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CAN FOREIGNERS REALY 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.
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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