By David W. Connell

The restricted zone, according to Article 27 of the Mexican Constitution, is all land located within 100 kilometers of any national border and within 50 kilometers of any ocean. Article 27 of the Constitution states that no foreigner will be allowed to acquire direct title to land within the restricted zone. However, Mexico’s Foreign Investment Law allows foreigners to acquire indirect title to land in the restricted zone by one of two methods; through a Mexican corporation or through a bank trust (fideicomiso).

This document will take a look at both options available:

I. – Acquiring property in the restricted zone using a corporation:

As of 1995 foreigners can fully own, operate and administer Mexican corporations. There remain some restrictions on the activities that a Mexican corporation can participate in when foreigners are involved such as mining, airports, and telecommunications; however, the general rule is 100% participation. There are no investment restrictions on foreign-owned Mexican corporations aimed at buying and developing property.

Mexican corporations require a minimum of two associates or shareholders. Both shareholders can be foreigners, and there is no need to have a Mexican partner.

There are several different types of Mexican corporations, however the two most common are the S.A. de C.V. and the S. de R.L. de C.V. The S.A. de C.V. is a limited liability corporation of shares and the S. de R.L. de C.V.  resembles a limited liability partnership. Choosing which type of corporation to set up is important for tax purposes in both the US and Mexico, and you should speak with an attorney or accountant on both sides of the border to understand the benefits and costs each one entails. Making sure these things are done correctly from the beginning will, without a doubt, save you time and money.

The Mexican legal system is a very “formal” system in that there are “forms or procedures” that must be followed in order for certain types of documents and transactions to be considered valid. This holds true with setting up a Mexican corporation. If the “forms and procedures” are not done properly, the limited liability nature of these corporations can be defeated and the shareholders or partners could be held jointly and unlimitedly liable.

Once your Mexican corporation is formed, it has the legal capacity to acquire property anywhere in Mexico, including the restricted zone. Acquiring property is also a “formal” procedure and you need to make sure all of the proper steps are done to secure title. The following section on trusts (fideicomisos) goes over some of these formalities.

If everything is done correctly you should have no problem acquiring title insurance on this property from any of the major US title insurance companies. That reflects how secure purchasing property in Mexico can be when done properly.

II. – Acquiring property in the restricted zone using a trust (fideicomiso):

A fideicomiso (trust) is a three-party contract by means of which the seller (settlor/fideicomitente) irrevocably transfers to a bank (trustee/fiduciario) real property so that a third party (beneficiary/fideicomisario) can use and enjoy such real property. The transfer of the real property from the seller to the bank is a definite and irrevocable transfer of title. Under Mexican law only an authorized Mexican banking institution can be a trustee.

The bank acquires title to the real property and is obligated to allow the beneficiary to use and enjoy the property as he sees fit (as long as the manner in which he or she does so is lawful). If the beneficiaries wish to rent the property to third parties they can do so by obtaining the necessary authorizations.  Beneficiaries also have the right to sell the property when they please and to receive the benefits produced by such sale.

The bank cannot encumber or sell the property without the express written consent of the beneficiary.

Mexican law requires that all real property transactions be done by a Notary Public. The Notary is obligated to register in his books the deed of transfer of title, have it signed by the parties involved and have it recorded in the Public Registry of Property that corresponds to the location of the property. Once the deed of transfer of title is signed in the presence of the Notary and registered with the Public Registry of Property, the real property transaction has fulfilled the requirements of Mexican law.

There is no escrow institution in Mexico. Instead, from the time the parties agree on a price and give a down payment until the deed of transfer of title is signed before the Notary, a preliminary agreement is usually signed to secure the rights of the parties involved. This agreement should only be signed after having confirmed with the Public Registry of Property that the property involved in the transaction is free of encumbrances. Once the preliminary agreement is signed, all the necessary paperwork and authorizations are obtained and sent to an appropriate notary for signing and registration.

The deed of transfer of title that is registered in the Notary´s books as well as with the Public Registry of Property will contain the entire trust agreement and is the document that will prove that you have rights to a certain piece of real property. Once the deed has been registered with the Public Registry of Property, the first deed of title goes to the bank and the second deed of title is given to the buyer/beneficiary.

If you need to verify to authorities outside Mexico that you have invested in a foreign country, an “apostilled” or “legalized” copy of your deed of trust will be sufficient.

The Foreign Investment Law permits trusts for up to 50 years, and such permits can be renewed.

Besides the above, some of the general terms of the contract of fideicomiso are as follows:

1. There can be more than one fideicomisario (beneficiary). If more than one fideicomisario is designated, each will be co-beneficiaries of the property held in trust (unless otherwise established).

2. Substitute beneficiaries or “fideicomisarios sustitutos” will need to be designated. Substitute beneficiaries are usually family members and will only have the right to participate in the trust once all of the first beneficiaries have passed away (unless otherwise established).

3. If the fideicomisario/beneficiary is not happy with the bank that is acting as fiduciario/trustee, the fideicomisario has the right to change banks.

4. If the property held in trust is unimproved land and larger than 2,000 square meters, the Ministry of Foreign Affairs will require that the beneficiaries sign a letter promising to invest in the land a certain amount of money over a 24 month period. The amount of money that will need to be invested will be determined by the location of the property and its size.

If you have any questions about this process, please feel free to contact me or you may discuss it with your real estate agent.

Sincerely,

David W. Connell

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By Everardo Terán Gallegos and David W. Connell

In order to understand how the tax authority views a sale we must go through a few definitions:

Definition Of “Sale”.- For tax purposes a sale of real property occurs when there is:

a) A transfer of property, even those in which the selling party reserves the ownership of the property sold.

b) A transfer of trust (fideicomiso) rights, changing the beneficial rights of the trust.

Definition Of “Fiscal Residence”.- You are considered a fiscal resident of Mexico when you have established your home in Mexico. However, when you have a home in another country, you will be considered a tax resident in Mexico if Mexico is where you have your “center of vital interests”.

Definition Of “Center Of Vital Interest”.- You will be considered to have a center of vital interests in Mexico when more than 50% of your total income comes from Mexico OR when you have set up the “main center of your professional activities” in Mexico.

Note.- Tax rule I.2.1.3. states that you do not have a primary residence in Mexico when you temporarily inhabit a home with tourist, vacation or recreational ends.

Those are the three definitions and one rule you really need to understand BEFORE we can talk about taxes on the sales of homes and allowable exemptions.

Exemptions On The Sale Of A Home For “Fiscal Residents”

Case 1.- When the amount of the sale does not exceed one million five hundred thousand investment units (approximately $550,000 USD as of Febuary 2008), the sale is exempt from income tax if you are a “Fiscal Resident” of that property. (see definitions above)

Case 2.- If you are a “Fiscal Resident” and the amount of the sale exceeds the above amount, you will pay tax on the amount that exceeds the exemption (550,000 USD) “proportional to the amount that results from dividing the amount that exceeds by the total amount of the sale”. What????? Let’s look at an example to clarify:

Purchase price $ 300,000 dollars
Sale price $ 1,000,000 dollars

Calculate $ 1,000,000 minus $ 550,000 (exemption amount) equals $ 450,000 (taxable income), which represents 45% of the total sales price. For your cost you can only apply 45% of your purchase price (this would be 45% of $ 300,000) or $ 135,000.

$ 450,000 (taxable income) minus $ 135,000 (adjusted cost) equals $ 315,000. This $ 315,000 is the amount over which your tax will be calculated.

NOTE.- The exemptions mentioned here only apply to the sale of one home per year.

Case 3.- If you are a “Fiscal Resident” for more than 5 years of a home, the sale of the home is exempt.

