For
Spanish The Mexican Bank Trust: Its History and How it Works
by Lic. José Francisco Campos García Zepeda
Director of Permits, Article 27 Constitutional
Secretary of Foreign Relations
Used and translated by permission. Linda Neil, Translator
Translator’s Note: The following was presented at the International Conference at the AMPI (Mexican Association of Real Estate Professionals) held in Leon, Guanajuato in September 2000. Because of the Punta Banda problems and continual loss and investor disillusionment, often due to a misunderstanding of Mexican laws, it is absolutely necessary for our potential investors to understand the basic law regarding acquisition of Mexican properties and then to seek the guidance of a professional in the field in order to protect the investor’s interests and investments.
The following article is clear and concise, it is MUST reading for any non-Mexican considering a real estate investment in Mexico. LN
Lic. José Francisco Campos García Zepeda
Director of Permits, Constitutional Article 27
Secretary of Foreign Relations
Presentation made at AMPI National Congress, Leon, Guanajuato, September, 2000
It is a pleasure to be with you today as a representative of the Foreign Relations Secretary and to make a few comments about the Mexican trust, the fideicomiso, which is the form and manner in which physical or legal foreign persons are able to hold real properties within the restricted zone of our country. First, before entering into the theme in detail, I would like to make a brief analogy regarding real rights of property and its union with the trust. In accordance with Article 27 of the Constitution the ability to acquire lands and national waters rests with only native or naturalized Mexicans or through companies created under Mexican law.
In spite of being the primary principle of property rights, this constitutional precept permits the Mexican State to concede these same property rights to foreigners, providing they agree before the Secretary of Foreign Relations, to be considered as nationals regarding these assets and not to invoke the protection of their governments in these matters. The penalty for violation of this provision is forfeiture of the subject property to the nation. This agreement is the first limitation for any foreigner acquiring property in this country. But it becomes more rigid in the strip of 100 kilometers along the borders and 50 kilometers along the beaches for the express prohibition in our magna carta of acquisition of these lands by foreign individuals or legal entities.
This prohibition which is still in effect today, is based upon happenings in the middle of the nineteenth century when we lost huge amounts of land that were in the hands of the United States invaders. Our legislators of that epoch then had to find a way to impede further loss of our territory by prohibiting foreign acquisition of large amounts of land along the borders and the coasts, thereby creating what is now known as the restricted zone.
In spite of the above, in the twentieth century, in the realization that we could not develop our country with only national capital, that foreign investment was required, the legal figure was developed, without violating the constitution, permitting use of foreign capital through the trust.
Thus, the use of the trust in the restricted zone contemplates two great advantages:
1. It permits the entry of foreign capital, generating with it sources of work and development of basic infrastructure which brings with it social and economic benefit to the region where it takes place; and
2. It impedes the foreigner from holding and owning real estate in the zone because the holder of the raw land is the trust institution which must request a permit from the Secretary of Foreign Relations, giving strict compliance with the constitutional prohibition.
In the trust we have the presence of three elements: The Trust Settlor (Fideicomitente) which may be a physical or legal Mexican person, who is the owner of the property which is to be placed in trust; the Trustee (Fiduciario) which, by law may be only a credit institution and which holds the raw real estate and the Beneficiaries (Fideicomisarios) the legal or physical foreign persons who are the beneficiaries of the trust who obtain the use and benefit of same.
It is important to note before proceeding further, that the law regulating the trust in the restricted zone is found in the Foreign Investment Law, published in the Official Diary (Diario Oficial) of the country on December 27, 1993, in the Regulations of the Foreign Investment Law and National Regulations for Foreign Investments published in this same organ on September 8, 1998.
The first law referred to clearly establishes the requirement in Article 11, for a permit from the Secretary of Foreign Relations so that credit institutions may acquire, as trustees, rights in real property located in the restricted zone when the object of the trust is to permit the usage of said assets without constituting real rights in them and when the beneficiaries or foreign legal or physical persons or Mexican companies with the clause to admit foreigners who wish to use, in this case, said properties for residential purposes.
It is important to explain that use of the properties located in the restricted zone includes, in Article 12 of the same law, the right to receive rents through the exploitation of the assets through third parties or through the same trust institution.
The application for a permit to constitute a trust which is granted by the Secretary of Foreign Relations begins with the application presented to the banking institution, through its trust delegate which must contain, in conformance with Article 9 of the Regulations to the Law, the following elements:
1. Name and Nationality of the Trust Settlors (Fideicomitentes)
2. Name of the Credit Institution which shall act as Trustee (Fiduciario)
3. Name and Nationality of the Beneficiary (Fideicomisario) and, if applicable, the Beneficiaries in second place and the Substitute Beneficiaries.
4. The term of the Trust
5. The use of the property
6. Description, location and surface area of the real property to be placed in trust, and the distance of the real property from the Federal Maritime Zone or, though not mentioned in the article, the distance from the international border.
The measurements and boundaries for the property to be placed in trust must be attached to the application for the permit.
