Relaciones Exteriores) issues a permit to a Mexican bank of the purchaser’s choice, allowing the bank to act as purchaser for the property on behalf of the beneficiary. The purchase property is placed in a Trust. The bank is the “Trustee” of the Trust and the actual purchaser is the “Beneficiary” of the “Trust.” Only a Mexican bank can act as Trustee of these types of trusts. The Trust is not an asset of the bank; the bank simply acts as Trustee to hold the Trust. The role of the Trustee is a passive one, only subject to the instructions it receives from the Beneficiary. Much like Living Wills or Estate Trusts in the U.S., the Mexican bank, as Trustee, takes instructions only from the Beneficiary of the Trust. The Beneficiary has all incidental rights to the ownership of real property, including, but not limited to, the right to use, enjoy, occupy and possess the property, lease the property, the right to build on it or otherwise improve it, etc. The Beneficiary may also sell the property by instructing the Trustee to transfer the rights to another qualified owner; or in the case of death of the Beneficiary, by providing in the trust instrument to bequeath the property to an inheritor. It should be noted that an important provision of this type of Trust is that it allows for a Successor Beneficiary, creating in essence a succession structure in the event of death of the Beneficiary. The initial term of the Trust is 50 years, and it can be renewed for additional periods of 50 years indefinitely, providing for long-term control of the asset. LEGAL FORM OF PROPERTY OWENERSHIP There are two basic ways by which a foreigner may own real property within the “restricted zone” of Mexico. Such form of ownership will hinge upon the type of use for which the property will be held. If the property will be for residential or any other purpose, the property must be owned through a Trust. In the Trust document, the Beneficiary or foreign owner for the property must be named. This can be the purchaser personally, multiple partners, a foreign corporation, an estate trust, a living will, or other entity. The Trustee of the Trust (the Mexican bank) will take direction from whoever is named as Beneficiary. If the property will be purchased/owned for development or for investment purposes, it can be owned through a Mexican corporation, and said corporation may hold fee simple title. It is against the law for a foreigner to own property in a Mexican corporation for residential purposes. TITLE INSURANCE Wherever you buy real estate you should always obtain title insurance to protect your investment. Mexico is no different, nowadays most major U.S. title insurance companies have operations in Mexico, and are offering title insurance for the purchase of real estate in most areas of Mexico. Title Insurance is purchased for a one-time fee and once acquired, protects the policy holder as long as there is a vested interest in the property. Title insurance is a contract of indemnity that protects the property rights transmitted to a new property owner/lender and indemnifies the policy holder against damage or loss arising from a defect in the title to real property. Some of the coverage’s that Title Insurance provides is the following: · Invalid documents executed under expired/non-existent power. · False assumption of identity concerning the legitimate property owner. · Liens and financial burdens charged to the previous property owner. · Non-registered easements. · Hidden heirs of previous owners · Frivolous lawsuits on Property Title ESCROW Until recently the concept of an escrow company, as understood in the U.S., was nonexistent in Mexico. With the advent of the North America Free Trade Agreement (NAFTA), the major title insurance companies, along with their escrow departments, found reasons and motivation to open up for business in Mexico. Most major title insurance companies in Mexico have escrow departments in the U.S. to provide the parties with the comfort necessary in a real estate transaction. This has now allowed for reputable third-party escrow services (e.g., Title Company) to hold money in individually U.S. numbered and insured escrow accounts until all matters and items required for closing in Mexico are completed and the property rights have been transferred to the purchaser. When purchasing property, one of the most important considerations for both a buyer and a seller is whether and under what conditions the transaction funds will be safely held and distributed by an independent party. In an international transaction, this issue is even more important and often complicated, as either the purchaser or the seller may not be familiar or comfortable having funds deposited in an unfamiliar jurisdiction or with an unfamiliar attorney or bank. Utilizing escrow services provides cost-effective security to all the parties involved in a real estate transaction. CLOSING COST Any purchase of property will incur closing costs. Mexico is no different. The typical and customary closing costs for the purchase of real property in Mexico include permit fees, Notary Fees, Acquisition Tax, certificate of no liens, appraisal and registration or recording fees. What amount the closing costs will be may vary, especially if the fees are negotiated favorably for matters such as appraisal, notary fees, and other items that are not regulated or set by law. Depending on the State where the property is located and the Notary Public involved, it should be assumed that typical closing costs will run approximately 5% to 7% of the purchase price. The primary fee, and the most important fee at closing, is the Acquisition Tax. This tax is paid by anyone purchasing or acquiring property in Mexico, whether a Mexican citizen or a foreign buyer. The Acquisition Tax is 2% of the purchase price (and may be somewhat higher in certain jurisdictions that may impose some form of local tax) and is paid when the actual closing takes place and the transfer deed is recorded NOTARY PUBLIC A Notary Public is required for the purpose of handling the closing of any real estate transaction in Mexico. The Notary “Notario Publico” is much different than in the U.S., he is a highly qualified attorney that acts more like a Clerk of the Court, he is invested public faith, verifies the identity of the parties and is responsible for the legality of the content in civil contracts, he also withholds taxes, protocolizes documents and orders the public deed (escritura publica) to be recorded with the local Property Public Registry (Registro Publico de la Propiedad). |