NOTES:

1. Exemptions only apply to construction and on land only “up to 3 times the area covered by the construction.” In order to do this calculation the value of the construction and land need to be separated if the land area is over 3 times the “footprint” of the construction. This is an existing tax rule but we have seen that this rule can be fought and won, making the entire sale exempt. We recommend getting an opinion on this if it is an issue.

2. Even though you are exempt from this tax, you must declare income on your Mexican annual filing for any residential sale that is over $500,000 pesos.

Who Calculates The Taxes, How Do You Pay It and What Documents Do They Ask For to Prove “Fiscal Residence”?

The notary is the person responsible for calculating, withholding and paying the tax on the sale of homes that belong to physical persons (not corporate entities). In our experience most notaries have “tax advisors” assist them with the calculation of taxes. We strongly advise that you get an independent advisor to do your own calculation of this tax. While notaries have very competent advisors, other experienced counsel can sometimes save you tens of thousands of dollars in taxes.

In order to prove “Fiscal Residence” you will have to confirm before the public notary that the property in question is your residence with any of the following documents:

II. Electrical or telephone receipt.

Note.- The documentation must be in the name of the taxpayer, his or her spouse, father, mother, or children.

How Are These Taxes Calculated?

The basic formula is: Income – Cost – Deductions = Capital Gain

1. Income is the value of the sale. If no value is given, the amount will be determined by an authorized fiscal appraiser.

2. Cost of Real Property is the verified cost of purchase adjusted up for inflation.

3. Cost of Construction.- From the cost of purchase you subtract the cost of the land and the result will be the cost of construction. When these individual costs are not clearly established, the default rule is to consider 20% of the purchase price as the price of the land.

Notes and Special Rules Pertaining to Cost of Construction:

· When you cannot separate the verified cost of purchase (the part that corresponds to the land from the part that corresponds to the construction) you are able to consider the proportion that appears in the appraisal at the time of purchase.

· Construction costs depreciate at 3% per year and cannot fall below 20% of the initial cost. The resulting cost will be adjusted up for inflation.

· The improvements that imply deductible investments will be subject to the same depreciation schedule, and must be supported with documentation (invoices in seller’s name).

· Maintenance is not a deductible expense.

· Estimation of construction cost. When, for any reason, the seller cannot verify the cost of investment in construction, improvements and extensions done to a building, they will be able to consider as cost 80% of the value of appraisal of the construction at the time of its completion. In order to register this value a procedure needs to be conducted before the municipal authority.

· Several other rules apply to cost of construction and we recommend that you have an advisor go over these with you.

DEDUCTIONS:

· Notary fees and expenses from deeds of acquisition or sale,

· Local tax on income from sale or transfer of immovable property, paid by the seller.

· Payments made for the appraisal of the property.

· The commissions paid on the sale or purchase of the property.

All the above deductions must have the proper documentary support and should be adjusted up for inflation.

CAPTIAL GAINS AMOUNT AND CALCULATION:

As we mentioned above, the calculation, withholding and provisional payment of this tax will be carried out by the public notary. The payment of this tax is determined on a scale that starts at 6.4% and goes to 28%.

CAPITAL GAINS ON THE SALE OF A HOME OWNED BY “NON FISCAL RESIDENTS” IN MEXICO.

If you are considered a Non-Fiscal Resident of a home, you will pay the following taxes on the sale of a home. You have the option to pay:

1. 25% on the total sale amount WITHOUT ANY DEDUCTIONS, or

2. 28% over capital gain. Formula: Income – Cost – Deductions = Capital Gain.

Note.- Option 2 only applies when: a) The seller has a legal representative in Mexico, or b) the transaction is formalized via a public deed (before a Notary).

FINAL COMMENTS

Mexico has created new rules and closed loopholes that previously existed in the tax rules pertaining to the sale of homes. This, coupled with the difficulty in determining the tax and the lack of a true tax- paying “culture” in Mexico has caused notaries to resort to techniques such as:

· Considering all foreigners as “NON RESIDENTES” for tax effects in Mexico,

· Considering that a person who does not have an RFC (prior to the sale) to not be able to acquire the exemptions allowed by the law,

· Soliciting additional documentation not required by the law to prove that a property is a primary residence.

· Not allowing authorized deductions even though they comply with all the fiscal requirements.

· Requesting FM2’s or FM3’s with specific text or addresses mentioned in them.

· Committing errors in calculations, etc.

The above information should put you in a position to have a general and correct understanding of how this tax is calculated. If someone is telling you something different, more often then not, they do not have a correct or complete understanding of the current tax laws, and you should look for other counsel. No one wants to pay taxes, but we have to. Looking for the legal manner to pay the least amount of taxes is what you should do. Take the time and get the right advice. You could save ten of thousand of dollars.

The present article is a general explanation of current tax issues valid at the moment of this publication. For each specific case we recommend that you acquire a written opinion of you actual tax liability.

This article was written jointly by Everado Teran Gallegos and David W. Connell. More articles and seminars by Mr. Teran and Mr. Connell can be seen at www.mexicolaw.com.mx . The present article is property of Connell & Associates and its reproduction of use requires the express written authorization of Mr. Teran and Mr. Connell, who reserve all right over this work. Copyright 2008.

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By David William Connell

For a foreigner, buying property in Mexico is a new and different experience. Most foreigners spend time researching the procedure of buying property, setting up a trust or a corporation and becoming familiar with the different permits and costs required to close on a property transaction in Mexico. A lot of effort is put into becoming familiar with the “closing procedure” yet very little time is spent on understanding what ongoing obligations exist after the property has been purchased. Furthermore, there is very little information on what these ongoing obligations are. The article will act as a general checklist for the types of obligations that any foreigner should observe after purchasing property in Mexico.

1. Trustee Fees

If you bought your property through a trust, your trustee (bank) will charge you an annual
administration fee to hold your trust. This fee needs to be paid to the bank every year. Some banks use the anniversary of the trust closing date as the date when this fee is due while others prorate the first year fee and start the second year on January 1st. Ask your bank or property manager to verify this date.

When your trust is set up your bank/trustee designates a “trust account number” for the trust. Please understand that this number is not in your deed and is a number that the bank generates to keep track of your trust. You need to get a copy of this trust account number because it is the file number the bank uses to keep track of the status of your trust and payments that are due.

Branch offices of the same bank as your trustee do not usually have your “trust account number” on record but if you have the trust account number they locate your trust via a central office and accept the annual payments you owe.

Most banks charge late fees for not paying on time so timely payment is recommended. Furthermore most banks do not send you a notification of when these fees are due so it is your responsibility to make sure you know when payment is due and make the corresponding payment You can either pay these fees yourself or hire a property administration service to pay them for you.

Again, in most cases foreigners do not want to spend part of their vacation dealing with bank managers trying to get these fees paid. However, if you do want to do it yourself and save some money, you will need the trust account number in order to make the deposit. When you pay the bank this fee, make sure you get a copy of the receipt. Banks are famous for not recording annual trust payments and have been know to try and double and triple charge. Your receipts will confirm your payment.

2. Property Taxes

Property taxes will need to be paid on your property yearly. These taxes are paid at the municipal offices that correspond to the location of the property. Property tax is called “impuesto predial”. Your property has a Property Tax Account number, which is called your “Cuenta Catastral”. This is the number you need to provide to the municipal property tax authority in order to get your yearly Property Tax Assessment.

Do not wait for the municipality to send you a bill or reminder, it is your obligation to go and pay this tax. Most municipalities will give you a discount for paying during January, February and March and start with late penalties in April.

You can either pay your property taxes yourself or hire a property management service to do it for you. Most people find that when they come to Mexico the last thing they want to do is spend a morning or day at the municipal offices trying to figure out how to pay these taxes. This is the principal reason why foreigners hire property managers to take care of their property tax payments. If you do have a property manager make these payments for you (or for that matter any payment), have them fax you a copy of the paid property tax bill as soon as it is paid in order to confirm 1) the amount you paid and 2) that it was paid.

