I've always heard that foreigners can't own coastal property in Mexico, is that true?
No, while it once was true, times have changed. Prior to 1973, foreigners were not allowed to hold legal title or exercise direct rights to real property in an area within 64 miles of Mexico's borders and 32 miles of its coasts. But laws passed in 1973 and 1993 have made it possible for foreigners, foreign firms and Mexican firms with foreign participation to acquire interest in coastal real estate through a bank trust (Fideicomiso).
Who is involved in this bank trust?
Three parties, the seller of the property is the Trustor, the bank is the Trustee (Fiduciario), and the buyer, or Beneficiary (Fideicomisario).
How does the trust function?
Title of the property is transferred to a trust with a Mexican bank acting as a Trustee. The Trust Agreement is formalized by the issuance of a permit from the Mexican Ministry of Foreign Affairs. The lot or home buyer is designated as Beneficiary in the Trust and the beneficiary rights are recorded in the public record by a Notary Public.
What are my rights as a buyer?
The trust is a legal substitute for fee simple ownership, but in this case, the Trustee is the legal holder of the property. As a beneficiary, you have the right to sell your property without restriction. You may also sell your rights to a third party, or pass it on to named heirs.
Is the trust renewable?
Yes. According to the Foreign Investment Law passed in 1993, trusts can be renewed for an indefinite number of successive 50 year periods. In effect they run in perpetuity.
If at a later date, I decide to sell my property can anyone buy it?
Yes. If the new buyer is also a foreigner, you simply assign your beneficial rights. If the new buyer is a Mexican National, you can instruct the bank to endorse the title in favor of the buyer.
If the buyer is a foreigner, is his interest limited to the balance of my 50 years trust?
No. Upon application, a foreigner automatically can renew for an additional 50 year permit. This, however, is not mandatory.
Do many foreigners currently own coastal property in Mexico?
Yes. Today thousands of foreigners enjoy coastal resort property and have benefited from appreciation in these luxury and limited availability areas.
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 parties involved in any real estate transaction in the restricted zone:
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A Real Estate company
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The buyer's lawyer
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A bank
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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.
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:
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.
What is "Truth In Lending" ?
Federal law requires lenders to provide a "good faith" estimate of the fees, APR and loan program specifics within three days after application. The disclosed information and the forms used to present it are referred to as the "Truth in Lending Disclosure" or "Regulation Z."
What is APR?
The APR (Annual Percentage Rate) includes the interest on the loan, as well as other costs and fees, expressed as a percentage. It is always equal to or higher than your actual interest rate. It never includes title, escrow, appraisal, or credit report fees.
What if I cannot document all of my income and assets?
There are no "Stated income" loans available at this time in Mexico.
However we can offer you a "Stated Income" refinance or Home Equity Line of Credit" (HELOC) in most states.
What are the fees in addition to the lender fees that I will have to pay?
Here are the fees. (We will better define each item below.)
Fideicomiso set-up Fee US$575.00 and US$550 Annual fee paid in advance.
SRE Permit and Registration with Foreign Investment US$1,500.00
Loan application Fee US$250
Public Registry (like recordation in your county) a percentage ranging from .00125 to .0045 of the loan amount.
Appriasal Fee Approximately US$1,500
Notario Publico ( Contract Attorney NOT a simple notary) Varies in each state, typically does not exceed 1% of the sales price.
Property Acquisition Tax varies by state but usually 2% of the purchase price.
What is a Notario Publico?
A Notario Publico is a specialized , highly educated contract attorney. They must take an exam at the state level and are appointed for life.
They have many duties, one of which is handling real estate transactions. Only after you have signed in front of the notario is your transaction complete.
The notario will determine if the seller must pay capital gains.
They verify that your deed or fidei comiso is correct, and they register it in the public registry.
They will also collect some of the fees associated with your transaction.
Do not confuse them with a public notary in the U.S. the jobs are very different.
What is a fideicomiso?
The fideicomiso (feedaycomeeso) is the ONLY LEGAL WAY for a foreigner to own residential property in Mexico's "Restricted Zones".
These are properties located 50 kilometers from a coastline or 100 kilometers from a border. All of the Baja Peninsula is in the restricted zone. THERE IS NO OTHER LEGAL WAY TO OWN RESIDENTIAL PROPERTY IN THE RESTRICTED ZONES.
The fidiecomiso is very much like a living trust. You are the beneficiary, and you have certain rights under the trust to improve it, sell it, mortgage it and bequeath it. The trust is issued in 50 year increments and can be renewed ad-infintum.
If you sell your buyer can assume your existing trust and enjoy all of the benefits.
THIS IS NOT A LEASE.
You will name secondary beneficiaries (like your children) and they will immediately assume ownership upon your death without probate.
The Mexican Constitution was amended to allow this instrument to be used for foreign investment. We cannot stress enough, that the only legal way to own property in the restricted zones is through a fideicomiso.
Whether you are buying from a Mexican, a developer or another foreigner, you must have a fideicomiso in the Restricted Zone.
Do I need Title Insurance?
Some of our lenders require title insurance for your and their protection. Other lenders we use do not require title insurance.
We believe that you should have title insurance.
In the case where the lender does not require title insurance, you may still purchase it. We have two American title insurance companies that we use, and we will provide that information to you.
Title insurance in Mexico is more expensive than in the U.S. But what is your peace of mind worth?