We are pleased to present this overview of the "Fideicomiso" or Mexican bank trust, a mechanism that has enabled some of the world's leading tourism industry companies, as well as individual investors, to benefit from the growth of Mexico's dynamic tourism sector.
Mexico, including some 6,000 miles of beautiful coastline, has attracted significant investment interest for many years. The trust mechanism was created to allow foreign investors to participate in Mexico's tourism and other rapidly expanding sectors exercising complete and legal control over their investment while complying with Mexico's investment laws.
A "Fideicomiso" or bank trust is defined for real estate purposes as a transaction entered into between a Mexican bank and a foreign individual or firm investing in an area otherwise restricted to foreign investment. The bank serves as trustee for the legal owner with respect to certain real property interests and the investor serving as the legal beneficiary of the trust. The bank holds title to the property in trust for the beneficiary who retains the exclusive right to the use and control of the property.
As trustee, the bank acts on behalf of the beneficiary in transactions involving the property held in trust. However, the beneficiary controls and makes investment decisions regarding the property, including the decision to transfer, assign or otherwise dispose of his or her interest in the property.
The trust is essentially a contractual arrangement, which in most respects is identical to the type of trust commonly used in the United States. Trusts are established for initial 50-year periods and can be renewed indefinitely.
The Trust Mechanism
The law governing foreign investment though trusts requires a Mexican banking institution to act as trustee on behalf of a foreign entity with respect to property held in trust. The bank holding title to the property for the benefit of the investor and acting on behalf of that investor in transactions involving the property. The beneficiary retains the use and control of the property held in trust and except for direct acquisitions, makes the investment decisions with regard to the property. This can include the decision to transfer such property interest to another foreign or
Investment In Real Estate Through Trusts
The trust mechanism allows foreign entities to invest in Mexico's coastal and border areas, which in the past were restricted from foreign investment of any type. The trust permits foreign investors to obtain almost all of the economic benefits that accompany equity ownership, as the direct owner of such property would have except for direct acquisitions. In addition, the beneficiary may transfer or assign beneficial interest to any person, keeping the profits from the sale which are subject to applicable tax laws, according to the instructions given to the trustee.
How Long Does A Trust Remain In Effect and Can it Be Renewed?
It is renewable at the end of its 50-year term and for additional periods of 50 years each. The law provides that if an application is filed no more than 360 or less than 181 days before the end of the original trust, the Secretary of Foreign Relations must issue a new trust permit, effective for an additional term of 50 years. The Trust can be renewed for perpetuity.
Can I Sell Or Transfer My Interest In A Trust?
A trust interest may be sold or transferred much like any other interest in real property. Upon the sale of an interest in land held under a trust, the Secretary of Foreign Relations is required by law to issue a new trust permit to the buyer. Thus, the buyer will have a full 50-year term during which to use and enjoy the property, after which he or she may seek to have the trust renewed for
an additional 50-year period. If property held under a Trust is sold to a Mexican National, the trust can be terminated and the Mexican National may then own the property directly.
Are Mexican Banks The Only Institutions that can hold Trusts On Behalf Of Foreign Investors?
Yes, however you have the right to choose which bank you would like to hold your Trust. The Trust is not an asset of the bank. Trusts also allow foreign investors to participate in other sectors of the Mexican economy. Foreign investors are required to use trusts to acquire certificates of participation representing shares of companies listed on the Mexican Stock Exchange.
Can Land Held Under A Trust Be Passed On To Future Generations Through Inheritance?
Land held under a trust can be passed on to future generations much like other forms of real property. As the transferee of property held under a trust, the person receiving the bequest may apply to the Secretary of Foreign Relations for a new permit granting that person an additional 50-year term during which to use and enjoy the property.
What Are The Procedures Involved In Establishing A Real Estate Trust?
The procedures for establishing a real estate are as follows:
A foreign person or company interested in purchasing real estate in the restricted area selects a Mexican bank to act as trustee with respect to the property. The investor must then furnish basic information to the trustee, which in turn applies to Mexico's Secretary of Foreign Relation's for a permit authorizing the trust.
Permits are granted if the property in question is to be used for practically any commercial purpose, including tourism, or if it is undeveloped property that is than 20 hectares (approximately 50 acres). If the investment does not meet either of those criteria, the permit will still be granted if the project is approved by the commission.
Once the permit is obtained, a process that generally takes 30 days from the date of submission of the application to the Secretary of Foreign Relations, the trustee contacts a notary public to draw up a deed for the property. The trustee then registers the trust with the commission.
As beneficiary, the foreign entity retains the same right to control the property held in trust such as construct, establish, sell, rent and operate:
- International standard resort complexes
- Five, four and three star hotels
- Motels, hostels, campgrounds and mobile home parks along Mexico's growing highway network
- Residential parks and developments
- Condominiums with opportunities for timeshare sale's
- Commercial centers
- Marinas and related facilities
- Golf courses and sports complexes
- Restaurants, cafeterias and bars
New rules governing foreign investment though real estate trusts were put into effect in l989. These rules clarified some of the rules and procedures under which investments in real estate in Mexico can be made, and provided the stability and protection or legal certainty for these types of investments.
Mexican law now expressly provides that at the end of the 50-year term of the trust, upon request, the Mexican government will issue a new permit for an additional 50-year term. Also, if an interest in Real Estate held under a trust is sold or conveyed, the transferee can obtain a permit, which provides for a new 50-year term no matter how much time remains on the original trust.
Trusts are not only utilized by foreign companies investing in Mexico's tourism sector, but also by individuals investing in residential property in the country's coastal or border areas. In these cases, foreign individuals purchase a property interest and title is transferred to a trust controlled by the investor. Notary publics are used to register this transaction and the transfer, for taxation purposes, is treated as a domestic transaction.
While a Mexican bank acting as trustee holds title to the property in these transactions, the bank is legally obligated to follow terms outlined in trust documents that comply in all areas with the requests of the foreign investor who is the trust beneficiary. As such, these trusts represent a legal alternative to actual property ownership for foreign investors.
As the beneficiary under the trust, the foreign investor has a personal and exclusive right to use, occupy and possess the trust property, including the right to build upon it or otherwise improve it, subject to applicable construction and building regulations.
In addition, the beneficiary may transfer or assign his beneficial interest to any person according to the instructions given to the trustee and may keep the profits from the sale of the property which are applicable to tax laws.
For many foreign investors involved in large-scale tourism resort development, the trust mechanism is utilized when there is a financial rather than an operational interest in tourism development in the border and coastal areas of Mexico.
The regulations governing the trust not only address real estate investments they also allow foreign individuals and companies to invest in Mexico's capital markets and certain regulated industries.