The calculation of property tax varies for municipality to municipality and from state to state. Your property tax is calculated base on the “Valor Catastral” or Property Tax Value of your property. Most municipalities (but by no means all of them) charge 2% of the land value and 1.2% – 2% of the construction value. In most municipalities these “Catastro” values are very low and therefore your taxes are low.

When you pay your property tax and get your receipt we recommend that you:

a) Make sure what you paid is stated on the receipt (less the property managers fees)

b) Verify that the information on the receipt is correct including:

a. Location of property
b. Property Tax Account Number – “Cuenta Catastral”. Make sure it is the right account number. If you have a doubt, check your deed for the number.
c. Name of owner. Note if you hold the property in a trust (fideicomiso) the bank’s name will appear as the owner. This is correct, but make sure it is the right bank.

c) Check that the calculation of how they arrived at your tax is understandable. I like to take the calculation of land and construction and work it backwards in order to understand the exact percentages charged to me. I have found many many errors in these calculations.

d) Make sure the receipt has a name, signature (or stamp) and date of payment. Payments should be made to the municipal treasurer or “Tesoreria Municipal”.

Many times you will see other charges on your bill for items such as “Pro-educación” (education) or “Pro-caminos” (roads). This is normal but all of these charges should make reference to thepercentage you are being charged (it is common to charge 15% of the tax amount for these items). Again make sure the calculation is correct. Put your property tax receipt in the same file with your deed. These receipts are important documents in Mexico.

3. Paying Bills

Do not expect your bills to be sent to your house on time. A lot of your bills will not make it there at all, or they will come after the due date. This can be a very frustrating experience for foreign buyers in Mexico. If you are not going to hire someone to pay your bills, you need to know when the bills are due. Water, electricity and telephone are usually due on the same day every month (or every other month). Service on electricity and telephone do get cut within days of non payment and getting you reconnected takes more time and money. When a bill is due and you have not yet received it, you need to go to the company’s office and make the payment. Make sure you take the last bill you have so that the company can easily identify your account number and tell you how much is owed. Most services providers will not accept checks or credit cards so make sure you take enough cash to pay your bill.

Telephone (Telmex) and electricity (CFE) can now be paid on line which makes things lot easier. However you will need to deal with their web page in Spanish and go through the learning curve of setting this up.

Water is usually local and needs to be paid, in most cases, at the corresponding office or at the bank. Gas in Mexico is not brought to your house via pipelines but is delivered in trucks. You will need to fill your own tanks or make sure that there is someone in charge of doing this. Other services providers such as cable, sky TV, etc usually will set up annual payments and/or monthly debt payments on a credit card.

4. Insurance

If you have construction, you should insure it. We recommend using the bigger insurance companies as they seem to respond better to claims. You can contact most insurance companies on line and they will put you in contact with the local agent. There are a few things that I always recommend when you get insurance:

a) Make sure you go over the amounts for each item (fire, flood, earthquake, etc) and that you are in greement. Note: most of the time these are expressed in pesos but not always. Make sure you know the money type. I have seen unfortunate cases where people thought they had a $ 500,000 dollar policy that turned out to be a $ 500,000 peso policy.

b) Make sure that when you pay the agent you get a receipt and an original policy with the policy number at the top. Most agents are very good but there are a few that have taken clients money and not paid for the policy. The insurance company will only respond to a policy that is paid and has a valid policy numbers. The insurance companies will verify policy numbers on line or via phone.

c) Do not expect them to send you a notification that your insurance has expired. You need to put this on your calendar and get in touch with the insurance company.

d) If you have a claim, make it right away and in writing. Over-the-phone claims do not count (even though they legally should). Write it down and send it in. You need to be proactive in following your claims up and always make sure the local agent and the central office are both copied on your claims.

5. Workers and social security

All workers must be under contract. If they are not, you will pay dearly for it. Worker liability will be your biggest problem in Mexico if you do not address it properly. If you think I am joking, you need to get on line and read the October 4, 2004 edition of Newsweek, which on page three published the outcome of a World Bank study that ranked nations on how hard it was to hire and fire employees. Mexico was not only in last place, but on a scale of 1 to 100 (1 being easiest nation in which you can hire and fire employees and 100 being hardest) it received a score of 72 while the second hardest nation to hire and fire in (India) scored a 48. Do not put this off. Worker liability in Mexico is as bad as punitive damages in the US and the attorney’s that live off this are more plentiful than ambulance chasers.

So how do you limit your worker liability?

a. Make sure all workers sign an agreement before they start working for you. This agreement should cover the necessary points required by law. I recommend that you get these contracts from an attorney who is familiar with labor law.

b. Make sure they sign a receipt every time you pay them their salary, vacation pay, overtime pay or end-of-year bonus. Some general information pertaining to these payments is:

By law each worker has the right to a certain number of days of paid vacation per year plus a 25% increment of the daily wage they are receiving when on vacation. The number of days of vacation given to each worker is as follows:

1st year: 6 days
2nd year: 8 days
3rd year: 10 days
4th year: 12 days
5th to 9th year: 14 days
10th to 14th year: 16 days
15th to 19th year: 18 days

and so on.

By law all workers have the right to an end of the year bonus equal to 15 days (minimum) salary. This bonus is called an “aguinaldo” and should be paid no later than the 20th of December. If a worker only works a fraction of a year he still has the right to receive the “aguinaldo” that corresponds to the fraction of the year he worked (example: if a worker works 6 months he has the right to ½ of his corresponding “aguinaldo”).

c. If you have a problem with a worker, before confronting the worker, talk to an attorney. You are probably thinking that I am looking to create as much businesses for myself as I can out of this article, but the truth of the matter is that you will save money if you make sure the steps above mentioned are taken.

Do you have to pay domestic workers Social Security? There is a lot of debate on this and the majority of professionals will tell you no, you do not have to pay Social Security for a domestic worker. On the contrary I recommend you pay if for several reasons including: 1) It demonstrates good faith, 2) It gives the worker access to medical care, 3) It give the worker access to low interest loans to purchase a home and 4) It is relatively inexpensive if you consider what you pay for domestic help (it adds approximately 33% to the salary you are paying). If your property is owned by a corporation you cannot consider any worker as “domestic” and all workers must be registered. Registering and removing workers from Social Security is not easy and it time consuming. Make sure you have good advice in this area and try to avoid cutting corners.

The above is a very general and basic overview of worker related issues and will give the reader a general idea of the importance of keeping documentation in order regarding workers. It is not intended to be a complete or all-encompassing guide to worker relations, and an attorney should be consulted to review each worker’s case individually.

6. Zona federal

If you have a property that borders on the Federal Zone (beach, river, lake, lagoon, etc) you will want to consider applying for the exclusive use and enjoyment of this zone. On the beach this zone includes 20 meters inland from the “mean” or average high tide line. The federal government can grant you a concesión to use and enjoy this property for a determined amount of time (usually 15 years) and will almost always renew the concesión if you have complied with its terms.

If you acquire the concession for the Federal Zone you will need to make the corresponding yearly payment, which is based on the number square meters of Federal Zone you occupy.

Why would you want the Federal Zone Concession? There are two main reasons: 1) to increase the value of your property and 2) to keep someone from setting up a “taco stand” or other unattractive structure on this land.

A concession application can take up to 3 years to be granted unless you hire someone to push it through the entire process.

7. Rental and tax obligations

If you rent the property you have purchased in Mexico, you do have tax obligations in Mexico. Many people believe that if they rent rooms in Mexico but receive the money in the US or Canada that they do not have any tax obligations in Mexico. This is not true. If you rent a property that is located in Mexico, the income generated by this rental is taxable in Mexico.

