How foreign investors can purchase a property in the Mexicans coasts?

By: Adan Aranda


Let's start by saying that in Mexico, in general, foreign investment is allowed to purchase a real estate. For this, in some areas of the country, the direct route of ownership is allowed and in other areas an innovative and secure method was created to hold the property. This method, which can raise some questions about its operation, known as "Fideicomiso", is regulated by the Foreign Investment Law, which was strengthened and regulated to provide security to the direct participation of foreign investment in Mexico, all thanks and since the North American Free Trade Agreement (NAFTA) between the United States, Mexico and Canada* was signed, and later with the signing of many other international agreements on trade to protect the foreign investment with Europe and other countries.


For the clarity of the reader of this article, we will begin by establishing the way in which this legal vehicle begins to be developed. You will first hear that the options to acquire ownership of land or real estate (lot, house or apartment) in Mexico are regulated by the Mexican Constitution, which establishes that "Only Mexicans by birth or naturalization and Mexican companies have the right to acquire ownership of land, water and its accessions or to obtain concessions for the exploitation of mines or water. The State may grant the same right to foreigners, provided that they agree before the Ministry of Relations to consider themselves nationals with respect to said assets and not invoke the protection of their governments for that reason, under penalty, in case of breaching the agreement, of losing for the benefit of the Nation, the goods they have acquired by virtue of it. In a strip of one hundred kilometers along the borders and fifty on the beaches, for no reason can foreigners acquire direct ownership of the land and waters".


Now, because the Mexican Constitution prohibits foreigners from purchasing real estate within 60 miles (100 km) of the international border of the United States, or within 30 miles (50 km) of the Mexican coast ( known as Restricted Zone); The aforementioned method described in the first paragraph, is the legal mechanism that allows foreign property through a restricted zone property trust known simply as a Fideicomiso. This is a trust agreement, just like a probate trust in the United States or Canada (Trust), which gives the buyer all rights of ownership.


Graphically we were able to observe how said Restricted Zone covers a large part of the territory of the Mexican Republic on its coasts and borders with the United States, Belize and Guatemala, however, if foreigners wish to buy a property outside that zone, that is, in the interior of the country, as would be the case of Mexico City, Oaxaca, San Miguel de Allende, Cuernavaca, Guadalajara, among others; they can do it without the need for a Trust, that is, they can directly acquire the property title as foreigners or for a foreign company or partnership, that is, in other words, direct foreign investment is allowed throughout the Mexican territory; only in the restricted zone strip, the property must be acquired through the Fideicomiso. See the following image to get an idea of ​​how the restricted area is made up.



In order to obtain the rights of ownership through a Fideicomiso, the Department of Foreign Affairs in Mexico issues a permit to the Mexican bank of the Purchaser’s choice, allowing the bank to act as Purchaser of the property.


Essentially, the bank acts as the “Trustee” for the trust and the Purchaser is the “Beneficiary” of the trust. The trust is not an asset of the bank; the banks simply act as the Trustee to hold the trust.


Much like living wills or estate trusts in the U.S., with a Fideicomiso the Mexican bank, or Trustee, takes instruction only from the Beneficiary of the trust (the Purchaser).


The Beneficiary has the right to use, occupy, lease and possess the property, including the right to build on it or otherwise improve it. The Beneficiary may also sell the property by instructing the Trustee to trans fer the rights to another qualified Purchaser, or bequeath the property to an Inheritor. The initial term of the trust is 50 years, however the trust can be renewed for additional periods of 50 years indenitely, providing for long-term control of the asset through the Fideicomiso.


The Purchaser holds the same rights as a property owner in the U.S. or Canada, including the right to enjoy, sell, rent, improve the property, etc.


This is not to be confused with a land lease. The property purchased is placed in a trust with the Purchaser named as the Beneficiary of the trust; the Purchaser is not a lessee. If the property purchased is already held in a trust, the Purchaser has the option of assuming that trust, or having the property vested in a new trust.


Establishing a Trust


A Notario Publico in Mexico is much different than a Notary Public in the U.S. or Canada. In Mexico, Notaries are specialized attorneys who act on behalf of the state and federal government in relation to any transaction; they are comparable to a U.S. Clerk of Courts. On average, you can obtain your trust within 60-90 days. In some cases title has been transferred in as little as two to three weeks.


Buying


The Purchaser should only release funds when he or she receives clear title. By utilizing a U.S. or Mexican third party escrow service like First American Title Company, Stewart Title Guaranty, or one of several escrow service providers in Mexico, your money is held in an individually numbered escrow account until your trust is complete and the property rights have been transferred to you, the Purchaser.


If the property is selling by a stablish developer or some one you have confidence to do so, you can do the above process or simple transfer to the developer or that person bank account. You just have to close your purchase following the advise of your Mexican legal advisor or lawyer, who will give you the confidence to make the purchase transaction in the terms that the developer or the private transaction has been agreed.


Title Insurance


When you purchase real estate in Mexico, it is not mandatory, but it is recommended you consider Title Insurance for your property purchase. We insure our cars, homes and our health. It is just as important to insure one of your largest investments: your property. Title Insurance is available for properties in Mexico purchased by any foreign investor and Mexican citizens through Stewart Title.


Ensuring Ownership


In the trust document the Purchaser must name the Beneficiary or foreign owner of the property. The purchaser can be an individual, multiple partners, a foreign corporation, an estate trust, a living will, or another entity. The Trustee of the trust (the Mexican bank) will take direction from whomever you name as the Beneficiary.


You also can name a U.S. or Canadian corporation as the Beneficiary of the trust. This is perfectly legal. If you sell the shares in the U.S. or Canada corporation, you have created a real estate transaction in Mexico and all Mexican capital gains taxes apply. I suggest to consult this with a tax professional before purchasing or selling Real Estate in Mexico.


Commercial vs Residential Purposes


You can own a property in a Mexican corporation and take title fee simple only if the property is for commercial, development or investment purposes, but, you cannot own property through Mexican corporation to bypass the trust process, it's call fraud to the law. The fine for this cases will be up to 100% of the purchase amount.


It is against the law for a foreigner to own property in a Mexican corporation for residential purposes. This refers to Foreign Investment Law and Article 190 of the Mexican Revenue Code and is also declared in the International Tax Treaty between the U.S. or Canada and Mexico. If this is done, and you do not pay the Mexican taxes, you will have created a tax burden over the property for the new owner. So be aware of the advise that some people give to foreign investors who ignore the law.


Owning in Mexico may sound complicated, but if you have a D'Ster Investland professional to guide you through the process, you will be living your dream before you even know it.


*North American Free Trade Agreement (NAFTA), today reformed and modified. In the United States now it is known as the U.S.–Mexico-Canada Agreement (USMCA); in Canada it is known as CUSMA (Canada-United States-Mexico Agreement), and in Mexico it is known as T-MEC (Treaty between Mexico, the United States and Canada).


Adan Aranda

aranda@ayr.com.mx

*Mexican Lawyer, specialist in Foreign Investment, Compliance and Corporate. He is CEO of the Law Firm www.ABROassociates.com , and Legal Managing Partner of www.DsterInvestland.com . In Canada he is Mortgage Broker with Mortgage Architects www.AdanAranda.com