Wednesday, January 19, 2005
Trust vs. Lease
This question always comes up often with people new to the world of Mexican coastal real estate. It also comes up among seasoned veterans in the RV and mobile home communities. One comment we have heard is: "Trust -- lease; it's all the same in Mexico". The fact is, nothing could be further from the truth!
What's the difference? The difference is in the ownership of the "asset value" of the underlying real estate. The underlying real estate is the land plus all permanently attached improvements. The question is: Who ownes the "asset value"?
Under the Trust situation: When you purchase you become the "beneficiary" of the trust with a Mexican National Bank as the "trustee" in a fiduciary capacity. No one HAS EVER lost a property property placed in a Mexican Land Trust! As the beneficiary of the trust, you receive ownership of 100% of the asset value of the real property along with all of the responsibilities of real property ownership. When you purchase you can assume an existing trust or set up a new one. A new trust runs for a period of 50 years.
KEY POINT: ALL of these trusts are renewable such that you or your heirs can own 100% of the asset of the real property for as long as you want! You can buy it, sell it, will it or donate it at any time. You can improve it all you want subject only to local zoning regulations. These zoning regulations ca be either municipal, or agreed to by the members of an owner's association. (Since we are guests in a foreign countrym it is very important that we respect these regulations whether we agree with them or not!).
Under the Lease situation: The asset value is owned by the landlord. The responsibilities of property ownership are negotiable. Again, the asset value includes the land plus all permanently attached improvements regardless of who paid for them. Technically you own the right to the property for the duration of your lease as long as your lease payments are current, HOWEVER, at the end of the lease, unlike the trust, you own NOTHING. Under this arrangement, as we have seen in San Carlos in the recent past, the leases can be broken and the lessees run off.
Information from Richard Baca, Sunshine Realty, San Carlos Sonora, Mexico 85506. For more information e-mail us at vivasancarlos@gmail.com
What's the difference? The difference is in the ownership of the "asset value" of the underlying real estate. The underlying real estate is the land plus all permanently attached improvements. The question is: Who ownes the "asset value"?
Under the Trust situation: When you purchase you become the "beneficiary" of the trust with a Mexican National Bank as the "trustee" in a fiduciary capacity. No one HAS EVER lost a property property placed in a Mexican Land Trust! As the beneficiary of the trust, you receive ownership of 100% of the asset value of the real property along with all of the responsibilities of real property ownership. When you purchase you can assume an existing trust or set up a new one. A new trust runs for a period of 50 years.
KEY POINT: ALL of these trusts are renewable such that you or your heirs can own 100% of the asset of the real property for as long as you want! You can buy it, sell it, will it or donate it at any time. You can improve it all you want subject only to local zoning regulations. These zoning regulations ca be either municipal, or agreed to by the members of an owner's association. (Since we are guests in a foreign countrym it is very important that we respect these regulations whether we agree with them or not!).
Under the Lease situation: The asset value is owned by the landlord. The responsibilities of property ownership are negotiable. Again, the asset value includes the land plus all permanently attached improvements regardless of who paid for them. Technically you own the right to the property for the duration of your lease as long as your lease payments are current, HOWEVER, at the end of the lease, unlike the trust, you own NOTHING. Under this arrangement, as we have seen in San Carlos in the recent past, the leases can be broken and the lessees run off.
Information from Richard Baca, Sunshine Realty, San Carlos Sonora, Mexico 85506. For more information e-mail us at vivasancarlos@gmail.com
Monday, January 10, 2005
Foreign Ownership of Mexican Property
If you’ve been considering purchasing a vacation or retirement property in Mexico you’ll be joining literally thousands who have made the same happy choice, but there are a few things you’ll need to know concerning the legal and financial issues of your acquisition.
Many people believe that foreigners cannot own land in Mexico. This is not true. Let us clarify these common misconceptions. Article 27 of the Mexican Constitution states that no foreigner may own any Mexican Property within 100 km of the border or within 50 km of the coast. At the time of the Mexican revolution, most of this "Restricted Zone" was controlled by foreigners, hence the constitutional concerns.
Naturally, this "Restricted Zone" includes the largest portion of current Mexican resort cities. The Mexican government, however, does allow indirect acquisition of properties within the "Restricted Zone" through the established system of "Trusts" (Fideicomisos) with Mexican Banks. This is the only legal and correct way for a foreigner to purchase a residence in the "Restricted Zone".
This is how the process works:
A Mexican Bank will acquire the property for you as the owner in Trust. All rights to, and use of the property is yours as the purchaser for 50 years, and is renewable. The purchaser’s rights may be transferred to a third party, and your heirs named as "Beneficiaries". All Real Estate transactions in Mexico are processed through a "Notario Publico", who is an Attorney appointed by the government.
