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Overview Of Mexican Real Estate Investments

Author:Mr Carlos Ibarra
Profession:Creel García-Cuéllar y Müggenburg
 
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The Mexican real estate market continues to grow despite the

slowdown of the US economy in the hospitality sector. Foreign

investors continue participating in real estate transactions in

Mexico, as residential complexes, shopping malls and industrial

parks are being built, financed or developed totally or partially

with foreign capital. This article aims to provide a general

overview of the main considerations and legal structures for

investing in real estate in Mexico, in particular, by examining the

following:

Ways to invest.

Tax considerations.

The documents required in various corporate real estate

transactions.

Completion considerations and jurisdiction specific

issues.

Ways to invest

Viable business entities (direct (real estate

acquisition) and indirect (stock acquisition) investment) and

necessary steps for implementation

Although the General Law of Mercantile Companies (Ley

General de Sociedades Mercantiles) contains six different

entity forms, the most commonly used structures are stock companies

(sociedades anónimas) (SAs) and limited liability

companies (sociedades de responsabilidad limitada) (SRLs).

Ventures structured through business trust agreements

(fideicomisos) are also widely used.

The Securities Market Law (Ley del Mercado de Valores)

contains some subclasses of stock companies, such as the investment

promoting stock company (sociedad anónima promotora de

inversión) (SAPI).

Investment structures

The most typical indirect investment vehicle used in Mexico is

the stock corporation, where the liability of the shareholders is

limited to the amount of their contribution to the capital stock,

which is represented by negotiable instruments.

Corporate name. An application must be filed

with the Ministry of Foreign Affairs (Secretaría de

Relaciones Exteriores) (MFA) for authorisation to use a

corporate name.

Capital stock. Under Mexican law, stock

corporations must be incorporated by at least two shareholders with

a minimum capital stock of MXN50,000 (about US$4,860). This type of

entity can be incorporated either as a variable or fixed capital

stock corporation. Variable stock corporations have fewer

formalities for increasing or decreasing the variable portion of

their stock (that is, notarial formalisation or by-law amendments

may not be required).

Shareholders' meeting. This is the supreme

authority of a corporation. Its tasks include passing resolutions

to approve each fiscal year (that is, to approve certain financial

information and other matters) and on various other material issues

(for example, amending the corporation's constitutional

documents, merger or spin-off, and so on).

Administration. A board of directors or a sole

administrator can manage a Mexican company. Foreign national

individuals residing in Mexico and deriving income from a Mexican

source must have the appropriate visa from the National Institute

of Migration (Instituto Nacional de Migración). If

provided for by the relevant company by-laws, resolutions by the

board of directors can also be passed and implemented by a

unanimous written resolution, adopted without a meeting.

Statutory auditor. The statutory auditor

(comisario) (usually appointed from an external auditing

firm) is in charge of the supervision of the corporation and also

reviews and provides a report on the financial information that the

board of directors must submit annually to the shareholders'

meeting.

Attorneys-in-fact. Legal acts by a Mexican

company must be carried out by an attorney-in-fact, who is

authorised to do so through a power of attorney. There are four

types of power of attorney, for:

Lawsuits and collections.

Acts of administration.

Acts of ownership.

Subscribing and guaranteeing payment of negotiable

instruments.

Powers of attorney can be granted to one or several individuals,

to act jointly or separately, and can also be limited as special

powers of attorney depending on the level of authority to be

granted.

Shares of stock. The capital stock is

represented by negotiable instruments (shares) which are freely

transferable, unless limited in the company's by-laws.

Generally, the above apply to SRLs (except for the minimum

capital stock, which is MXN3,000 (about US$292)). In addition,

management of the company can be carried out by a board of managers

or a sole manager (instead of directors). Instead of shareholders,

SRLs have members (no more than 50). Unlike corporations with

endorsable stock certificates, the capital stock of an SRL is

evidenced through membership interests that are recorded in the

relevant corporate book. The SRL is a more closed entity than a

stock company as the entrance of new members may require the

consent of existing members. Some jurisdictions (such as the US)

view SRLs as pass-through entities for tax purposes. SRLs cannot be

publicly listed.

The incorporation of a company (articles of incorporation and

by-laws) must be formalised in a public deed before a notary public

and then filed with the Public Registry of Commerce (PRC). This

public deed (first notarial counterpart or primer

testimonio), along with the PRC registration, evidence the

legal existence of the entity. This document is also used for other

legal steps, such as registering with the Tax Payers'

Registry.

Ownership of rustic lands by business organisations for

agrarian, cattle breeding or forestry purposes is subject to

compliance with several requirements, in particular, that:

Its corporate stock must designate a special class of T-series

shares ("T" standing for "tierra",

meaning land), which are equivalent to, and representative of, the

capital contributed in agrarian, cattle breeding or forestry lands.

These shares will be ordinary, although, if the company is

dissolved, T-series shareholders will receive land as

consideration.

Foreign nationals must not hold more than 49% of T-series

shares.

Investment restrictions

The Mexican Constitution sets out that foreign nationals cannot

acquire direct ownership of real estate within the Restricted Zone

(this is the band of land that extends out 50 kilometres along the

beaches and 100 kilometres along the borders).

Direct acquisition. To acquire title to real

estate outside the Restricted Zone, an investor must:

File a notice for a permit with the MFA.

Enter into a sale and purchase agreement with the seller before

a notary public.

Register the first authentic copy of the public deed with the

relevant Public Registry of Property (PRP).

Trust agreement (fideicomiso).

Ownership rights over real estate property located inside the

Restricted Zone by foreign nationals can only be achieved through

the use of a trust agreement. A Mexican bank is the fiduciary

trustee of the property and the foreign individual or entity has

the right to use and enjoy the property as a trust beneficiary (the

parties in an ordinary trust agreement are the settlor(s)

(fideicomitente(s)), the trustee (fiduciario) and

the trust beneficiary(ies) (fideicomisario(s)). Only

Mexican banks (and a few other entities in the Mexican financial

sector) can act as trustees. The use and enjoyment of the property

are subject to the terms and limits set out in the authorisation

granted by the MFA. Based on this, the trust can last up to 50

years, renewable according to the law. The creation of a real

estate trust agreement requires formalisation by a notary

public.

In its capacity as trust beneficiary, the foreign national can

instruct the Mexican bank to encumber or transfer title to the

property to a person appointed by it and then receive the proceeds

of the sale of the property.

Additionally, for properties that are not used for residential

purposes, Mexican companies that are wholly owned by foreign

nationals can purchase real estate located within the Restricted

Zone.

Property held under a real estate trust agreement can be

transferred by either:

Transferring the trust beneficiary rights.

Executing and extinguishing the trust agreement by instructing

the trustee to transfer the principal to another party. This party

can be an individual, an entity with rights to acquire land in the

Restricted Zone, or even a different trust estate.

A trust can be structured as revocable or irrevocable depending

on the underlying transaction. For example, in an outright sale

through a trust, the settlor/seller holds no interest in the

property once it passes to the trust estate.

Revocable trust agreements are used for purchases involving

payment in instalments, conditional sales or financing, and also

with transactions involving conditions precedent such as:

Obtaining finance.

Title insurance.

Governmental authorisations (such as competition).

Zoning.

Even though by statute the trustee is subject to certain

fiduciary duties, ordinarily the trust agreement contains indemnity

provisions in favour of the trustee (depending on the

characteristics...

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