The Mexican tax authority is getting tougher each year and has recently been reviewing the internet (web pages) to determine what properties are being rented. If you rent your property and do not pay taxes you are running the risk of having the tax authority put a lien on your property or worse. A lot of our clients tell us “well if the tax authority comes to the house I will just tell them I have not rented my property to anyone”. The bad news is that if you show no rental income or very little, the tax authority will use its “discretionary” powers to determine that you are not properly reporting income. They will use as a market indicator the occupancy of the hotels in your area (sometimes as high as 80%) and multiply this by your rate per night. Yes, we have seen cases where the tax authority has determined huge fines and penalties based on “perceived” rental income using estimated rates of occupancy.

If you rent property, contact a certified public accountant, get registered and start filing and paying taxes. It is not worth having your property encumbered with a tax debt and having to pay an attorney to defend you.

8. Owning through a corporation

If you own property through a corporation you need to make sure that you have a certified public accountant making the necessary tax and foreign investment filings. Corporations are businesses and must be treated as such. They require much more attention than holding property through a trust in that even if they do not have any income, they do have filing requirements (unless they are properly put in a “dormant” state). Not making these filings will result in fines and many headaches. Notverifying that your accountant is making these filings is ust as bad as not making them at all. At the end of the day the tax authority will come to the corporation and not the accountant.

Since corporations have monthly filing requirements, I recommend that each filing done by the accountant should be faxed or e-mailed to the administrator for verification. This means being in monthly contact with your accountant at a minimum. Corporations also have annual shareholders meeting requirements, which need to be signed by all shareholders or partners.

Corporations are businesses and should be treated as such. Mexico is rated as one of the worst countries in the world for the amount of paper work that needs to be kept and filed. If you have a corporation, you must plan on having an accountant and you need to get a list of all of the filings that have to be done annually. Make sure you know what these are and that you verify that they are being done. Ignoring your accounting and filing requirements is one of the largest sources of problems that we see in our line of work.

Things are different in Mexico, and there are many other things that will come up after buying your property. Many companies as well as the government will not send you bills so you need to make sure you are keeping track of what needs to be paid and when. Try to find a system or someone you can work with and stick with it. Reducing your time in getting these items done will give you more time to enjoy your property. The Mexican culture is different from what you are probably used to. I recommend you enjoy leaning a new (not better or worse) way of doing things. If you have concerns, make sure you use competent and trustworthy people to help you, such as an experienced real estate agent, attorney, accountant, property manager or even another home owner who has been living in the country for a number of years. Doing it right the first time will save you more than half the cost.

David Connell has been living and working in Mexico for over 16 years. He is a licensed Mexican attorney and the managing partner of the firm Connell & Associates with offices in Mexico City, Ixtapa-Zihuatanejo and Puerto Vallarta. Mr. Connell sits on the board of several organizations and corporations including non-profit and charitable organization, real estate and development companies, home owner associations, hotel, time-share and fractional companies. More information on Mr. Connell and the firm and articles on subjects concerning Mexico can be found at their web site www.mexicolaw.com.mx

David W. Connell

All rights reserved 2008.

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By David William Connell

A “pre-sale” purchase exists when a buyer enters into an agreement with a developer to purchase a unit that has not yet been built or finished.  This type of purchase is inherently risky. In Mexico over the last 10 years the real estate market has seen a major boom, especially in developed or developing coastal areas. Between 1995 and 2005 prices skyrocketed and fueled an increased number of new projects, the majority of which were sold as “pre-sales”. The first of these projects brought great returns to the buyers, who often times purchased at a 30% discount off the finished sales price. Furthermore, many of these projects went up in value 20 or 30% per year prior to being delivered, which made the investment even more profitable.

When the real estate boom started many investors thought long and hard about the terms of the pre-sale agreement before signing. Many did not sign these agreements as they presented too much risk and were too favorable to the developer. In short there was no guarantee a developer would finish a project or return the buyers’ funds if they could not deliver.

However, as the boom gained speed, people were more willing to accept a less protective agreement in order to secure deals and get in on the “great investment opportunity”. As the real estate boom continued, fewer and fewer people were concerned about the terms of the agreements they were signing and more were concerned with signing quickly so they would not lose the unit to another buyer.

The recent downturn in the world economy and the roller coaster stock market have seriously changed the outlook of every single buyer I have spoken with who is currently holding a signed agreement with a pre-sale project that has not yet been delivered . Just about every buyer that I speak with today who has invested in a pre-sale project that is not finished is asking me “Is the developer going to finish the project?” ”Can I get my money back?”  and “How can I protect myself if the project fails?” This article will go over where the pre-sale market is today, the risks of investing, and what you can do to limit those risks.

First and foremost, everyone must understand and have in mind that developers, more than anyone else, want to finish their projects and deliver the units. An unfinished, undelivered project means losses and no developer is in business to lose money. In most cases developers are the ones that have put up the initial millions of dollars in seed money to get the project going. Do “pre-sale” developers use your money to finance the projects? The answer is yes, they do use pre-sale money to finance or leverage their projects. However, everyone must also understand that in most cases they have put up hundreds of thousands of dollars, if not millions to get the project going.

This article will look at:  1) the general types of “pre-sale” projects that exist, 2) what you should negotiate for, and 3) what happens if the developer disappears and no one is on the project.

Types of “Pre-sale” projects

There are principally two types of “pre-sale” projects. Please understand that there are many variations of the two principal types, but they all seem to fall into one of the two following classes:

Class One: Financed Pre-Sale Projects.- These projects are financed by banks or private equity groups who fund the project “based on sales projections being met”. As a very general example, a developer will put up 20% of the initial funds to get the project moving, then as certain numbers of sales are made, the bank or private equity group will release funds to the project to move it forward. Based on an “absorption rate” (in general a speculative number of sales per month or quarter), the lender will release more funds to advance the project along. Obviously the “first round” of financing is usually the most difficult to get as the bank wants to see a “healthy” absorption of the product into the market. If they can see that 30% of total sales are reached, they are usually willing to release that really important first round of financing to get the project off the ground.

If you pick up a real estate magazine from a year ago you will see several advertised projects that no longer exist. Why? Because they did not get enough “absorption sales” to kick off their first round of financing.

Most of these Financed Pre-Sale Projects are the bigger, more well-known outfits. These outfits are usually better prepared to deal with problems in the market, but they are not completely immune to sharp downturns in the number of sales. So where do the risks lie in these projects? Principally they lie in the developer making initial sales projections to get first round of financing approved but then not making further benchmark “absorption sales” to get the second and third round of financing. Recently some developments are experiencing very low sales numbers and what is worse, they are having clients default on existing agreements, lowering their number of sales to below the minimum required for financing to be in place. If this happens the developers usually opt to do all or some of the following:

1. Ask for advanced or final payments. Most pre-sale agreements are very one-sided in favor of the developer and contain language that allows the developer to ask for final payment before delivering the product.

2. Slow the construction down to the bare minimum. This is to cut costs until cash flow increases or sales number are met, triggering the next round of financing.

3. Extend financing terms and sometimes pass them on to the buyers.

All of these options mean that you are going to be asked to pay more for your unit or it is going to be delivered later. The developer is looking at the economics of the project. You also need to be looking at this.

If you have invested in this type of pre-sale project and see the developer slowing down on construction or proposing any of the options above, you need to move as quickly as possible to renegotiate or force a settlement on your agreement. The first people to negotiate or force a deal will usually get a better deal than those who wait.

Class Two: Non-financed “Pre-sale” projects. These are the projects that do not have any type of formal financing and are speculating on making enough sales to generate cash flow for construction costs. These are usually smaller projects.

Needless to say, these types of project are higher risk projects because when the sales stop, so does the project. If the sales stop for any length of time, these projects are more susceptible to legal action and to having the developer “disappear”. Once the developer disappears, everyone loses.

