TRUST Article 27 of the Mexican Constitution prohibits foreigners from holding legal title to property within 50 kilometers along all

TRUST

Article 27 of the Mexican Constitution prohibits foreigners from holding legal title to property within 50 kilometers along all of Mexico's coastline and 100 kilometers along all of Mexico's borders. This land is commonly referred to as the "restricted zone". Relative to properties within this "restricted zone", the amended Foreign Investment Law's (FIL) intent is to clearly and narrowly define what is residential property, what properties must be in a fideicomiso (Mexican bank trust), and what properties are considered non-residential and therefore can be purchased by foreigners through a Mexican corporation. The trust system was developed to protect the interests of foreign property owners. Under that system, title to property is never conveyed. Bare legal title is held in trust by a Mexican bank, but the bank can never sell or change the property in any way unless it is approved by the beneficiary of the trust.

RESIDENTAL PROPERTY

For the purpose of the terms set forth in Article 5, Title Two of the law, real estate used for " residential purposes" shall mean any real estate destined "exclusively for residential use of the owner or third parties". The following activities, without limitation, shall be deemed real estate held for nonresidential purposes: (I) those destined for time-share use; (II) those destined for any industrial, commercial or tourism activity that may simultaneously contain a residential component; (III) real estate acquired by credit institutions, financier intermediaries, and auxiliary credit organizations to recover debts owed to them and in the ordinary course of business; (IV) real estate used by entities in the course of their business consistent with sale, development, construction, sub-division and other activities included in the development of real estate projects, until these are sold to third parties; and (V) generally, real estate destined for use in commercial, industrial, agricultural, livestock, fishing, forestry, or service-related activities.

When in doubt whether real estate is deemed destined for residential purposes, the Ministry of Foreign Relations shall resolve the matter in ten business days from the date the party consults the Ministry of Foreign Relations on the subject. lf at the end of ten business days, the Ministry of Foreign Relations fails to respond, the use in question shall be deemed for non-residential purposes. Further, Article 6 of Title Two specifies that when in doubt on whether real property is located within or outside the restricted zone, the Ministry of Foreign Relations, on consultation with the National Institute of Statistics, Geography and Data Processing, shall decide as appropriate. And lastly, Article 7 of Title Two provides the notification procedure which interested parties must give to the Ministry of Foreign Relations. That is (I) the location and description of the real estate; (II) a clear and accurate description of the uses to which the real estate in question is destined; and (III) an ordinary copy, in annex, of the public instrument, known as an "escritura", that records the formalization of the acquisition.

CHARACTERISTICS OF A TRUST AGREEMENT

Titles to real estate in the restricted zone can only be vested one of two ways: either in a 10, 20 or 50 year renewable and transferable fideicomiso (Mexican bank trust) or, in a Mexican corporation that can solely and exclusively be owned by one or more foreign stockholders with no Mexican ownership participation. 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 trustee the Mexican bank acts on behalf of the foreign beneficiary in transactions involving the property held in trust. However the beneficiary retains the use and control of the property held in trust, and, except for direct acquisitions, makes the investment decisions with respect to the property. As beneficiary, you have the right to use, lease, improve or sell the property without restriction, to transfer your rights to a third party, or pass the property on to named heirs.

The three parties involved in the trust are the seller of the property (the trustor), the buyer (the beneficiary or fideicomisario), and the Mexican bank (the Trustee of Fiduciario). Some banks operate in partnership with banks in the U.S. and Canada and all are secured by the Central Bank of Mexico.
The trustee applies to Mexico's Secretariat of Foreign Affairs for a permit authorizing the trust. Once the permit has been obtained the trustee and other parties involved contact a notary public to draw up a deed for the property. The trustee then must register the trust with the National Registry for Foreign Investment.

CLOSING COSTS AND TAXES

Closing costs are determined by the declared property value, which is usually the same as the sales price. That value then becomes the basis for all related taxes and fees. Generally the seller pays for real estate fees and the buyer is responsible for transfer tax and the cost of establishing the bank trust (if it isn't already in existence), notary fees, tax appraisal fees, and trust permits fees. Trust permits are granted by Mexico's Secretariat of Foreign Affairs within 45 days of the date the application was presented.

The United States and Mexico have a tax treaty which subjects American buyers to all applicable Mexican laws and taxes as well as to U.S. taxes. As a general rule you will be granted credit by the U.S. government for taxes paid in Mexico.

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.