Leap of Faith? Buying Real Estate in Mexico Through a Bank Trust (Fideicomiso)
By: PATRICK J. KELLY & LUIS G. RESÉNDIZ
In our November 2003 newsletter, we provided a general overview on buying real estate in Mexico. The article, Sun, Sand and Caveat Emptor, addressed a broad range of issues buyers have encountered. This article focuses more narrowly on buying property in Mexico through a Fideicomiso.
It's a familiar scenario. You have been vacationing in Mexico for years. You've fallen in love with the sun, sea, beaches, colonial cities, and people. The idea takes shape that maybe it is time to secure more permanent access to this place.
You start talking with real estate brokers, friends, and others who have experience purchasing real estate in Mexico. You learn that you cannot own title to a beach home directly. You keep hearing about the Fideicomiso, or bank trust (hereafter "Fideicomiso"). The realtors and the seller mention a Fideicomiso, or bank trust, and tell you not to worry, but you are suspicious.
To many foreigners faced with purchasing beach real estate in Mexico, the Fideicomiso is a total mystery. Buyers may not understand when they are required to buy through the Fideicomiso, how it is created, what rights they have in the real estate, who acts as the trustee, what the cost is, how long it lasts, and whether the buyer can direct the trustee to sell or transfer the real estate held in the Fideicomiso. Ultimately, what buyers want to know is whether the arrangement is secure.
The Mexican Constitution
Article 27 of the Mexican Constitution states that foreigners may have ownership rights to lands in Mexico provided that foreigners agree before the Secretary of Foreign Relations (SRE) to consider themselves as Mexican nationals with respect to such property, and not to invoke the protection of their own government in matters relating to the property under penalty of forfeiting the property if they fail to comply with this provision (this provision is known as the "Calvo Clause"). Furthermore, Article 27 establishes an outright prohibition against foreigners acquiring direct ownership of real estate within 100 kilometers of the national borders or 50 kilometers of the coastline (this zone is now known as the "Restricted Zone"). These constitutional restrictions have been softened by Mexico's foreign investment laws and regulations.
Mexico's Foreign Investment Law
In 1993, Mexico enacted the Foreign Investment Law (the FIL) liberalizing land ownership for foreigners in Mexico. The FIL (as amended) and its regulations dictate how foreign investors may acquire land in Mexico. If the real estate is not within the Restricted Zone, foreigners can obtain permission to acquire direct ownership of the property by simply notifying the SRE of their agreement to abide by the Calvo Clause. There are a few types of real estate (e.g. agricultural lands) that have specific rules, which are not covered by this article.
For real estate within the Restricted Zone used for non-residential activities (i.e. tourism, real estate development, commercial or industrial purposes), foreigners may acquire the land through a 100% foreign-owned Mexican legal entity (a Mexican corporation or limited liability company) that is authorized to have foreign ownership by the SRE and whose bylaws contain the Calvo Clause. If the land is located within the Restricted Zone and is used for residential purposes, foreigners may only acquire the rights to use and enjoy the land through a Fideicomiso, but may not acquire an outright title to it. Any disputes as to whether property lies within the Restricted Zone are reviewed and resolved by the SRE.
Residential versus Non-residential
Article 5 of the 1998 regulations to the FIL lists some activities that will be considered non-residential. These include those:
- subject to a time share;
- intended for some industrial, commercial or tourism activity, and which may be used simultaneously for residential purposes;
- acquired by credit institutions, financial brokers, and credit auxiliary organizations, repossessed to recoup debts in their favor;
- used by legal entities to fulfill social objectives that may consist in the transfer, urbanization, construction, and all other activities inherent in the development of real estate projects until they are commercialized or sold to third parties; and
- real estate assets used for commercial, industrial, agricultural, livestock, fishing, forestry uses, and for rendering of services.
Characteristics of the Fideicomiso
As stated above, buyers purchasing real estate in the Restricted Zone for residential purposes must purchase through a Fideicomiso. As detailed in Article 381 of the General Law of Commercial Paper and Credit Operations (the "LGTOC"), the seller (the "Grantor") transfers title to the real estate to a Mexican financial institution (the "Trustee") in trust to be used for the purposes designated by the grantor, for the benefit of the buyer, or the person(s) or entity(ies) designated by the buyer (the "Beneficiary or Beneficiaries"). While the LGTOC provides the general legal framework, parties to any Fideicomiso agreement are free to negotiate most of the terms and conditions of the agreement.
