- Mark B. Raven, Esq.
In General:
The following is a summary of the procedures for granting loans and creating and perfecting a security interest in real property located in Mexico, as well as foreclosure procedures, focusing on the laws of Mexico.
When U.S. entities make a loan, the loan may be secured by real property located in Mexico by means of (a) mortgage (hipoteca), or (b) guarantee trust (fideicomiso de garantía). Mexico has a well developed legal and judicial system, under which both mortgages and guaranty trusts are valid and enforceable, provided the documents are properly prepared. There are, however, significant differences between mortgages and guaranty trusts in terms of the manner, cost and/or timing of creating, perfecting, assigning, or foreclosing on these two types of security interests. Some of these differences are discussed below. First, however, this article will review similarities for loans regardless of whether they are secured by mortgages or guaranty trusts.
Under Mexican law, mortgages and guaranty trusts can secure not only real property, both also improvements, fixtures and new construction on the property. For both mortgages and guaranty trusts, there is no legal difference between the rights of a U.S. lender and the rights of a Mexican lender.
Ownership of Real Property by Non-Mexicans:
Mexican law prohibits non-Mexicans (including Mexican legal entities owned by non-Mexicans) from directly owning residential property in the “Restricted Zone, which is all land within 100 kilometers (about 62 miles) from the borders and 50 kilometers (about 31 miles) from the beaches. Non-Mexicans can acquire only indirect ownership of residential property in the Restricted Zone, and may do so only by having title held by a Mexican trust for the beneficial use of the non-Mexican buyer. Current law allows trust agreements to provide for trusts to be created for an initial term of up to 50 years, subject to renewal for an additional 50 years upon the request of the beneficiary.
The trust is established by a trust agreement executed between the seller of property and the trustee, with the non-Mexican “buyer” as beneficiary. In addition, a U.S. mortgage lender (“Lender”) (and an assignee of its loans) can be beneficiary(ies), if provided for in the trust agreement. The terms of the trust agreement establish the rights of the beneficiaries, and provide that the beneficiaries are entitled to the use, enjoyment, products, and benefits of the property, including proceeds from selling the property. The terms of the trust agreements therefore can affect the value of the property. The trust agreement for each property must be carefully analyzed to determine exactly what are the legally enforceable rights of the beneficiaries (including the Lender and, if applicable, assignees of the Lender’s loans).
Under Mexican law, only certain Mexican financial institutions can act as trustees, and they must be authorized by the Ministry of Foreign Affairs to act as a trustee for real estate in the Restricted Zone. The trustee holds legal title to the property in its name, but only as trustee acting on behalf of the trust’s beneficiary(ies). Legal actions with respect to the property (including sales and transfer of ownership following foreclosure) can be taken only by the trustee or a Mexican court. There can be delays and/or transaction costs involved in having a trustee act with respect to the property.
Non-Mexican buyers must also agree to submit themselves to the jurisdiction of the Mexican legal system for any dispute regarding the property, and under the penalty of forfeiture for noncompliance, not to invoke the protection of their government in matters regarding the property. This is known as the “Calvo Clause.” Before the transaction may be completed, the non-Mexican purchaser must notify the Ministry of Foreign Affairs that he or she agrees to the Calvo Clause, and the Ministry must register the purchase and issue a permit for the trust and for the non-Mexican beneficiary(ies) beneficial interest in the trust. The Lender (and any assignee of its loans) will not be able to resort to U.S. courts to resolve issues regarding ownership of, or security interests on, Mexican property. Such issues must be resolved in Mexican courts.
Notaries:
A Mexican notary public (“Notario”) is a special attorney appointed by the government with exclusive jurisdiction over property transfers and liens (including mortgages and guaranty trusts). Mortgages and guaranty trusts must be approved and processed by a Notario before they can be recorded in the Public Registry. Therefore, the timing and cost of closing loans and selling/securitizing loans depends in part on the Notario’s fees and time to process and record documents. It will be important for the Lender to locate cooperative and responsive Notarios so as to obtain expeditious processing and recording of the documents in every area of Mexico in which the secured property is located. Furthermore, the Lender should be aware that the Notario does not represent any of the parties to a transaction; rather, he or she represents the interests of the government and secondarily, the transaction itself. Although a Notario may use a document drafted by the parties, the Notario will use his or her own judgment regarding the document’s compliance with Mexican law. The Notario will also document the value of the property to be used for capital gains tax purposes.
Transfer Tax and Capital Gains Tax:
Upon the transfer of real property, the following taxes are due: a property transfer tax (2% of appraised value) and tax on capital gains generated by the sale. Various techniques have been used in some Mexican real estate transactions to try to lower or avoid the transfer tax and/or capital gains tax. These include establishing an artificially low value on the property.
Title Reports and Title Insurance:
Various U.S. title companies also currently provide title insurance for owners and lenders for Mexican real property. The availability, scope of coverage, and cost of Mexican title reports or title insurance is beyond the scope of this article.
Due diligence:
Proper due diligence should be conducted regarding each property, including but not limited to (a) title matters, (b) existing liens and encumbrances, and (c) zoning, subdivision compliance, infrastructure, and current and future availability of sewer, water and electricity service.
