The Mexican Constitution (Article 27 – Subsection 1) states that in a zone of 100km along its borders or 50km along the Mexican coast, a foreigner cannot acquire ownership of the land. This area is known as “The Restricted Zone”.
However, Foreign Investment Law allows foreign investors to obtain rights to use real estate in this area through an escrow arrangement.
Escrow is a tool for foreign investment in Mexico. This tool allows proprietors the same rights and obligations they would have normally when purchasing real estate.
WHAT ARE THE CHARACTERISTICS OF AN ESCROW AGREEMENT?
In this type of agreement, the seller or original proprietor, acting as a fideicomitente (a trustee) irrevocably transmits the ownership of the property to a bank as a fiduciario (a fiduciary) that also receives the value decided upon from the foreign recipient fideicomisario (beneficiary).
The fiduciary maintains ownership of the property throughout the duration of the contract (up to 50 years) allowing the foreign investor full access and use of it for tourist, commercial or industrial purposes in accordance with the permission previously granted by the Secretary (Ministry) of Foreign Relations.
In Mexico, the banks are the only institutions authorised to play the role of fiduciary. An escrow account is opened as a medium through which all operations are carried out. It is important to bear in mind that you have the right to select the bank where you wish to open an escrow account. Escrow is not a banking tool, but a mechanism which allows foreign investors to participate in the property deals but also in other sectors of the economy.
The legal obligation for an escrow agreement of this type is that the fiduciary, which is to be a Mexican legal entity, maintains the legal ownership of the property in accordance with Article 27 of the Mexican Constitution.
CRITERIA TO CONSTITUTE ESCROW OF THIS TYPE:
The following information and documentation must be provided:
a) Copy of the certificate of ownership of the property, a slip confirming proof of payment of property tax and a location map.
b) Name, residency, nationality, marital status and profession of the vendor (trustee).
c) Name, residency, nationality, marital status, profession and telephone number of the foreign investment. The same details are required for those who are to be designated beneficiaries in case of decease.
The foreign investor and the beneficiaries are not required to hold any special migratory status to constitute their escrow agreement.
e) The price agreed by the trustee and investor.
With the aforementioned information and documentation the fiduciary may apply for permission to establish the escrow agreement from the Secretaría de Relaciones Exteriores (The Secretary for Foreign Relations)
Once this permission is received, it will be subsequently sent to a public notary along with the project for the escrow contract to be formalised and legalised by means of a public deed.
WHAT RIGHTS AND OBLIGATIONS DOES THE FOREIGN INVESTOR HAVE?
The foreign investor will have usage rights of the property These are: the right to reside there, to make modifications or improvements to the property and to lease it. The investor will also be authorised to order the fiduciary to mortgage the property, to transfer ownership or to formalise the cession of the rights of the investor to any other individual or legal entity.
Should the investor sell the property to another foreigner, the rights may be transferred to the new beneficiary. Any such transfer must be formalised in the presence of a Mexican public notary, having paid all necessary taxes or rights for the transaction. Likewise, it is crucial that the FIDUCIARY approves the transfer.
Similarly, in the event of the death of the investor, the fiduciary will be able to designate one or various fideicomisarios sustitutos (substitute beneficiaries), who will receive all rights and obligations deriving from the escrow contract. In this case, the beneficiary or beneficiaries must only present their identification documents and a certified copy of the death certificate to the fiduciary.
The investor will be obliged to pay the property tax, the building maintenance quotes and for the public services (water, electricity etc.) along with the fiduciary annual management fees for the escrow agreement.
COMMISSION FOR THE FIDUCIARY FOR THIS SERVICE:
The commission and fees received by the fiduciary for this type of escrow agreement are:
A) For the opening and preparation of the contract, a fee of US$500, payable when the contract is signed.
B) For the annual management of the escrow agreement, a yearly fee of US$500. This commission is to be paid in advance.
The fiduciary fees will be subject to VAT at 10%.
The fiduciary will annually send an invoice the investor's home address or alternatively the fees can be paid through a VISA or MASTERCARD credit card.
WHAT OTHER COSTS MUST THE ESCROW AGREEMENT COVER?
The costs, taxes, rights and fees that accrued by this agreement are similar to those accumulated in an ownership transfer from one Mexican to another. They are specifically:
The notary fees and costs for the formalisation of the escrow agreement include:
- Inscription rights in the Public Property Register
- Relocation Tax (Acquisition of Property)
- The rights for obtaining permission from the Secretary of Foreign Relations
- The Inscription of the escrow agreement in the Foreign Investment National Register.
WHAT HAPPENS WHEN THE ESCROW AGREEMENT COMES TO AN END (MAXIMUM 50 YEARS)?
Article 13 of the Ley de Inversión Extranjera (Foreign Investment Law) states that the Secretary of Foreign Relations will allow the escrow agreement for property in the Restricted Zone to be renewed for a period equal to that of the original escrow agreement.
Furthermore, the Secretary for Foreign Relations can authorise a new escrow agreement for property that passes from one escrow agreement to another for a period of up to 50 years in the case of the original escrow agreement and the new one being different.
