Growing Pains in the Expanding Mexican Real Estate Market
- Mark B. Raven, Esq.
The second home real estate market involving U.S. purchasers in Mexican coastal areas like Puerto Peñasco is strong and healthy. Continued rapid growth is anticipated for economic and demographic reasons we are all familiar with. From the standpoint of an attorney active assisting buyers and sellers in Mexican real estate transactions, however, there still exist certain legal areas where improvement is needed if the market is to become more secure and user-friendly for American buyers. One of these problem areas is the timing of the Mexican bank trust.
This article will first explain certain key points about the Mexican bank trust and then talk about the timing issues that can create problems and yet are little understood. Finally, I will share some ideas for improving the present unsatisfactory situation.
Part One. The Mexican Bank Trust.
As many readers are already aware, foreigners cannot hold title in their own names to residential real estate in the so-called “restricted zone”, comprising a 50-kilometer strip along the entire coast of Mexico, the entire Baja, as well as within a 100-kilometer strip along the border.
In order to overcome this restriction, Mexico has devised a system whereby legal title is held in the name of a Mexican bank or other fiduciary institution as trustee for the benefit of the foreign owner. The foreign owner/beneficiary has the economic rights that come with ownership, but technically the rule against foreigners holding title to residential property in the restricted zone has been observed. This system of bank trusts has worked well for many decades. Currently the trust term can be 50 years, with a 50-year renewal.
What many people do not understand, however, is that putting a property in trust with a Mexican bank is not an automatic “no-brainer.”
Mexican trustee banks are not so different from trust banks in the United States in that they are well established, risk-averse, solid and conservative. They are highly regulated and act with the deliberation and attention to detail one would expect from fiduciary institutions charged by law with safeguarding other people’s money. Accepting a property in trust means taking on the responsibility and liability of administering the trust for the benefit of the beneficiary in accordance with the law.
Before a Mexican trustee bank can or will accept a property in trust, therefore, it must make sure the property complies with all legal and regulatory requisites. Prominent among these are the developer’s compliance with governmental land use regulations such as zoning, environmental, subdivision registration, development plan approval and completion of promised improvements.
It should be noted that Mexico has meaningful land use laws and regulations, which are basically comparable to those in the U.S. For Puerto Peñasco subdivisions, these laws and regulations are primarily administered by the State of Sonora through S.I.U.E., a state agency located in Hermosillo.
Until these subdivision and land use requirements have been fulfilled, the developer cannot get a “clean bill of health” from the State and municipal authorities, which includes an official permit to sell lots or condominium units. Without proof that the necessary governmental authorizations have been obtained, the Mexican trustee bank will not act as trustee for a development project. The issue for many developers is that meeting all of the above requirements costs money and takes time. In many cases the developer may not have enough money or enough time to comply, or is not willing to spend the money. The developer may be unhappy with the delay caused by the need to complete the approval process before selling to the public. Although most reputable developers will start the process and try to follow it to conclusion, at the same time most want to start selling before the process is completed. Unfortunately, in the real world there is little or no enforcement by the government and therefore sales can start without the necessary authorizations and without a bank trust.
To sum up, the business needs of the developer to make as much money as soon as possible collide with the legal requirements of the government and the trustee banks, and the developer’s needs win out.
Part Two. Timing Problems.
You may ask, “How can this be?” How can the developer sell a unit without a bank trust in place if the U.S. buyer is not legally allowed to own the unit except through such a trust? The short answer is that the buyer does NOT own the unit. Even though the buyer signs a contract with the developer and makes a substantial down payment, usually at least 30%, the buyer has only a promise that he or she will obtain ownership later, after the trust is put in place. This will happen only when the developer finishes all of his homework and the trust bank feels secure in taking on the trust. Until then the legal owner of record remains the developer. If you conduct a title search of the property in the Public Registry the buyer’s name will not appear.
The developer will counter that in the meantime, during the sometimes, long period before the trust is put in place, the buyer is given full use of the property. That is true, but the buyer seldom realizes the risk he is running during this period of “suspended animation”. For example, if the developer were to run into financial difficulties and find himself, unable to complete the work necessary to obtain final governmental and trustee bank approval so that his buyers can obtain their bank trusts, the buyers might not get their trusts for a long time. Without a trust, it is virtually impossible to sell or finance the property. Perhaps, as has happened in the past, buyers will have to settle for getting their trusts without the development ever being finished as promised. Worse, the developer’s creditors might have legal rights superior to those of the buyers. This is because the buyer’s interest, as explained above, is based on a private promise from the developer, not a deed recorded in the Public Registry. A buyer might decide to assume these risks in a given situation, but in my experience most are completely unaware that these risks even exist, let alone why.
Part Three. How to Improve The Situation?
Stronger governmental enforcement would clearly help, but given the enormous financial demands on the Mexican government, how likely is it that the protection of unwary U.S. buyers will take priority over the basic needs of their own people?
I personally believe that the best remedy at present is increased education of buyers. That is in fact the essential reason I wrote this article and formed ICS (International Consulting Services). If enough U.S. buyers refuse to pay money for a property unless at the same time they obtain ownership through a duly recorded bank trust, developers will be forced to stop “putting the cart before the horse” and will feel the pressure to comply with all government and trustee bank requirements before starting to sell.
It would also help enormously if a buyer without a trust and with only a “promise of trust” could at least have his or her property interest formalized by a Mexican Notario Publico and recorded in the Public Registry. This would give legal notice of ownership interest to all third parties, including potential competing claimants. As of this time, Notaries in Sonora are not willing to formalize such contracts, but this is an area where legal reform is long overdue. If the law really does not authorize Notaries to formalize such contracts and allow the contracts to be registered, the law should be changed.
Finally, there are contractual protections that an experienced attorney can often negotiate on behalf of the buyer.
It seems to me that the problem discussed in this article is the kind of “growing pain” that is experienced when the legal and business infrastructure in a region has not yet caught up with the rapid, unprecedented growth in real estate demand. I intend to do all I can personally to contribute to a solution that strikes a better balance between the goals of developers and the needs of buyers.