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Recent years have seen many changes in the regulations and practice governing real estate acquisition in Mexico, making it easier for foreigners, including U.S. citizens, to purchase property there. However, whether the buyer is a family looking for a second home in one of Mexico’s beautiful resort locations, small or medium-sized developers or sophisticated developers developing master-planned projects in key Mexican states, foreigners always have the same questions and concerns.

How does an American acquire legal title to property in Mexico? How can purchasers be confident that they are acquiring clear title? How does a closing work in Mexico?

When acquiring property in Mexico, the following considerations play roles:

• The public registries of property located within the vicinity of the property being acquired.

• Local regulations and tax laws.

• The local notary public.

• Land permits.

• The mechanics of closing.

The due diligence function of the public registry of property in Mexico allows potential purchasers to review the particular property’s chain of title and identify whether it bears any liens or encumbrances. In this regard, interested buyers should obtain a certificate from the public registry of property confirming whether certain liens and encumbrances have been recorded against the land. Experienced counsel should check the public registry of property again before closing, to make sure there are no new annotations against the property.

Most of Mexico’s public registries of property have a “preventive” function that allows a purchaser to file a notice with the public registry of property prior to acquiring the real estate, in order to inform third parties of the pending acquisition and to make the purchase a matter of public record.

The preventive notice is designed to protect the purchaser by freezing the file and not allowing any subsequent registrations against the property for the duration of the notice. A preventive notice usually lasts for 30 days, but this varies from state to state; some allow an extension for an additional 30 days or for a second preventive notice. Purchasers need to review local regulations to determine the length of time a preventive notice will remain in effect and the availability of extensions.

Another consideration in any purchase of Mexican real estate is the critical need to examine local regulations and property tax laws that could affect the acquisition and development of the property. For example, if the property is in a rural or agricultural area, it would be important to consult the National Agrarian Registry (Registro Agrario Nacional, or RAN) to confirm whether the property is subject to agrarian law. Agrarian laws in Mexico are highly complex, and therefore expert counsel must evaluate whether a property is encumbered by any “ejido” — or communal land — rights. In addition, purchasers should obtain tax receipts of prior payments on the property and a certificate of nonindebtedness from the Mexican Treasury to ensure that no taxes are owed. Certificates of nonindebtedness also can be had with respect to water payments.

The purchasing process

The formality of documents and use of notary publics have always played a key role in the Mexican legal system in general and the acquisition of real property in particular. A Mexican notary public (who must be a licensed attorney) must notarize the transfer document of Mexican property, which is usually a Mexican deed. The deed then is recorded at the public registry of property. Contrary to practice in the United States, not everyone may record a document directly with the public registry of property. It’s the notary public who registers the documents, and then only after he has approved them as to form and sufficiency.

As in the United States, in most transactions a purchaser will have to obtain land use permits to operate the property as desired. An attorney will have to review various codes and regulations that could affect the property to determine which permits will be necessary. If the property is located within the restricted zone of Mexico — that is, within 100 kilometers of the country’s borders or 50 kilometers of the coast — and the property is earmarked for certain regulated uses such as residential, then the foreign purchaser will need to own its property through a Mexican trust. The trust system is a complex but well-established form of ownership in Mexico. When using a trust, the U.S. purchaser is appointed as beneficiary of the trust while a Mexican bank will act as trustee. Mexican trusts have a term of 50 years but may be renewed for successive 50-year periods.

In any real estate transaction, it is customary for the buyer and seller to execute a private promissory agreement (contrato de promesa de compraventa), which is similar to a purchase agreement in the United States. It is a binding agreement whereby the seller and buyer agree to execute a future agreement for the transfer of the property, after a certain due diligence period has elapsed, provided the buyer does not encounter any red flags or unacceptable conditions in the meantime. If, at the end of this period, the buyer is satisfied, then the deed of purchase is executed in front of a notary public in Mexico.

Common practice is for possession and transfer of title to occur once the deed of purchase has been completed and the seller has received payment for the purchase price. It also is common in Mexico for the buyer to provide the funds through a certified or cashier’s check or, depending on the amount of the transaction, a wire transfer. The parties may coordinate execution of the deed simultaneously with receipt of the wire transfer. Upon execution of the public deed by both parties, the notary public then arranges to have the deed recorded at the public registry of property.