Furthermore since a financial institution or bank is not involved, there is usually no “contingency” or risk plan established in case the project fails. When a bank loans money to a project, they almost always include provisions to take over the project in the case of failure as well as a plan to inject the necessary capital to finalize the project. Smaller, self financed projects do not have these contingency plans.

In these smaller types of “Pre-sale” projects, if sales are not met usually one of two things happens:

1. Construction comes to a virtual halt. Maybe a handful of workers are kept on to maintain the appearance of progress, but for all intents and purposes the project is stopped.

2. The developer asks for advance payment or increases the price of the units.

Smaller projects are more susceptible to going under. It is extremely important to be aware of this and, if any of the warning signs mentioned above appear, to take immediate action to protect your investment. Action, in this case, would mean getting a written and notarized agreement from the developer as well as full disclosure on the finances of the project. Legal action may also be needed. Verbal agreements or promises mean absolutely nothing unless the person making them is willing to sign off on them.

What should you negotiate for?

If you can, you need to turn the emotions completely off and the math skills on. There is a whole range of questions that need to be answered in order to find the mathematical and economic solution that is best for you. Some of the general questions we go over with our clients are:

1. What is the developer offering? Any offer the developer is giving is a starting point. You need to build your arguments around this starting point.

2. What percentage of the total price have you paid? This is the liability of the developer as well as your exposure.

3. What are you willing to lose? This is a hard question but you have to understand that if you are not flexible, your ability to reach a negotiated resolution is not good, and litigation is expensive.

4. What legal options do you have and what are they going to cost? There are legal options besides litigation which can force a developer to come to a more reasonable solution. All of these options need to be explored.

5. How much more would you be willing to pay to have a finished unit vs. litigation?

6. Is there a group that has a professional common representative? The developer wants to resolve as many problems as he can. Groups of buyers will get priority attention over individual owners.

We must understand that a developer is in an economic bind if he is slowing down or stopping the project. His options are limited and he will do whatever he needs to in order to make the project not fail and avoid a lawsuit. The developer is not your friend nor is he your enemy. You are both investors in a project that is in trouble due to a world economic crisis. Finding or forcing a solution is better for both parties so you need to work with the developer or force him to work with you.

What if the developer is gone and no one is on the project?

This is the worst case scenario, and you need to do some immediate research on what happened too see if there are any groups working to negotiate, find the developer, or file action against the developer. Do not walk away from your investment. Even if you only recuperate 30% of what you invested, it is better than walking away and allowing someone else to take all of your investment. Get good advice, talk to other people in the development, review your options, and get moving to protect your investment.

If you have any questions about this process, please feel free to contact me or you may discuss it with your real estate agent.

Sincerely,

David W. Connell

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From Inmobiliari, March 2008

By Everardo Terán

This year, the Mexican tax authority has made some major modifications to the tax law. Furthermore two new taxes have been created and one has been revoked. The two new taxes are “IETU” or “Flat Tax on Business Operation” and “IDE” o “Tax on Cash Deposits”. This document gives brief descriptions of this year’s modifications and the new taxes. It is not intended to be a consultation on these modifications and the new taxes, but rather as an orientation to what they are. In order to determine how these modifications and the new taxes will affect you and your business, we highly recommend that you set up a meeting with your tax advisor and/or accountant.

I. Income Tax Modifications (ISR – Impuesto Sobre la Renta):

a) There is now a reporting requirement related to deposits received in “cash” as loans or contributions for future capital increases in excess of $600,000 pesos. If a corporation does not report these amounts within 15 days of receiving them in “cash”, the authority will consider the respective “cash” as taxable income. It is important to mention that the tax authority has not clearly defined what a “cash” deposit is considered. We await clarification. As of today there is no specific rule in the Income Tax Law regarding this.

b) Limitation of deductions of donations.

If any Mexican entity donates more than 7% of its previous year’s taxable profit, the excess will not be considered as a deduction for tax purposes.

If any individual donates more than 7% of his previous year’s taxable income, the excess will not be considered as a deduction for tax purposes.

Needless to say, any entity or person that did not show profits the previous year can not deduct any donations.

c) Registry of employees before Federal Taxpayer Registry (RFC) and their annual tax return.

Mexican entities have to withhold, prepare and file employees’ annual tax returns. As of this year if this is not done, the workers wages will not be considered deductible for the entity.

d) Selling of shares through stock markets.

Starting on October 2, 2007, the exemption for Capital Gains that an individual obtains from the sale of shares though authorized stock markets will not apply if the seller holds, directly or indirectly, 10% or more of the capital of the issuing company. This rule will apply also if the seller has “control” (under the terms of the Stock Market Law – Ley del Mercado de Valores) of the issuing company.

e) Income tax for individuals.

The authority modified the procedure to determine the income tax for individuals in accordance with the level of taxable income. Due to this change, in almost all cases, the withholding of taxes to employees has changed, sometimes to their benefit and some times against it.

In general, if the employer provides employees with additional benefits (i.e: life insurance, medical insurance, supermarket vouchers, etc), the employees will have a lower withholding of income tax. But, if the employer only provides a minimum of additional benefits, then the employee is going to suffer a higher withholding of income tax.

Payroll systems (accounting) will have to be updated this year to verify that the new withholdings are being made.

II. Flat Tax or “IETU” (Impuesto Empresarial a Tasa Unica):

This is a totally new tax and only applies to businesses (including the performance of independent services and leasing) for now.

The IETU has to be paid on a “cash flow basis” (similar to IVA – Value-added tax), and the Mexican authorities are considering it as a possible substitute for the ISR (income tax). The Authorities will analyze this substitution before June 2011, in short doing away with the ISR (Income tax) and going to a straight flat tax.

Taxpayers now obligated to pay IETU now have two taxes on income: ISR (income tax) and IETU (flat tax), where the minimum due is the IETU. Please see the following example:

· If IETU amounts to $100 and ISR amounts to $80, the taxpayer will have to pay IETU=$100.

· If IETU amounts to $60 and ISR amounts to $80, the taxpayer will have to pay ISR=$80

ISR (income tax) is 28% of the profits, with strict requirement for deductions, but in the end it is a tax on net profits.

IETU is 17.50% (16.50% in 2008 & 17.00% in 2009) of a specific base, which in many cases, is not going to include all the business operations.

With IETU, the minimum asset tax (IMPAC) was revoked.

The following is a general overview of the IETU rules:

a) Taxable Incomes (cash basis):

IETU applies to the following incomes:

1) Sale of goods (including real estate),

2) Performance of independent services, and

3) Leasing.

Interest, selling of shares, selling of receivable accounts and royalties between related parties are not subjects of IETU.

For Mexican financial institutions (banks, insurance companies, and other entities), there is an additional taxable income, which consists of the difference between the interests charged and the interests paid.

b) Deductions (cash basis):

Some deductions are allowed, such as:

1) Acquiring goods (including the acquisition of real estate which is 100% deductible in the year of payment),

2) Payments of independent services, and

3) Leasing.

Payments of some taxes (i.e. property tax and federal zone concession) are also deductible, but interest and payment of royalties are not deductible. Donations are deductible with the same limitation for ISR: For Mexican entities only 7% of its prior year’s tax profit, and for individuals only 7% of its prior year taxable income.

Wages and the respective social security payments are not deductible; however the taxpayer will have a yearly credit against the IETU related to these kinds of payments. This credit has to be determined considering only the wages which are subject to Income Tax withholding. For companies that provide more benefits to their employees the credit will be lower than for those companies that provide a minimum of additional benefits to their employees.

c) Inventory of goods as of December 31st, 2007:

This is one of the most troublesome points of the IETU. Any Inventory as of Dec 2007 will NOT be considered deductible; therefore the selling of this inventory during 2008 or following years will not have its complete respective deduction (cost of sale).

