HOW TO BUY REAL ESTATE IN MEXICO. International Tax Attorney NAR President s Liaison to the Mexican Association (AMPI)

Transcription

1 HOW TO BUY REAL ESTATE IN MEXICO International Tax Attorney NAR President s Liaison to the Mexican Association (AMPI) Past President of Mexican Real Estate Association (AMPI) Owner/Broker of Prudential Real Estate in La Paz and Cabo San Lucas Presented information on developments in Puerto Vallarta & Baja, California September 26, 2003 Time: 1:00 p.m. 5:00 p.m. Stillwater Resort at Jordanelle Sponsored by The Park City Board of REALTORS

2 Acquisition of Real Estate in Mexico Often, U.S. parties when participating in their first real estate purchase and sale transaction in Mexico are surprised to find that there is little, if any, title insurance available. Also, there is no widespread use of purchase and sale agreements as such documents are normally understood and used in the United States. In the U.S., we are used to an escrow period and a closing date, when, subject to certain - 2 -

3 conditions precedent, the transfer of title and payment of the purchase price takes place. In Mexico, notary publics play a critical role in the closing of real property transfers, much different from the role of U.S. notary publics in such transactions. The tax implications of real property transactions in Mexico are often much different from those of similar transactions in the United States. Also, non-mexican individuals are restricted from holding fee simple title to real property in a defined area - 3 -

4 along the coasts and borders. Finally, as a result of the above factors, title to real property is often held and even transferred through the use of trusts. In Mexico, the transfer of real property is regulated by both the Civil Code and by the Commercial Code, depending on the identity of the parties and whether or not the transfer of real property is made for speculative purposes. In the U.S., the parties usually execute a - 4 -

5 purchase and sale agreement and a deed evidencing the title to the real property is subsequently granted. In Mexico, the purchase and sale agreement is the deed and no other document exists evidencing title to the real property. Title to the property is transferred automatically upon the execution of the purchase and sale agreement, then that document is recorded in the Public Registry of Property of the place where the real estate is located. Most of the transactions in Mexico - 5 -

6 involving the transfer of real property require the notarization of the executed purchase and sale agreement. Notary Publics in Mexico are attorneys, licensed by the local authorities to practice as notaries. They have a unique role in the conveyancing and authenticating of documents in Mexico and are considered legal experts. Their primary function is to grant public faith that what they notarized is true

7 They certify the identity of the persons signing the documents, the veracity of the signatures, as well as the contents of the documents being signed. In Mexico, unlike in the U.S., notaries must calculate the taxes due and owing as a result of the conveyance, income tax, value added tax, public registry fees. They also are given the duty of withholding taxes from the purchase price paid under certain circumstances and effecting payment to the appropriate taxing authority

8 Notarized deeds effectuating transfers of real estate usually include a background chapter whereby the notary public transcribes all information relating to transfer of the real estate property being conveyed such as recorded real estate liens, property description, taxes owing and any encumbrances. He must also certify the contents of the agreement and taxes to be paid. Provisions containing the terms and conditions of the transfer, certification - 8 -

9 of the document s contents and an appendix of exhibits must also be prepared and filed by the notary public before the recordation of the real estate transfer is properly evidenced. Acquisitions of real property by foreigners or by Mexican legal entities with foreign equity participation are regulated by the Mexican Foreign Investment Law, Mexican nationals may acquire real property anywhere in Mexico, - 9 -

10 Mexican legal entities with foreign equity participation may freely acquire real property anywhere in Mexico outside of the Forbidden Zone. (Article 27 of the Mexican Constitution defines the Forbidden Zone as a stretch of land of 100- kilometer wide along Mexico s borders and 50-kilometers wide along the Mexican coasts). Within the Forbidden Zone, such legal entities may acquire real property intended for non-residential use, as long as the acquired property is registered with

11 the Mexican Foreign Affairs Ministry (Article 10, Section I of the Foreign Investment Law). It is important to remember that, the registration with the Mexican Foreign Affairs Ministry must be effected before the buyer obtains title to the real property. If real property is destined for residential use, then Mexican legal entities with foreign equity participation may only acquire interests in such real property through a trust (Article 10, Section II

