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PURCHASING RESIDENTIAL PROPERTY IN MEXICO

By Eleanor Bryant,2014-11-22 10:11
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PURCHASING RESIDENTIAL PROPERTY IN MEXICO

    MEXICO REAL ESTATE

    HANDOUTS

    Purchasing Residential Property in Mexico

    Purchasing Real Property Under a Mexican

    Corporation

    Process of Establishing a Bank Trust (Fideicomiso)

    Contract Process to Purchase Residential Property in

    Mexico

    Subdivision Approval in Mexico

    1

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    Purchasing Residential Property in

    Mexico

    Article 27 of the Mexican Constitution of 1917 prohibits foreign ownership of residential real property within 30 miles of any coastline or 60 miles of either international border. This is referred to as the prohibited or restricted zone”. Residential property shall mean “any real

    estate exclusively for residential use of the owner or third parties.”

    In 1973, recognizing that many foreigners would enjoy owning property in Mexico, and would bring needed dollars into the country through such ownership, the Mexican bank trust, or

    fideicomiso,” was established for the purchase of real estate in the restricted zone. This law governing ownership under a bank trust was further expanded in the Foreign Investments Laws of 1989 and 1992.

    Properties located within the restricted zone, which includes the entire Baja Peninsula, may be acquired by a foreigner through a bank trust, which designates the buyer of the property as the beneficiary of the trust. Legal title is placed in the name of the bank selected by the buyer as his trustee. The bank administers the property in accordance with the instructions of the buyer/beneficiary. The buyer/beneficiary enjoys the same rights of ownership, as does a Mexican national. He may build on the property, tear down existing buildings, modify them, rent, lease or sell at anytime, conforming only to the governing laws of the country established for all persons.

    The term of the trust is 50 years and is automatically renewable by law. In other words, title to the property may rest in one beneficiary indefinitely, provided that it is renewed within the terms established by the law.

    The cost of the bank trust permit is approximately $1,200 and the annual bank trust administration fee is $200-$750 per year. There is a 2% property transfer tax and notario fee also associated with closing.

    Purchasing Real Property Under a Mexican

    Corporation

    Under the 1993 Foreign Investment Law, a corporation established in Mexico is considered Mexican under the law, even if all the shareholders are foreigners. Thus a Mexican corporation with 100% foreign ownership can acquire real property in fee simple ownership, even in the “restricted zone.” This, however, is only for non-residential property such as:

     (1) time-share use;

     (2) any industrial, commercial or tourism activity that may simultaneously contain a

    residential component;

     (3) real estate acquired by credit institutions, financial intermediaries, and auxiliary

    credit organizations to recover debts owed to them and in the ordinary course of

    business;

     (4) 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

     (5) generally, real estate destined for use in commercial, industrial, agricultural,

    cattle, fishing, forestry, or service-related activities.

    It is a violation of the foreign investment law to place a retirement or vacation home in the name of a Mexican corporation. It would also be more costly than a trust due to periodic tax declarations and taxes on corporate assets.

    Contract Process to Purchase

    Residential Property in Mexic0

    Most real estate transactions in Mexico will have at least two (2) contracts: (1) an offer and acceptance (oferta); and (2) a purchase-sale agreement (contracto de compraventa). The first one is a preliminary agreement containing the basic transactional information. They are not the instruments by which title to the property is transferred to the buyer. The second contractional document is the agreement to be “protocolized” by the notario, which will transfer title to the buyer.

It may have several different forms:

    1. a real estate trust agreement (contracto de fideicomiso);

    2. a reserve title agreement (contracto de compraventa con reserve de dominio) , or

    3. an assignment of real estate trust rights (contracto de cesion de derechos

    fideicomisarios)

    The Civil Code defines an agreement (convenio) as an accord (acuerdo) between two or more persons to create, transfer, modify or extinguish obligations. Specifically, the Civil Code defines contracts as agreements that produce or transfer obligations and rights. In general, real estate contracts in Mexico must be recorded before a notary public (notario) and, to be binding on third parties, they must be filed with the public registry of property. Once there is a written acceptance of the offer, it is recommended that the buyer’s attorney draw up the sales contract. Since this agreement is the single most important document the buyer will execute with the seller, and the agreement’s contents will determine the terms and conditions of the

    transaction, the buyer should insist that his attorney assume this responsibility.

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    Contract Process to Purchase Residential Property in

    Mexico

    Historically, earnest money deposits and contractual consideration were given from the buyer directly to the seller. There are now a few Mexican title companies that will utilize U.S. bank accounts for earnest money or you may utilize a few U.S. title companies that have international offices in Mexico to handle the transaction. It is recommended by this firm that all foreign persons purchasing real estate in Mexico utilize credible U.S. title companies such as Stewart Title, First American Title or Fidelity Title to handle your transaction. Further, they can provide the necessary title insurance to protect your investment.

