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How
To Buy Residential Resort Property in Mexico
The quest for the perfect beach has
led to the development of Oceanside resorts around the world. For years,
however, Mexico’s 6,000 miles of spectacular coastlines were overlooked
because of Mexico’s restrictive property ownership laws. Thanks to recent shifts in Mexico’s
foreign development policies and concerted efforts to attract foreign
development dollars, that situation clearly has changed. For the first time,
non-Mexicans have real access to unspoiled beachfront property. It’s easy to understand the lure of
pristine beaches in such accessible sites. Now one question looms in the
minds of many Americans. “How do I go about buying residential resort
property in Mexico?” The answer, though seemingly complex,
is really fairly simple. Guillermo Ohem, Former Minister for
Tourism Affairs, U.S. Embassy of Mexico, Washington, D.C., explained that you
can acquire ownership rights to property in what is known as the “restricted
zone” through a 50 year renewable, transferable bank trust. 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,”says Ohem, “the
Mexican bank acts on behalf of the foreign beneficiary in transactions involving
the property held in the trust. However the beneficiary retains the use and
control of the property held in trust, and, except for the direct
acquisitions, makes the investment decisions with respect of 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 to
pass the property on to named heirs. In essence, you have the same absolute
rights to use and enjoy the property as if you owned it in fee. HOW IT CAME ABOUT
Historically, the “trust solution”
was a long time in coming. The prohibition of foreign ownership of property
in the “restricted zone” goes back to 1917. At that time, the Mexican
Constitution prohibited foreigners from holding legal title or exercising
direct property rights in an area located within 60 miles of Mexico’s borders
and 30 miles of its coastlines. Luis Hermosillo, owner of Real Estate
Services International in Montebello, California, and RESERI, its Mexican
counterpart, explains that while foreigners were not allowed to legally
purchase property in the restricted zone, it was frequently done through the
use of a “straw man.” That illegal system had many failings. Foreigners who
paid for property had no protection if the “straw man” decided to keep it. “A wave of international problems built up”, Hermosillo
recalls, “and in 1971, the Mexican government felt it was best to protect the
interests of foreign owners by developing the trust system. 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.” Originally, trusts were established for 10 years. The Foreign
Investment Law of 1971, codified in 1973, made it possible for foreigners to
obtain trust interests in land for up to 30 years. In 1989, the restrictions
were eased further. Regulations were passed to “Promote Mexican Investment
and Regulate Foreign Investment.” Those regulations enabled foreign owners to
apply for successive 30-year trusts. In effect, that meant a trust could run
in perpetuity. As 1993 drew to a close, explains Los
Angeles attorney David Ellsworth, senior partner and chairman of the Real
Estate Section of the law firm Morgan Lewis & Bockius, and legal counsel
for FONATUR, Mexico’s National Trust Fund for the Development of Tourism, as
well as many, Mexican and private sector developers active in Mexico,
“substantially all of the 1989 regulations, with a few significant changes,
were codified into law and became effective January 1, 1994. The most
significant change is that the
term of the trust was increased from 30 to 50 years.” HOW THE TRUST WORKS
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 of your choice (the Trustee or Fiduciario). Some of the
banks operate in partnership with banks in the U.S. and Canada, and all are
secured by the Central Bank of Mexico. Establishing the trust is easy,
according to Ohem. “A foreign person or company interested in purchasing real
estate in the restricted area selects a Mexican bank to act as trustee with
respect to the property. The investor then furnishes certain basic
information to the trustee, which in turn applies to Mexico’s Secretariat of
Foreign Affairs for a permit authorizing the trust. Once the permit is
obtained,” he continues, “the trustee and other parties involved contact a
public notary to draw up a deed for the property. The trustee registers the
trust with the National Registry for Foreign Investment.” Then you can begin
enjoying your property. There’s no need to fear hidden charges. Your closing
costs, for example, typically average between 3% to 6% of the purchase price.
Those charges 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 the real estate fees;
the buyer is responsible for the transfer tax and the cost of establishing
the bank trust (if it isn’t already in existence), notary fees, registration
fees, tax appraisal fees and trust permit fees. To ensure your loan is closed
in a timely fashion, Mexico’s Secretariat of Foreign Affairs grants trust permits
within 45 days of the date the application was presented. If at a later date, you decide to sell the property,
anyone can buy it. If the new buyer is also a foreigner, you simply assign
your beneficial interest. The foreign buyer, upon application, automatically
receives his own renewable 50-year permit. If, on the other hand you sell to
a Mexican National, the bank can endorse the fee title in favor of the buyer. As a prudent investor, you’ve no doubt considered taxes.
Mexico’s annual property taxes are approximately from 0.25% to 1.25% of the
assessed value for tax purposes, and, Hermosillo notes, transfer-acquisition
taxes fell to 2% from a one-time high of 10%. The United States and Mexico,
Ellsworth explains, 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, he says, you will be granted credit by the U.S. government for taxes
paid in Mexico. But for detailed answers to specific tax and legal questions,
it is always best to consult your attorney and/or tax specialist. DEVELOPMENTS
Announcements
by NorthAmerican firms to venture and invest in Mexican Real Estate coincide
with the recent legislation. “Well known and successful US and Mexican Real
Estate developers are investing millions of Dollars in the Mexican Resort
Areas, creating an adequate environment that translates into a secure
investment. Of course this investment can be very enjoyable with a good
profit in one of the most beautiful places of the world, says Mauricio Montes
de Oca, founder of Procabos real estate firm at Los Cabos. “The Mexican
government has found out that there’s not only oil for the support of the
Mexican economy, tourism is becoming rapidly one of the most important
industries and Mexico is opening the doors to foreign investments through the
enacted laws during the last decade”. With the North American Free Trade
Agreement (NAFTA) in place, experts predicted well an attractive investment
climate in Mexico, it has happened. Resort areas have developed at a rapid
pace. We have entered into The new millennium realizing that the world has
become smaller, For individual property owners, the sun is just rising on
paradise property located south of the border.
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Las Tiendas de
Palmilla Suite 236 Colonia Palmilla San Jose del Cabo,
B.C.S. México 23400 mailto:realestate@procabos.com Tel: (624) 3 55 46 53 Fax:
(624) 1 44 6991 From USA dial first: 011 (52) 1 For fax from USA dial first 011 (52) |
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