Can You Own in Mexico?

Yes, Americans, Canadians 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, known as a "fideicomiso" must be set up to hold title for the foreigner.

The following is a brief outline  of  the  law  regarding  such  trusts,  known as "fideicomisos".  Because you are obtaining a mortgage  loan, you can be assured

that every detail of the transaction will be done properly and completely. Since the lender usually has a bigger stake in the property than you do (they are loaning up to 80%, in which case you have 20% equity into the property), the lender is basically "running interference" for you. By making sure they have clear title to the property they are loaning money on, likewise you can be assured of the same clear title.

WHO'S INVOLVED IN REAL ESTATE TRANSACTIONS IN MEXICO?

Normally, there are four players involved in any real estate transaction obtained with mortgage financing in the restricted zone (read more below) in Mexico. Even if the real estate property you're purchasing is not in the restricted zone, if you are getting a loan, the lender will require a fideicomiso/bank trust.

The different players involved in the transaction are:

• The listing and selling real estate agents/companies

• The loan broker

• The lending institution

• The Notario Publico  (the "gate keeper" in charge of the entire real estate transaction)

All four are helpful in their respective areas in assisting with real estate transactions. By Mexican law, 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. However, transactions using mortgage financing are required by all lenders to use a fideicomiso/bank trust.

Because of the similarities of real estate transactions, 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. We try to make the transaction in Mexico look as much like a US or Canadian transaction as possible. 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 and Canada, there are many aspects that are completely different. As a rule, a foreigner should assume nothing.

Real estate agents and mortgage 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 or mortgage brokerage in Mexico. There are no special requirements or brokerage licenses to obtain. Consequently, you want to make sure you are dealing with a reputable and experienced real estate agent and mortgage broker. By working with us you are assured that your transaction will be handled with experienced professionals who know the territory in Mexico, and you will have a local contact, whom you know and trust, to keep you informed.

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 and loan brokers who prefer that buyers know as little as possible about real estate transactions. After all, a buyer cannot ask questions if he/she does not have any knowledge of the laws. As your mortgage professional, we will educate you and send you the standard disclosures and Good Faith Estimate you are used to receiving in your US transactions. Although these are not required in Mexico, we do all that we can to make your transaction as similar to the US as possible. We voluntarily use the regulation standards set up in the US to assure that you are informed every step of the way, and that you know we adhere to accepted standards you are familiar with in the US. Canadian loans work somewhat differently, but Canadians are very comfortable with the process and standards that have developed in Mexico. Lenders/brokers are not required by US or Mexican law to provide these disclosures.

It is a good idea, but not required, to have a Mexican attorney involved to review the conditions and terms of sale. There is no "standard" real estate contract used in Mexico like there is state-by-state in the US. If you have an attorney review your contract, you want to have them review it BEFORE you sign, rather than afterward. Legally, only a licensed Mexican attorney should provide advice on Mexican law. If an attorney is licensed in Mexico he/she should be able to produce a "cédula profesional." This document is a registered license to practice law in Mexico and includes a photo of the attorney and his/her signature. American attorneys are not licensed to practice law in Mexico and should not give advice on Mexican Law.

The Notario Publico is the "gate keeper" of the entire transaction. Notario Publicos shouldn't be confused nor compared with what we know as a Notary Public in the US. Notario Publicos are in charge of making sure the title is clear, there are no liens, that all appropriate Mexico fees and taxes are collected, and that all legal documents are absolutely correct, signed, and recorded. The Notario Publico is the highest designation an attorney in Mexico can achieve, and they are appointed by the Mexican government after meeting very stringent criteria. Because Lenders are totally comfortable with the Notario Publico process of making sure title is clear, they are comfortable that title will be clear when the transaction closes. Title insurance may not be required. This is a lender-by-lender guideline.