Tools for minimizing risk

As may be evident now given the examples above, Mexico does provide purchasers with tools to investigate and assess the status of a property. However, many U.S. purchasers through the years have sought additional risk-minimization tools when acquiring real property in Mexico. It is wise to prepare a list of due diligence items that identifies what the seller needs to review and provide so that the buyer can determine the viability of a particular property based on its location and the purchaser’s objectives in acquiring it. Experts must be identified to perform an environmental due diligence or other technical study, to obtain an appraisal and to advise on the optimum tax structure for the transaction.

U.S. purchasers want to be able to use the tools to which they are accustomed when closing real property transactions in the United States. When buying abroad, they desire very specific instruments that provide them and their lenders, when applicable, with an additional comfort level. Because many of these tools have become more standard in Mexican transactions, they now are available to the U.S. purchaser. Interestingly, Mexican nationals now are using many of them in their own acquisition of property in Mexico. Among the most important tools that have been incorporated into the Mexican real estate industry are escrow agreements and title insurance.

The use of escrow agreements has simplified Mexican real estate transactions in many circumstances. As mentioned above, it is common in Mexico to execute a promissory agreement before the beginning of the due diligence period. However, the purchaser usually must provide a deposit to the seller during this time. Through an escrow agreement, the buyer may transfer the deposit to the escrow agent, who will release it to the seller only under very specific circumstances once the due diligence period has elapsed.

The use of escrow agreements in Mexico offers other advantages at the time of the closing. To avoid having the notary’s office wait until the wire transfer has been confirmed to execute the deed of transfer, the money can be placed in an escrow account with disbursement instructions that identify the conditions for transferring the purchase price funds to the seller’s account. While this seems like a small shift in the closing dynamic, it simplifies the process dramatically at the notary’s office and saves time and money for all parties involved.

Another immediate benefit of the escrow agreement for Mexican transactions is that closing costs, such as the notarial fees, trustee fees if a trust is in place, public registry fees, taxes and title insurance payments, among others, can be deposited into escrow and disbursed to the corresponding parties, as provided in the escrow instructions. Previously, many buyers would have had to coordinate multiple wire transfers to different parties prior to closing. The escrow agreement provides real estate buyers with a more methodical and structured process for payment of the purchase price and the closing costs, while assuring the seller that the money has become available and will be released to him once the conditions agreed upon by the parties beforehand have been met.

The other U.S. tool that has been incorporated into the Mexican system is the use of title insurance. For many years, Mexican purchasers had difficulty grasping the need for title insurance. They were used to relying on a legal opinion from Mexican counsel advising them of the status of the property and whether they should acquire it. Times have changed; nowadays it is not only U.S. buyers and lenders that are requesting title insurance, but also Mexican buyers. Title insurance is sought not only by those acquiring mega-resort projects or single-family homes, but also by purchasers of fractional interests and other forms of common interest.

Demanding lenders

Lenders rarely will provide funding for properties that are not insured, or will make it a requirement for funding. This has created a major opportunity for established or newly minted title insurance companies in Mexico to provide those services. Part of the role of expert real estate attorneys is to review the jacket title insurance policy provided by the title company; another part is to negotiate the title insurance fees. In representing their clients, these attorneys must negotiate a title policy that will provide as few exceptions to coverage as possible.

One of the most heavily negotiated sections of the title commitments with title companies is the exceptions schedule. If exceptions are not properly negotiated, title insurance coverage may prove inadequate.

In addition, as part of the negotiation process, attorneys should help purchasers obtain all of the documents and information required for the title company to issue title insurance. A survey that meets American Land Title Association standards now is one of the documents that title companies require in order to eliminate certain exceptions. This is a survey of the property with very specific characteristics created under U.S. practice. It is an example of the application of one U.S. tool creating the need of a second one, the American Land Title Association survey. Many Mexican surveyors are trained to prepare these surveys and provide the necessary reports and certifications to title companies. It is important that buyers understand these requirements beforehand, to make sure they hire the appropriate parties to deliver the necessary documents. This will save them both time and money.

In conclusion, investing in real estate in Mexico is much easier than it seems. With the appropriate guidance from dual-licensed attorneys who can walk buyers through the common law and civil law system, it is a straightforward process.

The use of U.S. tools such as escrow agreements and title insurance can provide a greater comfort level to both purchasers and lenders.

Esther Zaidman is a senior associate in the real estate department of Greenberg Traurig’s Los Angeles office. She works on hotel, resort and commercial real estate development and financing in Mexico and the United States. Previously, she was an associate at the Mexican law firm Gallástegui y Lozano.

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