12 and Article II, Section I of the Foreign Investment Law). Foreign natural persons or legal entities acquiring interests in real property located in the Forbidden Zone may only acquire their interests through a trust (Article II, Section II of the Foreign Investment Law). Outside the Forbidden Zone, such persons may freely acquire direct title to real estate with no significant limitations, upon the fulfillment of certain minimal ministerial requirements. In addition, transfers of property cannot be

13 formalized and recorded when they have been legally identified in the Public Registry of Property and the real estate cannot be transferred if it is ejido property. General, ejido real property is constitutionally reserved for the ownership, use and exploitation of agrarian communities and their members and may only be alienated upon certain circumstances. For non-restricted transfers, the only formal requirements for the

14 transfer of real property are if the purchase price does not exceed 365 minimum daily salaries or $1,850 currently then a written purchase and sale contract, executed by the parties and two witnesses is sufficient to complete the transfer. But, in order to make this conveyance enforceable against third parties, the transaction documents must be recorded in the Public Registry of Property. In addition, the parties signatures must be ratified by a notary public and if the transaction involves a purchase

15 price greater than 365 minimum daily salaries the transfer will require a notarized deed to be issued. Real property that is subject to transfer restrictions may be acquired through the use of a trust. In Mexico, a trust is a contract that has as the trustee a Mexican bank, a trustor who places the property in trust and a beneficiary. Trusts must have as their purpose, the accomplishment of a legal objective and are regulated by the Mexican Instruments and Credit

16 Operations General law or Credit Operations Law, in Articles 346 to 359. For acquisition of real estate in the Forbidden Zone, many times a trust is used whereby the purchaser acquires title to the beneficiary interest created by the trust. Title to the real property is actually vested in the trustee and purchaser holds title to the trust beneficiary rights, not the real property. Title to the real property is indirectly transferred to

17 the beneficiary immediately upon execution of the trust agreement. Often trusts are made revocable, meaning title to the real property may revert back to the grantor of the trust. Even though the trust is made revocable, title to the real property is still transferred to the trustee upon execution of the trust agreement. Only the occurrence of certain preset events will cause title to revert to the grantor. Revocability of a trust in Mexico could take on certain tax issues if not crafted properly

18 The maximum term permitted for a real estate trust in Mexico is 50 years and renewable upon the beneficiary s request (Article 13 of the Foreign Investments Law). The execution of these trusts must be previously authorized by the Mexican Foreign Affairs Ministry. A trust agreement must be created with the same formalities required to transfer title to the property composing the corpus of the trust. Therefore, if the corpus of the trust is composed of real

19 property, the trust must be created before a notary public if the value of the real property exceeds 365 times the daily minimum wage. The acquisition of real property which is held in trust may be accomplished either through the transfer by the trustee directly to the purchaser or to another trust, or through the assignment of trust beneficiary rights. The benefit of one device over the other depends on the relevant practical issues when structuring the

20 transaction. If the provisions and overall structure of the trust agreement are not suitable for the purchaser s purposes, a newly established trust may be an option to consider for the acquisition of the real property. Also rate shopping can be utilized if a trustee s rates are particularly high in a transaction. The sale of real property by the trustee is accomplished by structuring the transfer such that the grantor is obligated to instruct the

21 trustee to carry out the transfer. If the acquirer is a Mexican corporation with foreign entity participation, buying for residential purposes or a foreign individual or entity, title to the real property will be transferred from one trustee to another. This procedure usually involves the transferor providing the trustee with written instructions detailing the steps that the trustee must take to effect the transfer. Trust agreements may provide specific steps to be followed in the case of transfer, as well as

22 conditions or restrictions on transfer, and should therefore always be carefully analyzed as part of the due diligence undertaken to the transaction. In certain circumstances, it may make more sense to structure the acquisition of real property as an acquisition of the real property owning entity. This may be done in order to prevent the triggering of real property transfer tax, to avoid the payment of Public Registry fees, or in

