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The Mexican Constitution
and modifications that affect foreign
Real Estate Investments
- By Thomas L. Lloyd
As more and more Americans, Canadians and Europeans are purchasing and investing into Mexican properties, a greater understanding and knowledge of the land acquisition regulations are greatly recommended. You should understand the legal requirements necessary to secure your rights in the property and know how to properly carry out the transaction.
The Mexican Constitution is the legal foundation for all real estate laws and regulations that govern all transactions. As well, each state in Mexico has its own Civil Code, and its own municipal regulations.
In the introductory article below, we will discuss the basic areas of the law.
Other laws and regulations that we will touch upon, and which we will discuss in further depth in future articles include the following:
After the revolution, the 1917 Mexican Constitution addressed various themes and regulations for the new independent country. Our interest being in real estate, we will focus our discussion to Article 27. The article declares that the new Mexican nation has ORIGINAL ownership to all land and water in Mexico, as well as to all minerals, salts, ore deposits, natural gas and oil etc. The majority of the land is private. Private ownership has and is continuously being transferred and assigned to individuals and non government entities.
The four legal categories of land tenure are as follows:
Another important regulation of the constitution dealing with acquisition of Real Estate, prohibits direct ownership of properties by non-Mexican foreigners in what is defined as the RESTRICTED ZONE. The RESTRICED ZONE encompasses all land within 100 kilometers of any Mexican border, and 50 kilometers of any coastline. Property in the interior of Mexico, beyond the RESTRICTED ZONE may be obtained in direct ownership by non-Mexicans.
Since the writing of the 1917 Constitution, and with the new global economies relying with greater importance to foreign activities, trades and investments, Mexico has realized various important amendments to these original articles. The goal of Mexico logically, is to impulse national market growth and job creations within the tourist and industrial sectors of various states and in their economy as a whole.
Therefore, today there exist two major tools available to Non Mexicans to ALLOW for such foreigners to invest and acquire real estate within the RESTRICTED ZONE.
In order to permit and promote foreign investments within the restricted zones, the Mexican Government created the FIDEICOMISO as an option to the 1917 Constitution.
1971
The foreign investment law was originally established during this year.
1973
The Foreign Investment Law is known as the: "Reglamento de la Ley Inversión Extranjera y del Registro Nacional de Inversiones Extranjeras". The amendment introduced the new trust system of "Fideicomiso" as well as a definition for classifying residential property. Through the Ministry of foreign Affairs, the Federal Government is now able to authorize Mexican Financial Institutions to act as trustees in acquiring real estate in this prohibited zone, whose beneficiaries are foreigners.
Upon acquiring a property in trust, a non-Mexican foreigner is allowed to use a Mexican financial institution. This institution becomes its new legal owner, subject to the clauses of the contract granting the beneficiary the rights to use, exploit, rent or sell the property or transfer the said rights to a third party (testament will). When a foreigner acquires the right of using and developing a property, he can instruct the Trustee to purchase and retain within a trust for a term of 30 years (in 1998 (50) fifty year term expansion was assigned).
The beneficiary can at any time during the term of the trust agreement or at its termination, arrange for the sale of the property to any person legally qualified to purchase the real estate. The trustee financial institution may not, without express written consent from the beneficiary, sell, transfer or encumber the property.
The beneficiaries of the trust (fideicomisarios) may be Mexican Corporations with foreign investment, Foreign individuals and other legal entities.
If selling a property held in a fideciomiso before the 50 year term has expired, the new buyer, if a non-Mexican, can choose to create a new Trust with a new 50 year term, or to assign the rights within the contract that the remaining balance of the original trust be respected by the financial institution (trustee) in benefit of the new buyer.
A common misconception exists that once the trust expires, the beneficiary loses all rights and benefits of the sale of the property held in trust. This is not the case. A real estate trust is not a lease. The beneficiary has a contractual right under the trust agreement with the Financial Institution outlining that all benefits that result from the use or sale of the property, is rightfully due to the beneficiary. Under Mexican Law, the bank, as trustee, has a fiduciary obligation to respect the constitutional amendments of the beneficiary.
1989
The modifications expand and detail many of the major areas of foreign investment outlined in 1973. Basically, the 1989 Regulations not only depart substantially from the original Act but were created to open up policies and promote areas for foreign investments.