    In Mexico, all real estate transactions and the legal conveyance of any type of property involve the participation of a notario publico. They are appointed by the Governor of the State and

    the Executive Branch of the federal government for a particular state district and are attorneys who have passed two extensive examinations in order to receive their lifetime appointments. In a typical transaction, they will prepare the deed of conveyance subject to the “protocolized”

    purchase-sale agreement. The notario brings buyer and seller together for the formalization of the property transfer and they authorize the appropriate signatures upon execution of the escritura. And lastly, after the property transfer has been formalized, the notario will record the escritura with the public registry of property where the property is located. Prior to the closing, the notario’s additional duties include:

    1. to examine the documents of the selling party to ensure their accuracy and

    legitimacy;

    2. to verify title;

    3. to search the public records to determine the status of seller’s title to the property

    and the existence of liens against the property; and

    4. to collect all applicable property taxes and government transfer taxes.

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    Process of Establishing a Bank Trust

    (FIDEICOMISO)

1. Purchase-Sale Agreement (contracto de compraventa)

2. Establish an Escrow account (plica) and due diligence

     -appraisal to establish transfer tax

     -title search (recommend a US title company policy)

     -determine property tax amount

    3. Preparation of the deed (escritura publica) by a Public Notary (notario

    publico)

    4. Application is made to the Secretary of Foreign Relations for the permit to

    establish the Bank Trust (fideicomiso)

    5. Upon receipt of the permit, the trustee bank sends instructions to the

    notario for preparation of the deed to the beneficial rights (contracto de

    fideicomiso)

6. Applicable taxes and closing fees are paid

    7. The deed is recorded in the municipality (public registry) where the

    property is located

8. A bank trust is a 50-year, renewable period

    Subdivision Approval in Mexico

    (Fraccionamiento)

    Under Article 27 of the Mexican Constitution, there are three (3) recognized property types in the county:

    1. Private property

    2. Social property

    3. public property

    In 1976, the government of Mexico established the Human Settlement Law for the regularization of land development and, in essence, the elimination of development chaos. Each of the 31 states in Mexico has its own development law and subsequent requirements. In the case of Sonora, there is the Law of Urban Development for the State of Sonora (La Ley de Desarrollo Urbano Para el Estado de Sonora). It is commonly referred to as Urban Development Law 101. The procedure to authorize the development of a subdivision (fraccionamiento) is specified by the Office of Urban Administration, Secretary of Urban Infrastructure and Ecology for the State Government of Sonora (Direccion de Administgracion Urbana, Secretaria de Infrastructura Urbana y Ecologia (SIUE), Gobierno del Estado de Sonora). Typically, the process to receive approval for an intended residential subdivision is as follows:

    The developer must obtain a land use license for the local municipality and city council (ayuntammiento). This process includes:

    1. Submission of an environmental impact study on the land to be developed;

    2. Deeds of ownership on the property (escrituras);

    3. a land plan of the tract;

    4. a location map of the overall property;

    5. blueprint or draft site plan of the proposed development (anteproyecto)

    Subdivision Approval in Mexico

    The local municipality will then present the draft of the proposed project along with the land use certificate, deeds, location map and land use plan, including layout of the lots and blocks of the subdivision, to SIUE. At the same time, the city council or municipality will facilitate and obtain the feasibility of potable (drinking) water service, drainage and electrical service for the proposed subdivision from the appropriate municipal agencies. The developer will then receive initial approval for the intended subdivision from the city or municipality.

    Once initial approval is granted, the developer must then submit a formal executive development plan and all required documents to the city council or municipality according to Article 129 of Urban Development Law 101 of Sonora. The local authorities will present the project again to SIUE with the calculations for water and sewer use for review, revision and approval. Additionally, the city will submit the calculations for electrical usage and street lighting to Mexico’s Federal Electricity Commission (“Comision Federal de Electricidad” or CFE) for their possible revision and subsequent approval. After a satisfactory review of the general project plan by the authorities, the developer will be authorized by way of formal agreements with the Mayor, which will establish the obligations, and the time period required to complete the proposed subdivision. After the developer donates 15% of the overall land as required to the local municipality (which is generally used for open space, green belts or schools) and pays the development fees as mandated, they must publish the subdivision approval in the “Boletin Oficial” or official bulletin. The Boletin gives the public notification and government approval of the intended development. Lastly, the developer must record the agreement in the Public Registry of Property along with the unilateral declarations of intention to develop the property with copies going to the local tax assessor, the treasury department and to SIUE.

    Any foreigner interested in purchasing property in Mexico should request copies of these approval documents from the developer or owner prior to disbursing any funds.

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