On November 5, 2007, Hacienda published a decree which allows the deduction of this inventory at 6% per year during the following 10 years (in total only 60%).

d) Some of the other important rules are:

1) Incomes of non-profit entities (associations and charitable foundations), are exempt from IETU only if these entities have the authorization from the tax authority to receive donations and emit tax deductible receipts. NOTE.- This year’s (2008) home owners’ association dues are exempt from IETU with the exception of what the administrator charges as a fee.

2) Taxpayers are obligated to make provisional payments of IETU on a monthly basis; therefore the first filing of IETU will have to be completed on February 18, 2008.

3) If deductions are greater than income (cash basis), there is a negative base of IETU (similar to a tax loss), which will be a credit for the taxpayer that can carry forward for the next 10 years against future positive bases.

4) Activities performed before January 1, 2008 are not subject of IETU even if these are collected/paid in 2008 – certain rules apply.

5) Taxpayers who acquired new fixed assets between September 1, 2007 and December 31, 2007, will have an additional deduction of 33.33% of these acquisitions during 2008, 2009 and 2010.

6) Taxpayers will have an additional credit against IETU that corresponds to the non-depreciated balance of fixed assets which were acquired from 1998 to 2007. This credit is only 5% of this non-depreciated balance during the following 10 years (NOTE.- In total, only 50% of the non-depreciated balance as of Dec 2007).

7) For Small Taxpayers IETU has not really impacted their operations but may do so in the future (depending on State legislation).

Please note that the above are some of, but not all the rules that apply to IETU. We have mentioned the major ones that will affect most of our clients.

Due to the new tax, you must now take into consideration the following:

A. Stricter controls of treasury (bank) operations. If the taxpayer receives a big payment at the end of the month, without enough time to use these funds in its operations payments, the taxpayer could be hit with very large IETU payments, even though the following month his bank statement is at zero.

B. An additional accounting reconciliation between accounting records and IETU filings.

Today, Mexican entities have to prepare:

a) Official accounting books, on an accrual basis in accordance with Mexican financial reporting standards (Mexican GAAP).

b) A reconciliation for ISR determination, considering all the related rules for incomes and deductions,

c) A reconciliation for IVA determination, considering cash flow basis, and now,

d) A reconciliation for IETU determination, considering cash flow basis and its specific rules.

C. The need to modify current business projections, which will now have to take into consideration the effect of IETU and ISR. Today, if the IETU is bigger than ISR, taxpayers will have to cover the IETU, so, the tax that is greater than 28% of net profits. How much more? Who knows? It has to be analyzed on a case-by-case basis.

III. Tax on Cash Deposits or “IDE” (Impuesto a los Depósitos en Efectivo):

Staring July 1, 2008, Mexican individuals and entities will be subject of this new tax. The Tax is 2% of all “cash deposits” (in pesos or foreign currency) that exceed $25,000 pesos during one month into checking or investment accounts.

The tax will be collected at the end of each month by the respective bank (YES, THE BANK WILL TAKE THIS OUT OF YOUR ACCOUNT), and will act as a credit against federal taxes (ISR, IETU and IVA – certain rules apply)

Electronic wire transfers and checks are not considered “cash deposits”

Non-profit entities (Associations and charitable foundations) in accordance with Income Tax Law are exempt of this IDE.

As you can see there have been some major changes this year. We highly recommend that you set up a meeting with your accountant and/or tax advisor to determine how these taxes will affect your operations and what can be done to minimize their impact.

All rights reserved 2008

Everardo Terán

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By Ana Lilia Lozano

Every day more people are hearing about ejidos and are getting more familiar with ejido processes and formalities. Actually, ejidos represent a very interesting topic for investors in real estate and tourism because a considerable amount of land in Mexico belongs to ejidos, and an important amount of these ejidos are located in coastal areas. This article intends to provide a general overview of ejidos in Mexico and the processes available to convert ejido land into sellable property, taking into consideration the most common inquiries I have been asked in working on ejido matters.

HISTORY- CLASSIFICATION OF PROPERTIES

In Mexico all real estate is classified either as public, private or social property. This classification is derived from in the Mexican Constitution of 1917, which states that “the ownership of the lands and waters comprised within the limits of the national territory originally corresponds to the nation, which has the right to transfer the ownership of such (lands and waters) to individuals to constitute private property. . .”

Public property- The ownership, use and enjoyment of public property is exclusive to the Mexican nation (natural resources, minerals, seas, rivers, lakes, lagoons, etc). Ownership rights cannot be transferred to any individual, however exclusive rights to use and enjoy some types of public property can be acquired under certain restrictions via “concessions” for a given length of time, i.e. federal zone concessions. It is important to note that all individuals have the right (non exclusive) to use public property.

Private property- All individuals and entities can acquire full ownership and domain over private property, which is transferable without any restriction except those established by the parties in such sale and by law, i.e. condominium property regime, zoning and construction ordinances.

Please note that the above is always subject to the restriction of Article 27 of the Mexican Constitution which establishes that no foreign individual or entity can acquire direct ownership of properties within the restricted zone (all lands located within 100 kilometers of any Mexican border and within 50 kilometers of any Mexican coast line).

Social property- is “held” by a group of people. Social property includes those properties held by ejidos, indigenous communities and agrarian colonies. Under this classification, members of ejidos, indigenous communities and agrarian colonies acquire use and enjoyment rights only.

At this point we will focus our attention on the ejidos and the process of converting their social property into Private Property.

Thanks to reforms to the Agrarian Law made in 1992, ejido members can now acquire ownership to the land they hold via PROCEDE (procedure for ejido rights certification) and DOMINIO PLENO (full ownership) procedures. They can then transfer it to any third party, including foreigners.

PROCEDE- CERTIFICATION OF EJIDO RIGHTS

In 1992, due to generalized conflicts existing within the ejidos regarding tenancy of land, the government recognized the need to regularize and give certainty to the tenancy of the land already ‘granted’ to ejidos. It therefore decided to stop granting more land to ejidos. Due to this circumstance a process called PROCEDE (Procedimiento de Certificacion de Derechos Ejidales / Procedure for Certification of Ejido Rights) was created under the current Agrarian Law.

By means of PROCEDE each class of ejido land is surveyed, numbered and assigned to each ejido member on an individual basis via ‘titles’ or ‘certificates’.

Prior to 1992 ejido members only acquired rights to use and enjoy the land, and were unable to transfer their rights to a third party as they did not ‘own’ the property. Through PROCEDE, among other things, ejido members are now able to:

i) Assign their rights to parcels between members of ejido;

ii) Inherit their ejido rights;

iii) Enter into long term (30 years, renewable) association agreements with third parties to exploit their parcels and common use land; and

iv) Acquire full ownership and title to solares (lots) and transfer them to any third party including foreigners, without restrictions.

For the above, PROCEDE is the process to certify ejido rights by means of which the ejido land is surveyed, classified (solares, parcels and common use land) and assigned to ejido members.

CLASES OF EJIDO LAND

PROCEDE classifies ejido land in the 3 following manners:

i) Parcels.- Areas assigned for individual use and enjoyment. The rights to this type of land are assigned individually to each ejido member and are subject to be assigned among ejido members or subject to joint venture agreements; and can be converted into private property via the DOMINIO PLENO procedure.

ii) Common use land.- Areas that belongs to all or some ejido members ‘in common’.

iii) Solares.- These are the urban area lots granted to each ejido member. Solares are granted through ‘Property Titles’ and the ejido members acquire full ownership and are able to transfer them to any third party without restriction (including foreign individuals and entities) as they are the ‘owners’. Solares do not comprise a classification of ejido land by themselves; actually they belong to a class called “Human Settlement Land”, which is the urbanized area within an ejido that guarantees the community coexistence; i.e. schools, areas reserved to community works and public services, etc.

This land, with the exception of solares, is not sellable or subject to embargo, prescription or lien.