The Notario’s duties are to
- make a title search through the Public Registry, to certify the property free of any liens or encumbrances (Libertad de Grabamen);
- verify that there are no unpaid bills or taxes due to the Treasury,
- and conduct an official appraisal, so the property can be transferred properly.
There are registration and transfer fees to the government and possibly Capital Gains taxes owed by the seller, which are all due and payable at the time of transfer. The Bank also has a set up fee for a new trust or a transfer fee for an existing trust and an annual fee to maintain the trust. These fees will vary slightly depending on the bank. Overall the "closing costs" will be slightly more than similar transactions north of the border, and property taxes less.
It is not uncommon for sellers to require a 20-30% deposit with a written offer, and the full cost upon signing the official deed (Escritura). Financing of property is rare, so most purchases are for cash.
We’ve all heard the horror stories of nightmares in Mexican Real Estate purchases - these can be traced to 3 issues;
1. Trying to circumvent the "Trust" system, to save some fees (such as putting the property in the name of a Mexican "friend").
2. The leasing of "Ejido" land (Government land for agrarian use).
In both cases the old saying "Buyer Beware" is appropriate advice.
3. Failure to properly sever past owner liabilities (labor and construction issues).
Future Growth and Development
The San Carlos area is not part of the destinations promoted by FONATUR, such as Cancun, Ixtapa and Los Cabos, although the national tourism entity is backing a $1.7 billion plan -called Escalera Nautica- renamed to "Sea of Cortez Project", to build 22 marinas along the Sea of Cortez in an attempt to stimulate tourism and development in the area. FONATUR projects that by 2014 it can attract enough investment to build 10,300 rooms and attract 5.3 million tourists annually, up from 200,000 today, while creating 53,000 jobs.
Information provided by John Barttlet from Caballero Group Realty. For more information e-mail us at vivasancarlos@gmail.com
Many people believe that foreigners cannot own land in Mexico. This is not true. Let us clarify these common misconceptions. Article 27 of the Mexican Constitution states that no foreigner may own any Mexican Property within 100 km of the border or within 50 km of the coast. At the time of the Mexican revolution, most of this "Restricted Zone" was controlled by foreigners, hence the constitutional concerns.
Naturally, this "Restricted Zone" includes the largest portion of current Mexican resort cities. The Mexican government, however, does allow indirect acquisition of properties within the "Restricted Zone" through the established system of "Trusts" (Fideicomisos) with Mexican Banks. This is the only legal and correct way for a foreigner to purchase a residence in the "Restricted Zone".
This is how the process works:
A Mexican Bank will acquire the property for you as the owner in Trust. All rights to, and use of the property is yours as the purchaser for 50 years, and is renewable. The purchaser’s rights may be transferred to a third party, and your heirs named as "Beneficiaries". All Real Estate transactions in Mexico are processed through a "Notario Publico", who is an Attorney appointed by the government.
The Notario’s duties are to
- make a title search through the Public Registry, to certify the property free of any liens or encumbrances (Libertad de Grabamen);
- verify that there are no unpaid bills or taxes due to the Treasury,
- and conduct an official appraisal, so the property can be transferred properly.
There are registration and transfer fees to the government and possibly Capital Gains taxes owed by the seller, which are all due and payable at the time of transfer. The Bank also has a set up fee for a new trust or a transfer fee for an existing trust and an annual fee to maintain the trust. These fees will vary slightly depending on the bank. Overall the "closing costs" will be slightly more than similar transactions north of the border, and property taxes less.
It is not uncommon for sellers to require a 20-30% deposit with a written offer, and the full cost upon signing the official deed (Escritura). Financing of property is rare, so most purchases are for cash.
We’ve all heard the horror stories of nightmares in Mexican Real Estate purchases - these can be traced to 3 issues;
1. Trying to circumvent the "Trust" system, to save some fees (such as putting the property in the name of a Mexican "friend").
2. The leasing of "Ejido" land (Government land for agrarian use).
In both cases the old saying "Buyer Beware" is appropriate advice.
3. Failure to properly sever past owner liabilities (labor and construction issues).
Future Growth and Development
The San Carlos area is not part of the destinations promoted by FONATUR, such as Cancun, Ixtapa and Los Cabos, although the national tourism entity is backing a $1.7 billion plan -called Escalera Nautica- renamed to "Sea of Cortez Project", to build 22 marinas along the Sea of Cortez in an attempt to stimulate tourism and development in the area. FONATUR projects that by 2014 it can attract enough investment to build 10,300 rooms and attract 5.3 million tourists annually, up from 200,000 today, while creating 53,000 jobs.
Information provided by John Barttlet from Caballero Group Realty. For more information e-mail us at vivasancarlos@gmail.com