The Grantor transfers title to the real estate to the Trustee to be held in trust for the benefit of the Beneficiary(ies) under the Fideicomiso agreement. The agreement should expressly state that the Fideicomiso is irrevocable and that the seller reserves no rights. Otherwise, the Grantor might retain some rights under the Fideicomiso during or upon expiration of its term.
The Trustee administers the Fideicomiso as fiduciary for the Beneficiaries, and is responsible for carrying out the terms of the agreement. In Mexico, only authorized Mexican financial institutions can act as Trustees. The Trustee can resign only for good cause, and then only after a Mexican judge has confirmed that good cause exists. The Trustee cannot do anything with the property other than what is allowed by the agreement. The Trustee is liable for loss or damage suffered by the Beneficiary as a result of the Trustee's negligence.
The buyer typically is the Beneficiary of the Trust. However, the buyer may designate other Beneficiaries. In fact, we recommend that the Fideicomiso agreement provide for substitute Beneficiaries, so that if the initial Beneficiary dies, the right to use and enjoy the real estate will pass to the substitutes without the need for probate. Those rights generally include the ability to use, rent, or improve the property, cause its sale or transfer, and, in general, undertake, with the Trustee's participation, all the activities performed by any real estate owner.
Fideicomiso Agreement, Registration, and Costs
As stated, the parties can negotiate most of the terms and conditions of the Fideicomiso agreement. The Trustee must obtain a permit from the SRE to acquire the real estate in trust if the Beneficiaries are foreigners. The Fideicomiso agreement must be executed before a Mexican notary, who will register it in the Public Registry of Property. While the costs of establishing a Fideicomiso and closing on the acquisition vary depending on the value of the property, the Trustee, and the location of the real estate, costs range from 5% to 10% of the purchase price. Typical costs include the fee to obtain a certificate of no liens, appraisal fee, notary fees, and real estate transfer tax which, depending on the State, ranges from 2% to 4% of the appraised value of the property. The Trustee also charges annual fees, which may range from $300 to $2,000, and additional fees in the event of a later transfer.
Steps to Closing
Other than the fact that the buyer is purchasing through a Fideicomiso, the purchase transaction is essentially the same as any other real estate transaction in Mexico. The buyer must make sure that:
- the seller holds valid, unencumbered title to the real estate;
- there are no taxes due on, or liens attached to, the property;
- the terms of the sale are evidenced by a written purchase contract or promissory contract if money is paid in advance of closing;
- the Fideicomiso agreement correctly describes the terms negotiated with the seller and the bank;
- the buyer obtains a certificate of no liens;
- the buyer obtains title insurance (such insurance may be obtained from Stewart Title Guaranty Company, First American Title Insurance, Chicago Title, to name a few); '
- the buyer obtains an appraisal of the real estate;
- the SRE issues a permit for the Fideicomiso;
- the Fideicomiso Agreement, which is incorporated into the escritura or deed, provides appropriate protections to the buyer; and
- the escritura/deed is registered in the Public Registry of Property.
Term/Termination of the Fideicomiso
The maximum initial term of a Fideicomiso is 50 years, which may be extended upon application to the SRE. Upon the termination of the Fideicomiso (and provided that the Grantor reserved no rights under the agreement), the real estate will be transferred to the person designated by the Beneficiary, provided that person is qualified to acquire the title (e.g., that the transferee is not a foreign national or entity that cannot acquire real estate in the Restricted Zone).
While purchasing real estate through a Fideicomiso may seem complicated, the process should not be an impediment to purchasing your dream beach house. Fideicomisos have been tried and tested over time. There is an enormous amount of foreign investment flowing into Mexico now through foreign residential real estate purchases in the Restricted Zone. The Mexican government does not want to lose this source of foreign investments. In fact, it is likely that the process will get easier in the future.
In the meantime, as long as you are patient and obtain competent counsel, you should have confidence in the Fideicomiso structure.