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Wednesday, February 29, 2012

Investing in Mexican Real Estate: Outlook, Framework and Special Considerations (Part 3)

B. Land Acquisition under the Foreign Investment Law

The Foreign Investment Law, which implements Article 27, Section I, of the Mexican Constitution, elaborates on how an interest in real property in Mexico may be acquired by foreigners and Mexican corporations that allow foreign investment. Under this framework, two key questions arise: (i) whether the real property is located within the Restricted Zone, and (ii) whether the property is intended for residential or non-residential purposes.

1. Location of the Property – Inside or Outside the Restricted Zone?

Foreign individuals and entities may acquire title to real property located outside the Restricted Zone, provided that they previously submit to the Ministry of Foreign Affairs a statement agreeing to the terms of Section I of Article 27 and obtain the corresponding permit from that Ministry. While the permit is not required for a purchase agreement to be valid and enforceable, it should be obtained prior to closing the transaction and signing the deed before a notary public. Also, where a foreign individual may become entitled to real property rights due to community property principles and the real property is located outside the Restricted Zone, the foreign individual must obtain the permit in order to acquire community property rights.

If the intended purchaser is a Mexican corporation whose by-laws allow foreign investment and the property is located within the Restricted Zone, but the property is intended to have a non-residential purpose, direct ownership to the property may be acquired (see subsection 2, below).

If the property is located within the Restricted Zone, foreign nationals as well as Mexican corporations that allow foreign investment but intend to use the property for residential purposes may only acquire real property rights as beneficiaries of a trust or fideicomiso. A Mexican trust is similar to a trust in the United States, with one significant difference: under Mexican law, only banks and financial institutions may act as trustees. Theoretically, a trust is a fiduciary agreement under which the grantor, acting in good faith, transfers to the trustee legal title (i.e. not whole ownership) to certain property in order to accomplish a specific purpose. Technically, it is a contract that must meet the formation requirements established by law. Legally, where a grantor segregates certain assets to accomplish a definite and legal goal, and the trustee is responsible for achieving the goal, there is a trust. Mechanically, in a trust (a) a person (grantor) decides to segregate all or part of his or her assets to accomplish a particular goal; (b) the goal may only be acquired through a trustee, who is granted legal title over the assets; (c) the assets then form an independent and segregated trust corpus, as whole ownership is not held by the grantor, the trustee, nor the beneficiaries; (d) the trust agreement will specify the rights and/or benefits that each beneficiary has with respect to the assets; and (e) once the goal has been accomplished, the trustee will dispose of the trust corpus in the manner provided in the trust agreement.

One of the great advantages of the trust is its flexibility. While a trust agreement can be a relatively simple contract (e.g., for the acquisition of a residential home in the Restricted Zone), it can also accomplish extremely complex business and estate planning transactions.

2. Nature of the Property – Residential v. Non-Residential?

Companies whose by-laws include the Calvo Clause may acquire title to real estate located in the Restricted Zone, provided the real property is intended for non-residential purposes, and notice of such acquisition is given to the Ministry of Foreign Affairs within sixty business days following the acquisition date. A property will be considered to serve a non-residential purpose if it is (a) subject to a timeshare; (b) intended for some industrial, commercial or tourism activity, while used simultaneously for residential purposes; (c) acquired by credit institutions, financial brokers, and credit auxiliary organizations, repossessed to recoup debts in their favor; (d) used by legal entities to fulfill social objectives which may consist of the transfer, urbanization, construction, and all other activities inherent in the development of real estate projects until they are commercialized or sold to third parties; and (e) real estate assets used for commercial, industrial, agricultural, livestock, fishing, forestry uses, and for rendering of services. (To be continued)