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. 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.

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

    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 from the Ministry of Foreign Affairs prior to contracting to acquire real estate in Mexico. This is currently done by the trustee/bank at the time a real estate trust is set-up.

    Given the changes made for 1997 in the foreign investment Law, and the fact that a buyer can now apply for and obtain a trust permit in a matter of days, it is always better to secure the trust permit from the Ministry of Foreign Affairs before entering into any contract.

    The bank, as trustee, must get a permit from the Ministry of Foreign Affairs to establish a real estate trust and acquire rights on real property located within the restricted zone. 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 beneficiaries of the trust (fideicomisarios) may be:

• Mexican corporations with foreign investment

• Foreign individuals or legal entities

The law defines "use" and "explotation" 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 law does not clarify how trust permits will be issued. Article 14 of the law states that the Ministry shall decide on issuing the permits "...considering the economic and social benefit, which the realization of such operations imply for the nation." The basic criteria used to determine such benefits are likely to change somewhat with the publication of the new foreign investment regulations. However, it is reasonable to anticipate that some of the unwritten rules used by the Mexican government in the area of real estate trusts will be included in the new foreign investment regulations. It is also possible that some of the confusing elements will be eliminated. It is important to understand the application of the current regulations, even if they are going to be replaced, as well as some of the unwritten policies the government has used in the past, to better understand what criteria will be used by the Ministry in the future.

    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 foreign-owned Mexican corporations 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 are considered authorized.

    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. On 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 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 liking and benefit, within the provisions of the law. Generally, the law allows most activities engaged in by foreigners.

• For your Protection

  Title Insurance:

    A home is usually your largest single investment. When you purchase a home, you purchase homeowner’s or hazard insurance to protect against loss from fire, theft or wind damage.

    Title insurance protects against hidden title hazards that may threaten your financial investment in your home. You see, when purchasing a home, you are really purchasing the title to the property – the right to occupy and use the land and improvements.

    Other types of insurance focus on possible future events and charge an annual premium. Title insurance is purchased with a one-time premium and safeguards against loss from hazards and defects that already exist in the title.

    There are two basic kinds of title insurance: lender or mortgagee protection, and owner’s coverage. Most lenders require mortgagee title insurance as security for their investment in real estate.

    Owner’s title insurance lasts as long as you, the policyholder – or your heirs – has an interest in the insured property. Depending on local practices and state law where the property is located, you may pay an additional premium for an owner’s policy or you may pay a simultaneous issue charge for the separate lenders coverage.

Title search and examination is the first step

    Insuring a home’s title begins with a search of public land records affecting the property. The title agent or attorney working on behalf of the title underwriter examines pertinent documents to determine whether the property is insurable.

    Those documents (among others) include deeds, wills, trusts, outstanding mortgages and judgments, property liens, highway or utility line easements, pending legal actions and notary acknowledgements.

    When title problems are disclosed during the search process, they are corrected whenever possible to avoid future claims. According to surveys done by the American Land Title Association (ALTA), title problems consistently arise in 36 percent, or one out of three real estate transactions.

    The process of performing title searches and curing title problems does not come cheap. Industry studies find that title insurers spend an average of 92 cents out of every premium dollar as their cost of doing business.

What if a problem is hidden or missed?

    After all this searching and examination, title problems may still be hidden or missed. A signature can be forged on a deed; an unknown heir can step forward to claim ownership of the property; a power of attorney used during a property transfer could have been expired or forged; a public record may be incorrect.

    In each of these cases and many more, when there is the appropriate title insurance coverage, a policy will offer financial protection (subject to the terms and conditions of the policy). The title insurer defends the title and either “perfects” the title or pays valid claims.

    In 2005, title insurers paid approximately $916.4 million in claims, up from $699.1 million the year before.

With title insurance, you have financial protection against covered title hazards. Your home is your most important investment – protect it with an owner’s title insurance policy.

Closing costs

    It is common practice that the buyer pays the transfer or acquisition tax as well as all other closing costs including the notary fees and expenses, and the seller pays capital gains tax and the broker’s commission. Since January 1, 1996, the federal law regarding the real estate transfer tax, wich was 2 percent for the entire Republic of Mexico, was modified to allow each of the Mexican states to determine its own tax. The range may be from 1 to 4 percent of the tax appraisal value, generally less than the sales value. The rest of the closing costs, which exclude the transfer cost mentioned above, may vary from 3 percent to 5 percent of the appraised tax value or more, depending on the particular state. These percentages are applied to the highest value of the following: the amount for which the property is sold, the value of the official tax appraisal or the value designated by the property assessment authorities.

Cost of the real estate Trusts

    Based on the present tariff, the bank charges the person desiring to set up a real estate trust, or fideicomiso, an initial fee of approximately $500 for drawing up the original trust agreement and establishing a trust, plus a percentage according to the value of the property. In addition, the property, to cover its services as a trustee.

Escrow, Title Insurance and Home Insurance

    It is the notary public who, in effect, acts as a “holding agent” for the involved parties, and for this reason, there are few escrow companies in Mexico. At present there is no general use of title insurance in Mexico, although some American companies are providing coverage in some resort areas of the country. But insurance companies do provide full home coverage throughout Mexico.

  Real Estate Broker’s Commission

    Most real estate companies in Puerto Vallarta charge a commission of 6 to 8 percent based on the actual sales price of the property. However, different area broker rates reflecting higher broker expenses may be found, such as in resorts areas. Some franchises encourage transnational referrals but success is limited since many Mexican practitioners are not yet accustomed to representing different parties and sharing commissions.

Capital Gains Taxes

    In Mexico the concept of capital gains tax does not apply in the sense in which it is understood in the United States. The gain from the sale of property is considered as normal income at a tax rate of up to 35 percent. In order to determine the gain, the following costs and expenses are deducted from the amount for which the property is officially sold:

• Original land cost and depreciated construction cost, based on the number of years the property was held and adjusted for inflation according to the official consumer price indexes.
• Additions, modifications and improvements, but not maintenance. Made on the property (construction), adjusted as described for inflation.
• Commissions paid to real estate brokers by the seller.
• Closing costs, including all expenses, taxes and fees paid by the seller.
  

    The notary retains the calculated gain after making appropriate deductions and forwards it to the Mexican tax authorities. The seller then deducts this amount from his annual tax return, which becomes an adjustable tax credit in the case of persons filing U.S. tax in Mexico if there is conclusive proof the seller has had the property as his or her primary residence for the previous two years.

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