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Over the past several years, lawyers in border states have witnessed a dramatic increase in the number of U.S. real estate companies participating in major real estate transactions in Mexico. These cross-border transactions involve complex legal questions and require an understanding of the laws and customs of foreign jurisdictions. Texas lawyers who represent American clients considering an investment in Mexican real estate need to be aware of a number of key issues. Choosing the appropriate local counsel is one of the best ways to ensure a successful transaction. Fortunately, there are many Mexican attorneys who speak fluent English, hold advanced degrees from U.S. law schools and have experience working at major U.S. law firms. The U.S. attorney and local Mexican counsel should work closely together to help guide the client through the process. Restrictions on foreign ownership of Mexican property must be considered in every transaction. Mexico’s foreign investment laws prohibit direct foreign ownership of property within the restricted zone, an area within 100 kilometers of Mexico’s borders and 50 kilometers of the coastline. Foreign individuals and companies may own property outside of the restricted zone, but they must agree to be bound by Mexican law with respect to matters concerning their property. A Mexican company owned by foreign investors is permitted to own property within the restricted zone, so long as it is used for nonresidential purposes. To own residential property within the restricted zone, a foreign investor must utilize a trust, or fideicomiso, pursuant to which a Mexican banking institution holds title to the property for the benefit of the investor. Fideicomisos permit the investor to direct the trustee in making all decisions relating to financing, leasing, development and sale of the property. Perhaps the greatest difference between U.S. and Mexican real estate transactions is the central role of the Mexican notary public, or notario, before whom parties must carry out certain real estate transactions, such as sales and financings. Notarios are attorneys who are appointed by the various state governments. They are responsible for confirming that transactions comply with all applicable laws and are properly authorized and documented. Notarios also collect any applicable taxes and record the transaction documents in the applicable public registries. As a result, U.S.-style escrow closings are not common. People � often local counsel � acting on behalf of the parties pursuant to powers of attorney generally execute closing documents and deliver the papers in the presence of the notario. Another issue presented in cross-border real estate transactions in Mexico is entity selection. While Mexico permits direct investment by a foreign company, subject to the restrictions described above, most investors elect to form either a sociedad anonima de capital variable, which is similar to a U.S. corporation, or a sociedad de responsibilidad limitada (S de R.L.) which is similar to a U.S. limited liability company. The latter qualifies as a pass-through entity for U.S. tax purposes. Lawyers for American investors also commonly utilize certain types of fideicomisos for joint venture transactions. Although the trust vehicle involves the additional expense of the trustee, the beneficiaries have greater flexibility to structure their relationship on a contractual basis. While S de R.L. entities, for example, may have no more than 50 members, and all members must approve a transfer by one member to a third party, trust agreements may not be subject to these restrictions. Certain trusts also qualify as pass-through entities for U.S. tax purposes. Chain of Title Performing real estate due diligence in Mexico can be a challenging process for lawyers representing American investors, who are accustomed to U.S. practices. Far less information regarding Mexican properties is publicly available than in similar transactions in the United States. The lack of information regarding comparable sales, for example, makes appraisals more difficult to complete. In addition, Mexican tenants are not accustomed to delivering estoppel certificates, and lease provisions requiring estoppels are usually found only where an American investor or lender participated in the lease negotiation.
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Several U.S. title companies now offer title insurance covering property in Mexico. These policies are based on title opinions prepared by their local counsel. Mexican investors have been slow to embrace the practice of buying title insurance, but many U.S. investors take comfort in this additional protection. Although the applicable state property registries issue certificates of no encumbrances, which reflect the existence or absence of liens and encumbrances affecting a property, an independent review of the chain of title generally is advisable, as there is no recourse against the government in the event of errors in the certificates. Additional scrutiny is required when acquiring property that was held for the benefit of ejido � agricultural cooperatives � to ensure compliance with the requirements for converting this land to private ownership. Taxes are always an important consideration in cross-border transactions. While a full discussion of the Mexican tax system and U.S. foreign investment laws is beyond the scope of this article, most American investors utilize a combination of equity and shareholder loans (or similar debt) to minimize taxes payable on both sides of the border. Mexican law provides a number of benefits to employees, including the right to participate in the profits of a company. As a result, most U.S. investors will contract with third parties for services to avoid employment-related risks. In addition to the real estate, corporate, tax and employment issues discussed above, other U.S. laws apply to American companies doing business in foreign jurisdictions. In particular, the Foreign Corrupt Practices Act prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business. While cross-border transactions can be complicated, the globalization of the real estate business offers exciting opportunities for Texas lawyers to expand their practices beyond U.S. borders. Peter M. Oxman is counsel at the Houston office of King & Spalding, where he is a member of the firm’s real estate and Latin America practice groups. He regularly represents American as well as foreign companies in acquiring, developing, financing, leasing and selling industrial, office, residential and resort properties in the United States and Latin America. His e-mail address is [email protected] .

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