By Jorge M. Conde, Esq.
Mexican real estate transactions are not carried out in the same manner as United States real estate transactions.
The Mexican Federal Constitution declares that foreigners are not allowed to hold direct title to real estate property within the restricted zone. The restricted zone encompasses all land located within 50 kilometers (about 31 miles) of any Mexican coastline inland and 100 kilometers (about 62 miles) of any border. We are talking about most of the territory of Baja California and Baja California Sur. This limitation comes from historical reasons of military protection.
Nonetheless, under Mexican law, Foreigners are entitled to acquire real estate property within the restricted zone through a “Fideicomiso”. Fideicomiso is a Mexican type of contract. There are three main parties involved in the Fideicomiso for real estate acquisitions for foreigners: (i) The seller, which is called: “Fideicomitente”; (ii) a Mexican Bank, called “Fiduciario”; and (iii) the foreigner purchaser called: “Fideicomisario” or beneficiary.
By means of the Fideicomiso, the seller (Fideicomitente) will transfer the ownership rights of the real estate property located in the restricted zone to a Mexican Bank (Fiduciario). This means that foreigners are not the legal “owners” of real estate property in Baja. Mexican Banks are reliable institutions that will hold the property for you in exchange an annual fee.
The foreigner purchaser (Fideicomisario) will be entitled to use, lease, mortgage, build, modify, develop, assign, sell, profit, etc. the real estate property at any time through the Mexican Bank (Fiduciario), as the beneficiary of the Fideicomiso.
The Fideicomiso is formally executed before a Mexican Notary. Prior to the execution of the Fideicomiso deed, it is common to sign preliminary agreements, such as: “Offer to Purchase”, “Promissory Purchase Agreement”, “Promise to Constitute a Trust Agreement”, among others, in order to establish the conditions under which the sale will be conducted. The price, closing costs, closing date, escrow agent, earnest money deposit, house amenities and upgrades, are the most common topics for preliminary agreements. A Mexican attorney should be involved to draw up contracts and to review the conditions and terms of sale.
After the preliminary agreement has been signed, the closing agent (broker, attorney or real estate professional) will assist in the purchase process. Property title search, appraisals, finance approval, visual inspections, etc. are usually performed before the closing date.
Additionally, a permit issued by the Federal Ministry of Foreign Affairs is required to allow the Mexican Bank to: (i) hold the real estate property and (ii) grant the use and enjoyment of such property to the foreign purchaser (Fideicomisario), during renewable periods of 50 years. The Permit may include certain limitations to property, for example: “no fence shall be placed in beachfront lots that may restrain free access to the beach”. Therefore, it is important to be fully aware of the permit’s term and provisions.
There is a common misconception among foreigners investing in Mexico that once the Fideicomiso or the Permit expires, the Fideicomisario loses all rights and benefits upon the property. This is not the case. The Fideicomiso or the Permit may be extended even extemporaneously and the Mexican Bank is bound to abide the beneficiary rights of the Fideicomisario until the formal dissolution of the Fideicomiso.
An important rule for Fideicomisos is the assignment of substitute beneficiaries in case of the Fideicomisario’s decease. If the Fideicomisario passes away, the Mexican Bank will recognize the designated substitutes as the new beneficiaries of the Fideicomiso, without having to prosecute a probate procedure, unlike the simple title called an “escrituras”.
Once the Fideicomiso has been executed before a Mexican Notary, the foreign purchaser will be absolutely entitled to use and enjoy the real estate property. Furthermore, the foreign purchaser will be responsible for paying the Mexican Bank annual fee, property tax, condominium maintenance fees (if applicable), water and energy bills, as well as any other service contracted. Some Mexican Banks will require Fideicomisarios to prove them to be in current payment of the property tax every certain periods, as well as to keep them informed about mayor constructions or in case of lease, all depending on the Fideicomiso provisions. Make sure to request a translated version of your Fideicomiso.
Buying real estate property in Baja is easier than it appears to be; however it is recommendable that purchasers retain professionals to assist in the transaction. Well-timed advice can be very helpful in saving money and avoid problems.
Jorge M. Conde, licensed real estate attorney. firstname.lastname@example.org.