Dr. Paul S. Fraser

Foreigners can own and lease real estate in Mexico, but there are important differences between U.S. and Mexican laws. Because this information is general guidance only, and may not apply to your situation, before purchasing or leasing real estate in Mexico, buyers should:

· Understand the legal differences between the U.S. and Mexican laws,
· Assume nothing, and
· Seek competent legal advice.

MEXICAN REAL PROPERTY LAW

Mexican real property law is largely based on Mexico's Constitution although state and local laws apply. Mexico's Constitution gives the government control of land and the transfer of ownership rights. Foreigners can, subject to certain restrictions, own land in Mexico--except in the "restricted zone," generally defined as within 100 kilometers (62 miles) of the border or 50 kilometers (31 miles) from the coast. However, foreigners can acquire property in the restricted zone through a "fideicomiso," or through a Mexican corporation.

What is a fideicomiso? To encourage foreign investment, the Mexican government created the fideicomiso, a real estate trust agreement (not a lease) between a Mexican bank, a real estate seller and buyer. The process is:

· The bank, acting as trustee for the buyer (also called the "beneficiary"), purchases the property and holds the title,
· The buyer gets the basic rights of ownership, including benefits from the use and sale of the property,
· Trusts usually last 50 years and are renewable.

Creating a fideicomiso is relatively straightforward. The requirements are:

· In most cases, an initial fee, based on the property value,
· An annual trustee fee, and
· A permit from the Ministry of Foreign Affairs--usually arranged by the trustee/bank when the fideicomiso is established.

An Alternative to the fideicomiso: Ownership of property through a Mexican corporation is an alternative. Mexican corporations do not require Mexican owners; they can be completely owned by foreigners. Since a Mexican corporation can own property outright, a fideicomiso is not needed. The corporation owners essentially own the property in "fee simple." Establishing a Mexican corporation is similar to doing so in the U.S. Of course, one should discuss the pros and cons of forming a Mexican corporation with a Mexican attorney well versed in the process. NOTE: The primary requirement is that the property involved is commercial, not residential: a corporation shouldn't be set up to circumvent the fideicomiso process.

If one does not desire to buy property in a restricted zone as defined above, he may own the property outright in his own name the same as any mexican citizen. It is important to repeat that the alternatives described above only pertain to foreigners purchasing real estate within a restricted zone.

THE EJIDO ISSUE

The Mexican government historically gave farmers an interest in land called "Ejidos." Ejidatarios could live, farm, and build homes on the property--but could not sell it. In the 1990s, the government began privatizing ejido properties and giving ejidatarios full ownership, including the right to sell. However, there have been cases of foreigners buying ejidos that weren't properly privatized and couldn't legally be sold. This needs to be researched by any potential buyer of ejido land. ALWAYS WORK THROUGH AN ATTORNEY AND A NOTARY AND YOU WILL AVOID 99% OF THESE PROBLEMS!!!

THE TRANSACTION, PARTIES AND COSTS

Mexican real estate transactions ("operaciones") are different from those in the U.S. A buyer should have professional assistance and, as brokers are not legally licensed in Mexico, cannot depend on many safeguards that apply in the U.S.

Making an Offer: The first step in purchasing property is usually an offer to purchase ("promesa de compra"), typically a letter of intent drafted by the parties with basic information (property description, price, terms of payment, etc.). A licensed Mexican attorney can be used to draft contracts, review conditions/terms of sale, and point out problems or alternatives.

Closing the Deal: Once the buyer accepts the promesa de compra, the closing process that follows, which should include a thorough title search, usually takes 1-3 months during which a purchase-sales agreement ("contrato de compraventa") is finalized. Title insurance, increasingly common, may be obtained in some cases, but is not really necessary since title to the property prepared by a notary is rarely contested.

Closing Costs: Closing costs are usually paid by the buyer and are generally higher in Mexico than the U.S. However, property taxes, or "predial," are relatively low. Buyers customarily pay a transfer tax (2-6% of the appraised value which is often less than the sales price) and notario publico's fees (2-3% of appraised value) while the seller usually pays an agent's commission. Some items usually part of a purchase in the U.S., such as telephone access, may not be included.

One important participant in the transaction is the "Notario Publico," a special lawyer with quasi-judicial functions (not the same as a "Notary Public" in the U.S.) The Notario Publico acts as government representatives with fiduciary responsibilities to both parties and can do title searches, obtain "no lien" certificates, secure official appraisals, verify that there are no unpaid taxes, and draft deeds.

Renting or Leasing Property: Because Mexican landlord-tenant laws are generally tenant-oriented, leases tend to be written to protect the landlord and evictions are difficult. While rents vary, 1% of the property value per month is relatively typical. One-year contracts are common, often with renewal options but leases in excess of ten years may not be enforceable by the lessee. CAUTION: If you are considering a lease, you should carefully research the overall situation, e.g., does the owner lease to other tenants and if so under what terms, does the owner have a good track record, is there a Home Owners Association, etc. Deposits are generally required with tenants paying utilities, telephone, cable and condominium fees.