23 order to acquire certain permits, acquisitions or licenses relating to the real property. This type of transaction should only be undertaken upon the completion of a thorough due diligence review of the legal entity to be acquired. It is very common in Mexico to execute promise agreements for the transfer of real property. Promise agreements are often used as an attempt to create a security interest in favor of the transferor. Often, when it

24 is agreed that a purchase price for real property will be paid in installments, transferors prefer to execute a promise agreement whereby the parties agree that the transfer agreement will be executed upon full payment of the purchase price. By executing the promise agreement, transferors mistakenly expect title to be transferred to the acquirer upon execution of the definitive transfer agreement and to remain as owners of the real property while the purchase price is owing

25 This structure, however, does not have the desired legal effects anticipated by the sellers. Title to property in Mexico is transferred after execution of a promise agreement if certain acts that are considered performance under the transfer agreement take place. Therefore, if part of the purchase price is paid, title will pass to the purchaser, even if only a promise agreement was executed. In this example, the transfer will lack the requisite form for real property transfer agreements,

26 but the parties will be entitled to request a competent court to enforce the transfer. Promise agreements are also commonly used in the marketing of pre-sale developments in Mexico. Often, these pre-sale marketing plans begin before the improvements on the property are finished or the lots comprising the real estate development are subdivided for Public Registry and tax purposes. As transfer of property cannot be

27 formalized and recorded because the tracts and lots do not legally exist, developers often begin marketing real property by means of promise agreements, whereby it is agreed that the definitive transfer agreement will be executed upon completion of the subdivision or condominium. There are numerous problems with this type of transaction such as the promise is not recordable in the Public Registry of Property or under Mexican Law. Also there is the

28 problem of double sales and thirdparty litigation. In addition, the seller will not be able to provide the purchaser with a valid deed evidencing title to the property. Financing will be difficult, if not impossible, because the purchaser will not be able to provide his creditors with security interest or mortgage on the property because no title exists yet on the property. U.S. parties can structure their real property purchase and sale

29 transaction in a manner that resembles a U.S. style transaction if their agreement is combined with a Mexican trust agreement used as a U.S. escrow account. The parties to a Mexican real property purchase and sale transaction are free to negotiate a purchase and sale agreement providing for the terms and conditions included. In most U.S. purchase and sale agreements, Mexican banks can act as escrow agents or trustees and the seller and purchaser would each be trustors

30 and beneficiaries under the terms of the trust. The seller would make a revocable transfer to the trustee of title to the real property with instructions that the trustee transfer title to the purchaser upon the satisfaction of certain conditions precedent. The purchaser would make a revocable transfer to the trustee of the earnest and/or purchase money with instructions to transfer the money to the seller simultaneously with the transfer of title to the real property in favor of the

31 purchaser. Depending on the size of the transaction, this vehicle could prove quite costly compared to a comparable U.S. transaction of similar size and complexity. A notarized deed is a document that must fulfill certain specific requirements provided by law. An acquirer of real property will need a certificate of no liens in order to be granted a notarized deed in Mexico form the Public Registry of the State where the property is located. Title

32 searches are often conducted separate from the notary public and cover the chain of title for 20 years or longer. The need and desirability of such certificates is accentuated by the general lack of title insurance in Mexico. Granting title insurance in Mexico is a recent practice and currently only a few U.S. companies grant it. The coverage is limited in Mexico and has numerous exclusions such as taxes and assessments. Often, in a real property transaction it is more prudent to spend the money

33 on a very thorough due diligence investigation rather than a costly title insurance policy. Mexico s recordation rules are similar to U.S. jurisdictions with race statutes. Therefore, those transfers of real property, liens, encumbrances or judgments that are recorded first will have priority over those subsequently filed. The only exception is the preventive notice legends recorded against property that puts third parties on notice of

34 certain facts affecting real property. Finally, in accordance with the Mexican Civil Code Article 3005, only notarized documents and deeds, court resolutions and agreements executed in writing, duly signed by the parties and ratified with a notary public shall be recordable in the Public Registry of Property