Ejido members only acquire use and enjoyment rights to parcels and common use land, which are recognized or supported by ‘certificates’. However, these certificates are not ‘property titles’ and they can only be transferred to other ejido members at this point.

DOMINIO PLENO-(FULL OWNERSHIP)- CONVERSION OF EJIDO LAND TO PRIVATE PROPERTY

In order to convert ejido ‘parcels’ into private property, the ejido members should apply for the ‘dominio pleno’ (full ownership) to the parcels they were assigned once the PROCEDE is complete. This will provide them with a property title that can be transferred to any third person, including foreign individuals or entities, and that accredits the ownership over such land.

Only members of ejidos in which the ‘majority’ of parcels have been assigned via PROCEDE can acquire DOMINIO PLENO over their land. By means of this procedure, the ‘certificados parcelarios’ are cancelled and substituted by ‘property titles’ that attest to the full ownership over such land.

The parcels converted to private properties by following the ‘dominio pleno’ procedure are totally sellable. However, the first sale is subject to “right of first refusal” that is given to the ejido representatives (comisariado ejidal), 30 days prior the sale, in writing and before a notary and two witnesses. If this notification is not made the sale can be nullified.

None of these procedures, PROCEDE or DOMINIO PLENO are automatic; the ejido must invoke and carry out all procedures and formalities of law related and together with the respective agrarian authorities to complete them, which in some cases take years to complete.

CONCLUSIONS

According to most recent statistics published by the agrarian authorities, 52% of Mexican territory is comprised of social property, 40% of private property and 8% of public property.

In addition to the above, an important amount of social property belongs to ejidos that are located in the coastal areas, which certainly increases the interest of real estate and tourism business investors in this type of land. For all of the above, in order to determine how realistic and reasonable acquiring ejido land in Mexico is for you, the following premises are to be considered:

i) Solares are sellable to any third party, including foreign individuals or entities, as the ejido members are the owners and ‘title holders’.

ii) Parcels are not sellable or subject to fractioning or subdivision if they are not converted to private property, by means of PROCEDE and DOMINIO PLENO.

iii) Rights to parcels not converted into private property can be assigned only between ejido members of the same ejido and the assignment is subject to various formalities.

iv) All assignments of rights to parcels must be recorded before the National Agrarian Registry (RAN) and the existing parcel certificate has to be cancelled in order for a new one to be issued in favor of the new ‘certificate’ holder.

v) No Mexican or foreign entity or foreign individual can become an ejido member.

vi) Parcels converted into private property are sellable, but the first sale is subject to the notification of ‘right of first refusal’. If this notification is not made the sale can be nullified.

vii) Parcels and common use land can be subject to long term (30 years, renewable) agreements (lease, use and usufruct, joint venture).

viii) Common use and human settlement land (except for solares) are not sellable or subject to conversion into private property.

In dealing with an ejido the first thing that is recommended is to do the necessary background research of the ejido to determine when it was created, if it has entered PROCEDE and DOMINIO PLENO and where it lies in these procedures. Once the above information is obtained the different scenarios available for acquiring the land can be explored.

I will be glad to clarify any question you have regarding the above or to assist you if you are interested in acquiring ejido land in Mexico.

Sincerely,

Ana Lilia Lozano

2008. All right reserved.

Tel:  01 (755) 555 0400 or 554 7957
Fax:  01 (755) 554 2035

alozano@mexicolaw.com.mx
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From the Vallarta Tribune
4 August 2007

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By Analilia Lozano, 2007, Connell & Associates

Dear Clients and Friends,

The following information is of interest to all owners of beachfront lots.

Recently the environmental authorities have partially released an official and general survey of all Federal Maritime Zones that border the coastal areas of this State of Guerrero. This official survey is only being carried out in the state of Guerrero. It describes the areas known as “Terrenos Ganados al Mar” or Land Gained from the Sea that exist between Federal Maritime Zones and beachfront properties.

This survey, among other things, intends to establish an official parameter in the elaboration of any individual Federal Maritime Zone or Land Gained from the Sea survey that is used to apply for concessions over such areas.

Most of our clients know what the Federal Maritime Zone is and are aware of the process of acquiring the concession rights of the Federal Maritime Zone that is adjacent to their beachfront lots. However, most of them are uncertain about the nature of this Land Gained from the Sea and if these lands can be ‘acquired’ in any form. The purpose of this message is to briefly describe what Land Gained from the Sea is and how it can be acquired.

The Federal Maritime Zone is the 20-meter-wide strip of firm and passable land that borders beaches or natural deposits of marine water. As mentioned before, the Land Gained from the Sea is a fraction of land that may exist between such Federal Maritime Zone and the adjacent private property (beach front lot).

Both Federal Maritime Zone and Land Gained from the Sea are considered public property, which means that the Government is the owner. While the Federal Maritime Zone usage can only be ‘acquired’ through a concession by means of which the licensee only acquires rights to ‘use and enjoy’ such Federal Maritime Zone in an exclusive manner, the Land Gained from the Sea can be ‘acquired’ either through a concession or public sale (auction), giving the purchaser direct title over such land and converting it into private property. No further fee or tax should be payable to the Government after the price for the (public) sale is paid. The price payable for the sale will be estimated based on an official appraisal.

The process of acquiring the concession over Land Gained from the Sea is similar to the process of acquiring a Federal Maritime Zone concession. The process of acquiring the Land Gained from the Sea via public auction could certainly represent a larger and more annoying process. However, the outcome is that this land will be converted into private property and for that reason will be totally sellable. This process has several phases which must be carried out correctly. This process does take time, and we estimate that it could run as long as 2 years to complete.

An important note to consider is that the owners of lots that have acquired the concession title over the adjacent Federal Maritime Zone have the right of preference for acquiring adjacent Land Gained from the Sea via direct sale, thus completely avoiding a public auction.

Note that not all beachfront lots have gained land from the sea. It is important to check on your particular case before proceeding.

Since the Government has released the surveys for the State of Guerrero, our firm has begun several of these procedures. If you are interested in finding out if you have Land Gained from the Sea, please give us a call.

Please contact me in case you have any question or comment in regards to the above.

Sincerely,

Lic. Ana Lilia Lozano

2007. All rights reserved.

Ana Lilia Lozano

Tel: 01 (755) 555 0400 or 554 7957

Fax: 01 (755) 554 2035

alozano@mexicolaw.com.mx
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Forbes Magazine

By Taylor Antrim

7 April 2005

Back in 1996, Huey Rodeheaver of St. Louis, Missouri , bumped north from the Mexican resort town of Ixtapa in a rented jeep, searching for “pretty beachfront.” He was preparing to sell his telecommunications company for a tidy sum, and wanted a second home to retire to. Puerto Vallarta was too big; Cancún, too young.

About 15 miles north of Ixtapa, he came across Troncones, a village with a few rooms for rent and a little seafood restaurant right on the beach. For $52,500 he bought two side-by-side lots, a total of 10,000 square feet . Then he hired a Mexican architect to build the house of his dreams. Nine years later, at age 58, he has to be dragged up from the beach to speak to us by phone. “It’s been an excellent investment,” he says.

Property values have risen steadily in Troncones-though not yet into the stratosphere. Quarter-acre beachfront lots currently go for $190,000 to $250,000. Local contractors charge about $80 per square foot to build. One businessman from Santa Barbara recently put up a 10,000-square-foot, seven-bedroom home with triple-decker pool and lighted tennis court on little more than an acre of empty beachfront here for $1.6 million, all in. No chance of pulling that off in Malibu .

