Trust or Corporation to Buy Properties as a Foreigner in Restricted Zones? – Part I (Procedures)

According to article 27 of the Political Constitution of the United Mexican States, the Restricted Zone is all land located approximately 62 miles from any national border and about 31 miles from any ocean. That same law establishes that no foreigner can acquire the direct title to the land in that area. However, Mexico’s Foreign Investment Law allows non-Mexicans to acquire indirect land titles in the Restricted Zone, by forming a bank trust in which the title is held or by creating a Mexican corporation which will hold the title to the property.

In this first part, David Connell, partner and manager of Connell & Associates, presents—in a general way—the procedures a foreigner must followed so that he/she can buy a property in the Restricted Zone.

Depending on the way the property will be used, one of these options must be used for its acquisition.

Buying a Property through a Bank Trust

A trust is a three-party contract, where the seller (settler) irrevocably transfers real estate to a bank (trustee), where a third party (beneficiary) can use and enjoy it. Under Mexican law, only an authorized Mexican banking institution can be a trustee. As trustee, the bank has the title to the property, but the beneficiary has the right to use it as a convenience (as long as it is legal). A foreign buyer becomes the beneficiary of the trust in which the title is held and can designate additional beneficiaries or secondary beneficiaries.

The bank cannot encumber or sell the property without the express written consent of the beneficiary.

When buying a property in the Restricted Zone of Mexico through a trust, the “deed” will be the trust. A Mexican notary public then signs the trust and with this the transfer will be finalized.

A normal purchase transaction includes:

1. Make a written offer on real estate.
2. Have a signed offer acceptance.
3. Sign an escrow and opening escrow contract with the corresponding deposit.
4. Have a period to carry out due diligence (while for residential it may take 10 to 15 days, for commercial it may be longer).
5. Perform closing due diligence.
6. Buyer to have the final and total financing of the escrow between three to five days before closing.
7. Signature of closing documents (transfer of trust title) before a notary public and signature of the Disbursement Instruction for Escrow.

Some common terms of a Mexican bank trust are:

1. The term of the trust is usually 50 years and can be renewed.
2. The interested party will be asked to designate primary beneficiaries (generally the buyer) and secondary or substitute beneficiaries. Because the trust property is not part of the “estate” (this will not determine who will receive it), the bank trustee will ask for names, addresses and identifications of secondary or substitute beneficiaries. This is good, as this avoids having to prove property rights, as the rights will be transferred to their secondary or substitute beneficiaries. It’s imperative for the primary beneficiary to be careful that the instructions are very clear regarding who the secondary or substitute beneficiaries are. If, for some reason, the trust does not specifically designate the beneficiaries, the will will have to be probated in Mexico, which could take a long time.
3. If the trust property is unimproved land and has more than 21,527 square feet, the Ministry of Foreign Affairs will require the beneficiaries to sign a letter promising to invest a certain amount of money in the land over a period of 24 months. The location and size of the property will determine the investment amount.
4. If for any reason, you want to change the bank trustee that holds the title of the property, you can do it and choose another Mexican bank. Many international banks are located in Mexico and provide this service.
5. The owners will have to pay an administrative cancellation fee to the bank in the vent of changing trustees. For this type of trust, annual costs start at 600 USD. Most banks do not seem to have good records of annual payments, so you should keep your original receipts for documentation.
6. Banks are not responsible for protecting the property from any legal claim. If there is a lawsuit, the trust beneficiary/landlord or their attorney will need a power of attorney from the bank to defend it.

David Conell, partner and manager of Connell & Associates.

Buying a Property through a Mexican Corporation

Since 1995, foreigners have been allowed to own, operate and manage Mexican companies, but there are still some restrictions on certain activities (such as mining, airports and telecommunications), where foreigners are limited in the percentage of ownership they may retain of Mexican corporations. However, the general rule is that they can participate up to 100% in the ownership of Mexican entities, including Mexican corporations that buy and sell real estate.

Mexican corporations require a minimum of two members, of which both can be foreigners. There is no legal requirement to have a Mexican partner/member in an established Mexican corporation to purchase real estate.

There are different types of Mexican business entities; however, the two most common are the S.A. de C.V. (public limited company) and S. de R.L. de C.V. (society). Both the S.A. de C.V. and the S. de R.L. de C.V. are limited liability entities, and both receive the same treatment for Mexican tax purposes. However, some foreign governments (such as the United States) treat them differently, so it is important to find get advice from a U.S. tax attorney specializing in foreign investment on which entity is best for each case.

Forming and maintaining Mexican corporate entities represents much more expense than in other countries. All Mexican entities require monthly and annual tax returns. The corporation must hire an accountant to file the returns online as well as performing additional tasks, such as filling out the Investment documents including Foreign and, in many cases, Anti-Money Laundering documentation. Because of the additional services required and salaries paid to specialists, it can be quite expensive to set up and maintain a Mexican corporation as a foreigner.

If everything is done properly in either of these two options, as a foreigner there should be no problems in acquiring a property in Mexico.