Legal Process to Purchase

THE LAND TRUST

Land trusts: Perhaps the most widely known use of a Mexican trust, especially amongst Americans and other non-Mexicans, is the real estate or land trust for the restricted zone for acquiring residential property.

Under Mexican law, foreign persons and entities may not own land that is located within the restricted zone, which is an area of 100 kilometers from either border (north or south) and 50 kilometers from the coastline. These types of trusts are commonly used by foreigners purchasing residential property in tourist destinations like Los Cabos, Riviera Maya, Puerto Vallarta and Acapulco, to name a few. These trusts can be for a term of 50 years and can be renewed or extended. The formation process usually takes place by having the seller/developer act as the trustor and by irrevocably transferring title to the property, to the trustee. The trustee then holds the property for the benefit of the beneficiary. The beneficiary will normally have the unrestricted right to enjoy and use the property, as well the benefit of any rental and sale proceeds, if and when the trusts assets are sold, provided the trust allows it. Before the land trust can be created, the trustee, a Mexican bank, applies for a trust permit with Mexico’s Foreign Relations Department (FRD). The application process is relatively simple. Information on the parties and the property is required as part of the application process, together with the payment of an application fee. Under statutory provisions, the FRD has 5 business days to respond all applications, although the term extends to 30 days if the filing takes place at any of the FRD offices located outside Mexico City. Upon the issuance of the trust permit, the parties are then free to formalize the creation of the trust by transferring the real property in front of a Mexican Notary Public. Like any other real estate transaction, the creation of a land trust will also require the standard due diligence on the property, appraisals, inspections, title searches, the obtaining of certificates of no-liens, certificates of no-debt (on property taxes) and any other customary or statutory requirement under local and state laws for closing on real estate. Another important feature of land trusts is that they allow the beneficiary to appoint a “substitute beneficiary” at the time of the trust’s creation. Upon the beneficiary’s death, the substitute beneficiary takes over, as the trust’s beneficiary, therefore saving considerable time and money from an otherwise complex probate proceeding in Mexico. Although the formation process for a land trust may seem relatively easy, and one where little effort is needed, it is advised that beneficiaries negotiate as much freedom and flexibility relative to the assets in trust, and that such terms be clear in the trust itself. Otherwise, the involvement of the trustee will be required, and its is well known that banks can be slow and bureaucratic. Generally speaking, beneficiaries will have the ability to use, and enjoy the property.

However when it comes to renting, managing or making improvements, securing permits, federal zone concessions, and the like, or other more specific actions, unless its negotiated and included in the trust, beneficiaries may find out that they require the participation of the trustee. 4

Trustees usually grant powers of attorney to beneficiaries to perform such actions, but the granting process takes time, and money, although bank fees are mostly reasonable. Some banks are more flexible than others when it comes to granting powers of attorney and their overall response time, so its important to choose wisely who the trustee will be when the trust is set up. To sum it up, the Mexican land trust is as safe as the deed to your home in the US or Canada. Other types of land trusts, including non-business trusts that create certain tax advantages for US companies: Aside from the land trust used by foreigners to acquire residential properties within the restricted zone, there are other types or variations of the land trust. Developers whether acting alone or with other partners in joint ventures, may use land trusts as part of their overall business structure. These land trusts may be required either to segregate ownership of land from a business operation, to satisfy lenders requirements, or to facilitate the ongoing operations with joint venture partners. Foreign companies investing in land developments throughout Mexico, and not just in the restricted zone, have favored the use of trusts because of certain tax and fiscal advantages. For instance, a US limited liability company may decide to use a trust and become the beneficial owner and lessor of real property located in Mexico. The US company will apply for its tax id in Mexico, and elect to pay taxes on a net basis as provided under the US-Mexico tax treaty. The trust will also provide that the beneficiary will be entitled sign lease agreements relative to the assets in trust. These non-business land trusts also allow the beneficiary to enter into construction, management, development and marketing agreements with third parties, further enhancing the investment structure and control of the development. In addition to any tax advantages that these companies receive in the US, some of the advantages in Mexico include that the US company will not have pay withholding taxes on interest payments, and will be able to take depreciation on 100% of the value of improvements built on the site.