Loan Agreements and Promissory Notes:
Regardless of whether a mortgage or guaranty trust is used, it is normally advisable to have the borrower execute a loan agreement and a bilingual promissory note enforceable in both the U.S. and Mexico. The best practice is for the loan agreement to be executed in English and Spanish with concurrent jurisdiction in Mexico and the United States. This allows the creditor to pursue remedies in both countries in the event of default. To be enforceable in both countries, the loan agreement must comply with both Mexican and U.S. law. The borrower must also execute a Spanish language security instrument (i.e., the mortgage or guaranty trust). Together with the bilingual promissory note or notes in favor of the creditor, this documentation allows the creditor, in the event of a default by the borrower, to file a lawsuit through a summary judicial proceeding in Mexico, whereby the creditor is entitled to obtain a preliminary attachment on the Mexican property.
Possession/Eviction:
Mexican law requires a judge’s order for a debtor (or other person in possession of the property) to be forced to deliver real property to the creditor. Thus, the lender may be required to obtain a court order to evict and obtain possession, even after foreclosure.
Foreclosure:
The foreclosure procedures for mortgages and guaranty trusts differ in some significant respects. In general terms, the mortgage foreclosure procedure, because it must proceed in court, is in theory generally expected to be more time consuming and costly than the non-judicial foreclosure procedure permitted for guaranty trusts under Mexican law. However, the non-judicial foreclosure process provided by law for guaranty trusts has not yet been fully tested and upheld by Mexican courts, nor has it been utilized to any significant extent by Mexican bank trustees. The cost and time required to foreclose on a mortgage or guaranty trust can vary depending on a number of factors, and are therefore difficult to estimate. This difficulty is enhanced by the lack of available historical data on recovery rates, costs and time delays regarding foreclosures on Mexican real estate. This is especially true in the case of non-judicial foreclosures of property secured by guarantee trusts. The amount recoverable can also vary significantly based on the market for real property in Mexico, which can be affected by all variables that affect real estate markets in the U.S., as well as aspects unique to Mexico (such as currency exchange, political and social stability, safety concerns, and anything else that affects the market for Mexican property)
Different federal and/or state laws apply to mortgages and guaranty trusts:
While guarantee trusts are generally governed by Mexican federal law, which is the same throughout Mexico, mortgages are generally governed by state laws which vary as to certain aspects of the perfection, assignment, and foreclosure process. These variations may make using a mortgage preferable to a guarantee trust, or vice versa, depending on the state in which the property is located.
Mortgages (Hipotecas):
The mortgage is perfected against third parties by filing the Public Deed at the Public Registry of Property within the jurisdiction of the mortgaged property. Priority is determined by recording dates. Assignment of secured party’s rights in mortgages is governed by state law, which must be examined for each state in which the property is located to determine how to properly assign the mortgage if the Lender’s loans are sold or securitized.
Foreclosure of a mortgage must be done in court. Although there is a special “summary” judicial procedure available for mortgages, such proceedings may, depending on the particular circumstances, last from six months up to three years or more before a creditor receives payment. Attorney’s fees for these types of lawsuits are commonly 20% of the amount received by the creditor plus any expenses incurred.
Securitization and financing:
A number of risk factors can significantly impact the potential sale or securitization by the Lender of loans secured by Mexican real property or the ability of the Lender to obtain financing on favorable to terms to fund to its loans and operations. Among other things, such factors (or investors’ perception of such factors) could increase the difficulty or cost of selling or securitizing the Lender’s loans or obtaining financing, and/or decrease the profitability of selling or securitizing the loans, and/or even result in the Lender being unable to sell or securitize its loans or obtain financing. Some, but not all, of such risk factors that can affect the potential sale or securitization of the loans are mentioned herein, but this is not, and is not intended to be, a comprehensive or exhaustive review of such factors. In addition, although this is changing, there is not yet an established secondary market in the U.S. for investing in loans secured by Mexican real estate.
The National Law Center for Inter-American Free Trade (NLCIFT), located in Tucson, Arizona, is preparing to launch a pilot program for securitization of real estate assets in Mexico that entails collaboration between the public and private sectors to promote economic development along and near the U.S.-Mexico border and to facilitate the cross-border flow of goods and services. A feasibility study by the Center will address the reforms needed to occur to facilitate placement of securitization in the U.S. secondary market, with a particular emphasis on two key border states in Mexico, i.e., Baja California and Sonora. The proposed work of the Center in the area of securitization will provide greater certainty and security to U.S. lenders to the Mexican market for tourism construction and later for low and middle-income housing in those two Mexican states and the rest of Mexico and ultimately throughout Latin America.
This proposed work, thus, has an economic development component via increased access to more affordable credit to finance much-needed low and middle-income housing, an export enhancement component for the United States with respect to construction materials and services, etc., and a job creation component for the United States (construction and related supply industries, banking and credit sectors, etc.) and also for construction and banking in Mexico and other parts of Latin America. The feasibility study will address the three main categories of reform required: 1) transactional (standardization of transactional documentation); 2) substantive legal (modernization of the legal framework for securitization); and 3) institutional (modernization, strengthening and reorganization of public registries). The Center will be working in close cooperation with officials in Mexico, including at the State of Sonora’s Instituto Catastral y Registral del Estado de Sonora (ICRESON) and the Secretariat of Infrastructure and Urban Development in Baja California.