Doing Business in Puerto Peņasco

by John and Margaret Fleming

The following scenarios are fictional. Any resemblance to actual persons or events is purely coincidental.

Jim Beam and three of his buddies were drinking in a bar one night and had the brilliant idea of driving their quads across the border and setting up a business in Puerto Peņasco renting them. So one Friday they drove across, parked their vehicles on the beach, and put up a sign saying, "RENTALS, $25/HOUR." Business was a little slow at first, so two of them decided to take a ride down the beach. Unfortunately they had been drinking a lot of beer and were not very steady drivers. They rolled over the quads, putting both the vehicles and themselves out of commission. While they were being treated, Jim rented another quad to a guy on the beach, who took off and never came back. The fourth quad was confiscated because Jim and his friends had no license to do business in Mexico.

Jane and Ted Arvey found what they thought was an excellent bargain on an RV park outside of Puerto Peņasco. The price was right, and the American real estate agent they bought it from assured them that they would have lots of business as soon as the season started. The contract was in Spanish, which they didn't understand, but the agent, who didn't know Spanish either, explained that it was a standard purchase contract granting them title to the property. The season came, but no business. Frustrated, Jane and Ted went to a Mexican lawyer and found out that what they had was only a lease on property that belonged to a Mexican landowner.

Joe Contractor bought a piece of land in Cholla Bay from an old friend just before he died. Actually the friend just signed a quitclaim deed in English and passed it on to Joe. Joe, who was a general contractor in the U.S., decided to build a house on his new property. He loaded up a truck with tools and building materials, but when he got to the border, he found out that he had to pay an impossibly large import duty because he didn't have a corporation or a legal business in Mexico that was permitted to import materials at a lower cost. The customs office refused to let him import the tools because they thought he would be selling them illegally. Later he found out that his friend had never obtained a bank trust on the property, so he had no legal rights of ownership, even though the city sent Joe a bill for 5 years of back taxes that his friend had never paid.

Frida Fry was an excellent cook. Her specialty was Mexican food. In Phoenix she had many friends who were always telling her, "You ought to open a restaurant." Her friend Lucinda owned a large house in Puerto Peņasco, so the two women decided to open a restaurant, even though Frida had never been there. When she arrived, she was a bit disconcerted to find out that there were 9 other restaurants within a few blocks all serving Mexican food. Most of them had liquor licenses, and Frida didn't, but the expense of a liquor license was more than she could afford.

Pete and Sue Newlie bought a lot in a large new subdivision that was being developed in Puerto Peņasco. The company financed the purchase, so they paid 50% down and were making payments of $300 a month. A year later, a job transfer made it necessary for them to sell the lot. When they consulted an agent who was familiar with Mexican real estate, they found out that they had a private contract with the company, which in turn had a private contract with the previous owner. The agent told them that what they had was not readily marketable, because they didn't have recorded ownership, although they still owed over 40% of the price.

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What do the above scenarios have in common? In all of them, Americans trying to do business or buy property in Mexico are making stupid and/or illegal mistakes. Why? Well, there may be a number of reasons, but some of the most common are based on false assumptions, such as the following:

1. It should be possible to go on vacation in Puerto Peņasco and make some money on the side. NOT LIKELY.

2. Mexico has no regulations, so anything is possible. NOT TRUE.

3. Buying property in Mexico is just like buying it in the U.S. There are: licensed real estate agents a Multiple Listing Service title companies to handle escrow state regulation of the real estate industry. NONE OF THE ABOVE.

If you are an American wanting to do business in Mexico, here are some tips for you.

1. When you arrive in Mexico, turn off your vacation attitude and turn on your business brain. You will do better if you aren't distracted by Margaritas and fun.

2. Do a feasibility study (formal, if you can afford it) to see whether your kind of business will meet a local need and whether you can afford the startup costs. Items to consider are:

• demand for the product or service
• proposed location of business
• traffic
• costs
• suppliers
• contacts
• permits needed
• advertising and marketing
• potential return on investment

3. When buying land, do it right. In Puerto Peņasco foreign individuals can purchase residential property with a bank trust. It gives them all the rights of ownership, but the title is held in trust for them by a bank. A Mexican corporation can own property outright but only for business purposes. There are other possible ways to purchase property, but in all cases you should consult a Mexican lawyer beforehand.

4. A Mexican corporation is a Mexican entity, even if the stockholders are all foreigners. There can be as few as two stockholders. To form a corporation requires the services of a notario, a special lawyer appointed by the state. It will cost from $1000 up. Foreigners must get an FM3, a permit they need to work in Mexico. It must be renewed annually. To apply requires certain formalities and documents, such as bank statements, passport or visa, and photos. The corporation must have a physical address, an accountant, a bank account, and proof of financial stability.

The potential for doing business in Puerto Peņasco is excellent. The state and the federal government have opened their arms and invited us to bring in our businesses. But it is important to go slowly, to become informed, to take care, and to comply with all the legal requirements set up by the city of Puerto Peņasco, the state of Sonora, and the government of Mexico.

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