Troncones isn’t the only small town on Mexico’s Pacific coast with beachfront property for sale, says California-born, Zihuatanejo-based lawyer David Connell , but it’s attracting the most affluent clientele. Why? The tranquil atmosphere, the proximity to the international airport in Ixtapa and the fact that you won’t hear horror stories of nefarious developers or sudden, unexplained government evictions. “There have been lots of changes over the last ten years that have made foreigners more willing to buy down here,” says Connell, the go-to lawyer for real estate transactions in the area. He points out that all coastal property titles must still be held through a bank-administered trust or Mexican corporation, but since NAFTA’s inception, Mexico ’s financial markets have opened up, and Citigroup is now the largest bank in the country. Plus, a handful of U.S. firms are now willing to insure titles in Troncones “ Mexico is very pro-foreign investment right now, says Connell.

Americans have long sought out unspoiled beachfront property in Mexico . But due to a recent Mexican land rush, formerly sleepy coastal villages are no longer all that sleepy. Which is why Troncones, with more than a dozen beachfront lots still unsold id such a find.

Rodeheaver knows this as well as anyone. “My kids always tell me I either have foresight and no money, or money and no foresight,” he says, sighing. “I should have bought the whole damn beach.” For general information on Troncones, visit www.troncones.net; for information on real estate opportunities, contact Dewey McMillin, 011-52-755-553-2812; for legal consulting, contact Connell & Associates, 011-52-755-554-7957, www.mexicolaw.com.mx

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Watch out for the boilerplate trust agreements.

From Vallarta Voice Magazine, April 2002

By David William Connell

Over the years I have been contacted by many foreigners who are frustrated with the fees they have to pay to the bank acting as their trustee. Unfortunately, upon reviewing their trust agreements (escrituras) I have to inform them that when their trust was set up they agreed to pay the fees the bank charges and also authorized the bank to be able to unilaterally modify these fees. By the time people contact me they are already so angry with their bank they want nothing further to do with them. In these cases the only way out is to transfer the property to a new trust, which means paying expensive closing costs and taxes. How do you avoid this? If you have a trust already set up, you may want to renegotiate its terms. If you are just setting up your trust, then you need to watch out for the boilerplate agreements.

The procedure for purchasing property in Mexico is very foreign to what most Americans and Canadians are used to. People who are not familiar with a real estate transaction in Mexico usually try and stay on top of what is going on so that their purchase does not become one of the many horror stories they have heard of. They get wrapped up in the details of “closing” on the property and often fail to really understand the trust agreement that they are entering into with the bank. The foreigner gets wrapped up in checking to see if the title to the property is clear, if the property taxes are paid, if the electrical, phone and water bills have been paid up to date, if they have their finances in order to make a cash purchase, what will their annual expenses be, does the property have any structural, plumbing or electrical problems, can title insurance be acquired and just basically trying to understand a foreign way of transferring title to real property. On top of all this, throw in a foreign language and you have a lot bases to cover to make sure title gets transferred correctly into your name.

Once you get all of the above in order, you move to closing. Documents are signed, payments are made and the parties extend congratulations on the purchase and sale. You have just closed on your new vacation dream home or property, congratulations! Oh but wait, what you have also just done is agreed to the banks boilerplate agreement and this agreement was designed by some very experiences attorneys that work for the bank. As you can imagine, this agreement is written extremely in favor of the bank. This bank now holds title to your property and this boilerplate agreements set down the rules and regulations governing your relationship with your trustee/bank.

I have worked with most of the banks that set up trusts for acquiring property in Mexico restricted zone. Some of the things that you will find in all of their boilerplate agreements are the following:

1.- The bank has the authority to modify, whenever it deems necessary, the annual fees it charges for the administration of your trust. Annual fees are paid either based on a percentage of the value of the property or a fixed dollar amount. If your annual fees are set as a percentage of the value of the property, the bank authorizes itself to re-appraise your property whenever it see fit and adjust your annual fees accordingly. I recommend that you make sure your trust does not use the percentage method to determine the annual administrative fees.

Make sure your annual administration is set in dollars and that it can only increase if 1) You are in agreement, or 2) In accordance with inflation of the United States of America. Many times banks will want to set the fees in dollars and then establish that they can increase in accordance with inflation of Mexico. Do not let them get away with this. If you are using dollars, the inflation should be set to United States inflation. If they want to use the inflation of Mexico, well than they should set the annual administration fees in pesos. Most banks will not want to set fees in pesos because if the pesos devaluates, which it often does, they lose big.

2.- The bank can charges late interest or fines for not paying your administration fees on time. I have seen agreements that charge late interest as high as 3% a month, that is 36% a year!!! What is worse is the bank has no obligation to notify you when payments are due and where they should be paid. Often times you will go to your bank to make your administration payment and the teller or bank manager has no idea what you want to pay or how to do it. This means that you spend your vacation time in banks and on the phone. To avoid this make sure the account information where you have to deposit the fees is clear. Also make sure you know the dates when you have to make payments and most important, make sure that the bank charges NO LATE INTEREST OR FINES unless they notify you fees are overdue and where you can deposit them in order to avoid interest and fines.

3.-The bank will set fees for signing powers of attorney and the sale of the property. These fees usually seem responsible, however what many people don’t see is that the bank has the authority to charge more for what they consider “unusual circumstances”. From my experience it seems that the bank finds “unusual circumstances” in just about every sale of property or power of attorney they have to sign. An example of this was a power of attorney a client of mine recently needed to defend himself against a legal claim made by the environmental protection agency. The trust document said that the bank could charge $ 300 dollars for granting powers of attorney. The bank charged $ 650 dollars and stated that there were “unusual circumstance”. If my client did not pay the $ 650 dollars the bank would not sign the power of attorney and he would loose the legal battle with the environmental protection agency by default. You need to make sure the amounts the bank can charge for signing powers of attorney or the sale of the property are clearly established.

4.- The bank has the authority to determine what fees will be charged for any other types of activities they have to be involved in, such as reviewing documents, authorizing federal zone permits, authorizing mortgages, etc. Do not give this power to the bank. Set a fixed price for reviewing and signing documents other than powers of attorney or the sale of the property. I usually establish a charge of $ 300 dollars.

5.- The bank can refrain from signing documents if fees and fines or late interest are not paid. This type of disposition goes completely against the concept of having a fiduciary or trustee responsibility, however it is in just about every boilerplate agreement and the bank always uses this type of policy. This type of disposition should only be allowed regarding the sale of the property held in trust, other than that, it should be taken out of the agreement.

When you close on a property you do so before a notary. The notary charges fees to set up the trust and have it registered. In almost all cases the notary will use a boilerplate agreement given to him by the bank acting as trustee and his fees do not include negotiating with the bank the necessary modifications to the banks boilerplate agreement. To make modification to the boilerplate, you either need to do it yourself or hire someone to do it for you. Spending a little before you sign the agreement will save you a lot in the future. You may also want to ask the notary what extra fees he will charge you to handle this negotiation (he may not even charge you). Make sure you get in writing the modifications that will be made.

If you have already signed the trust agreement before a notary and are unhappy about what the bank is charging, you need to determine whether negotiating modifications to the existing agreement are feasible. You need to either personally contact the bank or have an attorney contact the bank and determine what needs to be done to modify the agreement. You also need to determine if the cost of the negotiation and modifications will be more than they are worth in the long run. I recommend that you pay an attorney or someone familiar with trusts to contact the bank and determine, 1) The possibility of modifying the trust and 2) An accurate estimate of costs to make the modifications. Make sure you get the estimate in writing and that it covers all costs and fees. Modifications to existing trusts are difficult but not impossible. These modifications need to be dealt with on an individual basis and only after having read and understood the terms of the existing agreement.

The bank has a fiduciary responsibility with you and they charge for these services. Do not let them give you a boilerplate agreement which authorizes them to determine, at their own free will what these fees will be. If you have already signed an agreement which does allow them to charge whatever they see fit, you may want to negotiate a modification and put a stop to increasing fees.

All right reserved 2002

David William Connell

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