1993
This federal statute governs foreign investment in Mexico.
The Foreign Investment Law was once again modified to incorporate the provisions of the NAFTA treaty allowing the Mexican foreigners even more options and protections with their real estate holdings.
Before 1993, Mexican Corporations were required to have at least 51% of the shareholders to be Mexican Nationals. Once passed, the new law allowed for ownership to be 100% foreign owned with the exception of a very few select industries. A corporation established in Mexico is considered a Mexican Entity under the law, even if all the shareholders are foreigners. Thus, a Mexican Corporation with 100% foreign ownership can acquire real property in fee simple ownership, even if acquiring properties within the RESTRICTED ZONE. This is for non-residential property: a hotel, a bed and breakfast, a restaurant, and rental units for example. A Mexican tax consultant can be very helpful to determine specific classifications and definitions regarding these topics to assist in implementing the correct corporate strategy.
December 27, 1998
On September 8, 1998, the government of Mexico through the Secretariat of Commerce and Industrial Development (SECOFI) enacted the “Reglamento de la Inversion Extranjera y del Registro Nacional de Inversiones Extranjeras”. The purpose of this legislative enactment was to regulate the volume, type and domestic behavior of foreign investments in Mexico.
Composed by 39 sections (Artículos), this statute regulates acquisition of real estate and trusts (Fideicomisos); foreign corporations and their investments; the functions of the National Commission on Foreign Investments and the corresponding Registry; and sanctions.
Contrary to Article 27 (I) of the Federal Constitution, you will find that the 1998 regulations detail how a Mexican corporation with foreign investment may acquire the direct ownership of real estate anywhere in Mexico, including the Restricted Zones, when described acquisition is realized for commercial purposes. The amendment goes further to clearly define what is residential property, what properties must be in a “fideicomiso”, and which properties are considered non-residential for Mexican Corporate acquisitions.
Residential Properties shall include:
Non-Residential Properties shall include:
The Foreign Investment Law also extended the Mexican Financial Institution Trust term from (30) years to (50) fifty years. Application with the trustee for multiple renewals was an included allowance in 1998. A property therefore may be held by a family or business for various generations.
IV Investment by Foreign Legal Entities (Artículo 21). This sets out the manner in which foreign corporations must register with the Mexican government to be authorized to conduct business in Mexico.
VII National Register of Foreign Investments (Registro Nacional de Inversiones Extranjeras, Articulos 30-46) Outlines the organization, activities, and basic inscriptions to be made by the Registry, whose major objective is to organize, keep and maintain an official register of all foreign investments in Mexico.
Additional notes and subjects for foreign Real Estate Investors
Ministry of Foreign Affairs.
When purchasing real estate in the restricted zones, an approval by the Ministry of Foreign Affairs (Secretaria de Relaciones Exteriores, or SRE) must be obtained. An efficient process that takes near 15 days to realize and which the financial institution or lawyer administers for a minor fee.
The "Calvo clause" of Article 27.
The document, requires that foreign individuals and/or corporations agree before the Ministry of Foreign Affairs to consider themselves as Mexican nationals in reference to their acquisition of real estate. They as well agree not to invoke the protection of their own government in regards to their property. This requirement is having less and less validity due to the NAFTA agreement and foreign investment protection regulations between Mexico, USA, and Canadian law makers and other existing foreign and trade agreements.
Whether the investment is a “maquiladora”, a tourist development involving the construction of hotels or condominiums, or simply the construction of summer homes by foreigners, Mexico is modifying their regulations and enhancing the protection in these segments for the non-Mexican investors. It is important to understand that acquisition of real estate within the Restricted Zone can only be realized either in 50 year renewable Mexican Financial Institution Trusts, or via a Mexican corporation which can be 100% foreign owned.
Investment opportunities in Mexico are becoming more available every year. As Baby boomers and investors begin traveling, searching, and discovering Mexican real estate especially the water front properties, the demand and values of property in this southern country are increasing dramatically.
We hope these articles to be helpful, educational, and practical in discovering new options and opportunities for all of your businesses, offices and clients.
- Thomas L. Lloyd
Retiring in Mexico Advisor
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