As a mortgage broker, our Mexico affiliate will ask you what your plans and requirements are for owning your property in Mexico. They will narrow the available options to meet your requirements, give you a side-by-side comparison of these options, and help you decide which program is best suited to your needs. Our affiliate will gather documents and prepare your loan to be submitted to the Lender's underwriters for approval. They will then work on the ground in Mexico to complete the appraisal, permits, fideicomiso and any other items that are necessary to close your transaction.

All real estate transactions involving a trust are governed by Mexican federal law. This means that all such transactions are carried out the same way regardless if the property is in Cancun, Puerto Vallarta, Los Cabos or any other location in Mexico. Our Mexico affiliate has dealt with many attorneys throughout Mexico and may be able to recommend a good attorney local to the area in which you're purchasing your property. A licensed attorney may practice law anywhere in Mexico so a local attorney is not required, but usually preferred.

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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. Your property is not an asset of the bank. The bank acts in a fiduciary capacity. 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. It is also an excellent way to transfer title to your "substitute beneficiaries" in the advent of your death.

Although Mexican law only requires the use of a fideicomiso in the restricted zone, lenders require the use of a fideicomiso even in non-restricted zones (such as San Miguel de Allende and Lake Chapala/Ajijic). The reason for this is that the fideicomiso en garantia which is required by all lenders (in both the restricted and non-restricted zones) provides for certain guarantees a lender needs in order to collect for their loan balance in case of default by a borrower.

A fideicomiso is a trust agreement created for the benefit of a foreign buyer, executed between a Mexican bank and the purchaser 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, and 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.

There are two different types of fideicomiso trusts. One is a standard or administrative  trust, which is  generally  used for properties  with no loan.  The

other is a fideicomiso en garantia which is used when a loan is involved. You own your real estate. The costs for trusts vary, but they are not as expensive as most people think. Trust fees cost approximately $600 per year (plus 15% IVA, the Mexican sales tax) and the one-time setup fee is the same - approximately $600. This is not to say that some foreigners have spent much more to set up a trust - sometimes in the thousands of dollars. However, since you have the lender looking out for you (and themselves) in the transaction, there is no abuse of the trust setup and yearly fees. This has become a very competitive service offered by Mexican banks and the lenders have negotiated very good prices for the fideicomiso/bank trusts.

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 (called the SRE permit) from the Ministry of Foreign Affairs in Mexico City prior to obtaining the fideicomiso. This is currently done by the trustee/bank at the time a real estate trust is set up. This will all be taken care of for you as part of processing and closing your loan. You will be kept up-to-date on everything that occurs so you are not "left in the dark" with the process. This permit is considered a "pre-closing" fee and will be collected once your loan is approved.

The bank, as trustee, must get this SRE permit from the Ministry of Foreign Affairs to establish a real estate trust and acquire rights on real property located within the restricted zone. This is generally done after your loan is approved. This is an area in which long delays can occur with inexperienced lenders/brokers. Since we have expert on-the-ground teams that are experienced in obtaining these permits and other local requirements, we obtain these permits very quickly.

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 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 beneficiaries of the trust (fideicomisarios) may be:

• Mexican corporations with foreign investment

• Foreign individuals or legal entities

Lenders will generally not allow Mexican corporations, as these corporations are "for profit" and lenders are not generally loaning on property held for investment purposes. Your property must be considered as a second home, or in some cases, lenders will allow your home in Mexico to be your primary residence. Be sure to let us know if this will be your primary residence rather than your second home, as this changes the specific loan programs that may be available to you.

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 a foreign-owned Mexican corporation 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 is considered authorized. Although this is the law in Mexico, it is one of those areas where custom seems to take precedence. There are busy times of year where it takes longer than the law requires, and there is really no recourse, nor is the permit registration "considered authorized." The lender is going to require the specific SRE permit before the trust will be drawn up by the trust bank. Each lending institution has its own preferred trust bank that we must use for the fideicomiso. Rates are approximately the same from trust bank to trust bank.

A Common Misconception

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. To 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/she 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/her liking and benefit, within the provisions of the law. Generally, the law allows most activities engaged in by foreigners.

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