The importance of the recovering Mexican economy cannot be overstated. It unleashes pent-up Mexican demand and makes domestic capital sources available for joint venture development opportunities.
All of this comes at a time when Mexico has made substantial strides to change its Foreign Investment Law, and to a much more limited extent, its legal structure and bureaucracy to encourage and facilitate foreign investment. Foreigners are permitted to own real estate anywhere in Mexico, except in the "forbidden zone" which is anywhere 50 kilometers from the coast or 100 kilometers from its border with a foreign country. Recognizing the depressant this constitutional limitation imposes on foreign investment and the resulting employment for its citizens in this "forbidden zone" which contains many of the country's most attractive tourism sites, Mexico in the 1960s created a statutory trust mechanism (fideicomiso), that allows Mexican banks as trustee to hold title to the Mexican real estate for the benefit of the foreign investor. The main drawback of the trusts has been their cost, with fees to the Mexican trustee averaging 0.25 to 3.0 percent per year, depending on the value of the property in the trust.
Recently, Mexico has changed its laws to permit a Mexican corporation with up to 100 percent foreign ownership to acquire real estate in the "forbidden zone" so long as such real estate is not being acquired for residential purposes. Mexican corporate income taxes are 34 percent; unlike the United States, however, Mexico does not impose double taxation on corporate income, i.e., so long as the corporation pays its taxes, the dividends are not taxed to the shareholders.
The cost of acquisition can be significantly more than a foreign investor may be accustomed to in his or her own country. Notarial fees can be substantial, although they will vary significantly depending on the locale and the willingness of the notary to negotiate. Subject to negotiating, these fees are often split between the buyer and the seller. Although the notarial fees are substantial it should be remembered that the notary in Mexico serves the role of escrow agent and guarantor of title. Despite that the notary is responsible for assuring title, many United States investors and lenders are obtaining title insurance for Mexican properties issued by, or reinsured by, United States title insurance companies. Acquisition costs in Mexico are also inflated by a two percent transfer tax, that is customarily paid by the purchaser, and registration fees, that often run between .25 to 10.0 percent of the appraised value of the property, although Mexico, D.F. has placed a Ps5,045 cap on such registration fees.
For lenders on Mexican real estate, underwriting the credit risk requires considerably more flexibility than what is often required in the United States. Although the traditional means of securing a real estate loan through a recorded mortgage is similar to the procedure in the United States (aside from the cost aspect described above), the differences are encountered in obtaining security interests in related personal property (e.g., FF&E, accounts receivable) and in enforcing the lender's interest in the real estate or the personal property. Mexico's constitution has been interpreted to prohibit the creditors exercising self-help as they are accustomed to doing in the United States; instead, creditors must seek court orders to enforce their interest in real or personal collateral. Even with the best of documentation taking advantage of those aspects of Mexican laws assisting the creditor, if the borrower resists, the process can take more than one year.
The traditional approach is often supplemented with use of a special purpose vehicle to own the property and a pledge of its shares. Once the loan has been made, the shareholders of the pledged shares can authorize the lender in writing to foreclose on those shares in the future without going to court; obtaining such written authorization is a fairly customary procedure in Mexico.
In recent years a new use of the Mexican trust mechanism has come into vogue as a vehicle to reduce the enforcement risk. The real property and personal property are transferred to a Mexican bank as trustee and the grantor-borrower and the beneficiary-lender agree in the trust agreement to the nature and mechanism of remedies (including foreclosure) to be taken by the trustee in the event of a default. This use of the Mexican trust mechanism to avoid having to seek a court order for enforcement has been challenged in court as an evasion of the Constitutional prohibition on self help, but it has generally been upheld. The opportunities in Mexican real estate are numerous and the environment in Mexico is more encouraging than ever. Coordination with experienced cross-border and Mexican counsel can go far to reduce the risks of the differing legal environment in Mexico.