Legal Briefing

The essential facts for real estate projects in Mexico

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Real Estate | 23 January 2019

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Real estate in Mexico involves several branches of the law. The enforcement of the law varies according to the branch responsible for the matter. Income tax, for example, is a federal tax, but, in general, real estate projects depend on the municipality or state where the development takes place.

Real estate is registered in Mexico through its states and municipalities, and the Public Registry of Property and Commerce. The Public Registry of Property is the institution in charge of making public the different legal status of assets and rights, as well as the legal acts to be registered to make it effective against third parties. The registration of legal acts in the Public Registry is merely declarative, and does not constitute any right. Therefore, it does not guarantee that the actions registered there are the only ones to be carried out, since the registered title holder is not necessarily the last owner of a property, and if there are encumbrances, there could be additional encumbrances to the ones already registered. The fundamental principle of ‘first in time, first in right’ is applicable, although in practice what is registered first is not necessarily the first in right, even though it has priority in precedence.

In Mexico, there are three types of properties: urban real estate, rural property and restricted border and coastal zones. There are no restrictions on acquiring urban real estate, even if foreign shareholders participate in the capital stock or an individual acquires it directly. However, the general rule is that foreigners should agree to consider themselves nationals in matters regarding that property, and to not invoke the protection of their governments, under the penalty of forfeiting their property for the benefit of Mexico if they do so (the ‘Calvo clause’). Several restrictions apply to acquiring rural properties, and the land must be mainly dedicated to agricultural, cattle or forest activities. Mexican law also deems that foreign shareholders acquiring property in restricted border and coastal zones – a ‘belt zone’ surrounding Mexico’s territory, 100km wide along border regions and 50km wide along the coast – agree to the Calvo clause. Foreign individuals cannot, by any means, acquire property within the restricted zone. They can be the beneficiaries of a trust that holds the ownership of the real estate, but prior authorisation of the Ministry of Foreign Affairs is required, as is agreement with the Calvo clause principles.

There are laws, regulations and programmes at federal, state and municipal levels, which regulate the corresponding organisations: urban development, spatial planning, urban policies, the protection to the rights of the city in question, urban growth control, the sustainable development of the property, construction and land use.

The government can expropriate properties only in the cases of public utility foreseen by the law, as long as there is monetary compensation in national currency or, where appropriate, the affected parties agree to compensation in kind with similar goods. In the latter case, a prior commercial valuation for the purpose of obtaining the value is required.

There are several vehicles to carry out an investment, such as trusts, limited companies and joint ventures. These are the entities that offer the best protection for foreign investors, because they limit their responsibilities and, in some cases, their fiscal transparency.

According to the location of the property, or the use given to it, an environmental review may be required. When the properties are located in the coast or forests, environmental regulation is more specific (eg, conservation and preservation of ecosystems, natural resources, ecological protection and preservation of flora and fauna).

Categories of legal ownership and leasehold include: owners, bare owners, bailees, usufructuaries, possessors, lessees, lessors, sublessees, sublessors, trustors, trustees, guarantors, donors, donees, intended seller and intended buyer.

Financing real estate in Mexico is common and the types of real estate security instruments to guarantee a loan are mortgage, trust as guarantee, trust as method of payment, promissory note, and joint liability.

There is financing for lessees that require to construct a future development in a surface right using, as a guarantee, the collecting rights of the future leases already executed, and to adapt those spaces already leased. The guarantees enter into full force and effect through public and private documents (ratified before a notary) duly registered in the Public Registry of Property to warrant the precedence of the acts, prior to review of their freedom from encumbrances.

It is common that creditors request a commercial or bank valuation through a construction specialist certified in this matter, for the property to be guaranteed. The appraisers must have a specialisation and a professional licence issued by the Secretary of Public Education of Mexico and they also must be registered in the local government office as appraisers. In the event of non-compliance by the debtor, the creditor can commence a legal procedure at a corresponding court to initiate a recoupment and compliance process, including the execution of the guarantee. In this event, the law foresees the mercantile executive procedure, which is used to enable the seizure of enough goods in a short period of time. When the credit has been guaranteed through a trust, the guarantee may be executed through an extra-judicial procedure previously agreed by the parties.

In recent years, a new investment method called FIBRA has arisen in real estate matters. FIBRA is based on the real estate investment trust (REIT) model and involves trusts that provide investors the opportunity to invest in real estate to be leased and obtain a return. n