It is important to mention that the time that the law gives to the Secretary to resolve regarding the applications presented is five business days for applications presented in the main office and thirty business days for applications presented in one of the state offices of the Foreign Relations Secretary. If no resolution is made within this time period it is understood as approved.
The current cost for the permit granted by the Secretary of Foreign Relations is $6,780.00 pesos, or if the permit is amplified or changed after authorization, the cost is $3,050.00 pesos, in conformance with Article 25, Section V, Parts A and B of the Federal Rights Law.
In continuation, permit me to outline the conditions contained in the permit granted by the Secretary of Foreign Relations, in conformance with the Regulations of the Foreign Investment Law:
1. That the public instrument establish that the foreign beneficiaries agree to be considered as Mexicans regarding their rights as beneficiaries and shall not invoke the protection of their governments and, in the event of doing so, shall lose their rights in the property to the nation;
2. That during the term of the trust, the Trustee institution shall conserve the title of the real property placed in trust, without conceding real property rights in same to the beneficiaries;
3. That the Trustee institution shall present to the Secretary of Foreign Relations not later than April each year a report on the trusts authorized, those in which a substitution of trustee was made, as well as designation of substitution of beneficiaries or assignment of trust rights in favor of physical or legal foreign persons or Mexican companies with a clause permitting the inclusion of foreigners, in any properties acquired for residential purposes.
4. That the beneficiaries are obligated to inform the trust institution of compliance with the objectives of the trust and the trustee is obligated to inform the Secretary of Foreign Relations of this, when required, if reasons exist to suspect non-compliance with the conditions under which the permit was granted. In the event of non-compliance or violation of any of the conditions established in the corresponding permit, the trustee institution shall have a term of sixty business days to make changes or corrections, from the date of notification by the Foreign Relations Secretariat of said irregularities. If not complied with, the terms of Section 7, explained further ahead, shall be applied;
5. That the trust institution obtain permission from the Secretary of Foreign Relations when the trust is enlarged or the goals modified,
6. That the trustee institution is obligated to notify the Secretary of Foreign Relations within forty business days after a trust is extinguished;
7. That the parties to the contract promise to extinguish the trust upon request from the Secretary of Foreign Relations within a period of one hundred eighty days from the date of notification of this requirement, in the event of non-compliance or violation of any of the conditions established in the corresponding permit. The permits that are granted by Secretary of Foreign Relations do not exempt compliance with plans and programs of urban development and ecological order of the area where the real property is located, nor the criteria of feasibility that may be determined by federal, state or municipal authorities.
As to the term of the trust and its extensions, pursuant to Article 13 of the Law and 12 of its Regulations, the trust is authorized for a maximum period of fifty years and can be extended upon request by the interested parties, through the trust institutions within ninety business days prior to expiration of the contract, provided that all conditions of the permit have been complied with.
Compliance with these conditions may be verified by the Secretary of Foreign Relations at any time, through visits made directly to the real property, in conformance with the second paragraph of the mentioned article 13 of the Law.
For you as professional real estate agents it is important to always consider in the event of the Trust Settlor (Fideicomitente), and especially in the restricted zone for those non-residential uses enumerated in the five sections of Article 5 of the Regulations to the Law, that there is compliance in a timely manner with that established in Article 10, Section 1 of the Foreign Investment Law regarding the need to present the notification of acquisition of real property by a Mexican company with the clause of admission of foreigners, within sixty business days following the act of acquisition. Failure to do so, the company may be penalized as provided in Article 38, Section VI of the Law with a penalty of 100 to 1,000 minimum general salaries in the Federal District at the time of determining the oversight.
The determination and imposition of monetary penalties by the Secretary of Foreign Relations has been done through the right of audience with the affected party and is determined taking into consideration the nature and seriousness of the violation, the economic capacity of the violator, the time that has lapsed between the date in which he should have complied and actual compliance as well as the total value of the operation through which the property was acquired.
I have deliberately left until the end of this talk an outline of the criteria that the Secretary of Foreign Relations follows to grant permits which, under Article 11 of the Foreign Investment Law, must take into consideration the economic and social benefit that these operations imply for the country. It is for this reason that the department insists upon commitment letters from foreign investors for properties of 2,000 square meters or greater. A minimum investment must be made of $ 250,000. U.S. dlls. within a term of twenty four months, from the date of the permit, which is increased $50,000. U.S. dlls. for each additional 1,000 square meters of land.
It should be understood that this criteria is not rigid. Taking into consideration the place where the investment is to be made, as well as the amount and the time to do it, the amounts mentioned above can be reduced.
Thank you for your attention and I wish you great success in the rest of this significant event. Thank you.
Publisher’s Note: The translator, Linda Neil, is a Member of the National Advisory Council for AMPI, the Mexican Real Estate Association. She is also the Founder of and Advisor for The Settlement Company, Mexico’s original escrow company which processes transfers of titles and performs multiple services related to Mexico properties. For further information: 011-521-142-2006 Fax: 011-521-142-2016, e-mail: info@settlement-co.com, and website: www: settlement-co.com
