Can foreigners own beachfront property in Mexico?
Foreign investment in Mexican territory has always been a benefit both for the foreign person who wishes to invest in national territory, as well as for the Mexican Government and, of course, for Mexicans, who are obviously benefitted from job sources.
However, as an investor you may consider: How far is it possible that as a foreign investor, you can really exploit your investment in places that are possibly considered a Restricted Zone in Mexico? What is a restricted area? Can you invest in a restricted area?
If you are a foreigner and you are interested in residing or acquiring a property in Mexico, you need specialized legal advice, especially if you want to acquire a real estate in border strips or coastal areas, since these are considered restricted areas for foreigners. This means that a person who is not Mexican cannot directly acquire the property in a strip of one hundred kilometers along the borders and fifty kilometers on the beaches.
Such is established in Article 27 of the Mexican Constitution and was born from various historical antecedents. The most important one, was the colonization and independence of the state of Texas. Thus, the Mexican State saw the need to restrict the acquisition of real estate by foreigners through the Colonization Law, promulgated on August 18, 1824, constituting the first antecedent of the prohibited areas, now defined as restricted.
However, in 1948, section I of Article 27 of the Constitution was added in order to contemplate the possibility that foreigners could acquire real estate within the national territory, in order to prevent that the lack of international reciprocity could cause that Mexicans could not do the same in foreign territory. Therefore, there is a way in which foreigners can obtain possession of a property in coastal areas indirectly, this through a domain transfer trust.
It is important to mention that when foreigners acquire properties in the restricted zone, mainly in residential developments such as condominiums and apartments that have already been built or are developing, they generally have to sign two contracts:
A Private Purchase Agreement with the developer and / or construction company; and,
Trust Public Deed with the financial institution that will act as fiduciary; this when the property is built, delivered and the acquirer has already made a payment for the property.
These two legal instruments give foreign investors greater assurance that their money will be invested appropriately and will bear good fruit, especially the Trust Agreement, since this legal entity is in charge of monitoring that the people involved in the contractual relationship, receive exactly what they should obtain from the execution of the ownership transfer trust, regardless their nationality.
What is a domain translative trust?
As explained above, the partial restriction of real estate acquisition by non-Mexican people is due to Mexican state’s justifiable reasons derived from various historical events that marked the country, such as: the loss of more than half of national territory by annexing it to the United States of America through the Guadalupe Hidalgo Treaty, the claims of the United States inspired by the Monroe doctrine of annexing the Baja California Peninsula, Sonora, Chihuahua and the right of transit over Tehuantepec´s Isthmus.
As a national security act in 1917, foreigners were prohibited from direct control of land and water in a strip of 100 km at borders and 50 km on beaches. Years later, they were allowed to acquire the right to use and exploit this type of real estate, through the figure of the trust. This is a legal figure taken from Anglo-Saxon law and successfully adapted to our legal system and which is widely accepted in banking institutions, with good results for foreigners.
The trust is a legal act by means of which the trustor delivers to the trustee certain assets or rights with the objective that once the terms and conditions of the trust are fulfilled, the real estate property is transferred to the individual(s) that he freely or conventionally determines.
Pursuant to Article 27, Section I of Mexican Constitution, foreigners are prevented from acquiring direct ownership of land and water in a strip of one hundred kilometers along the borders and fifty in the beaches. Foreigners are only allowed to use and exploit real estate located within this restricted zone, through the constitution of a trust, in accordance with the Second Title of the Foreign Investment Law.
Trusts are intended to allow the use and exploitation of real estate located in a restricted area on behalf of foreigners (individuals or corporations) or Mexican companies with a foreigner admission clause, only if the real estate is intended for residential purposes, for a maximum period of 50 years. The trust agreement must be registered in a public deed.
This does not mean that the trust only lasts for the agreed 50 years. When a trust contract established under a permit granted by the Ministry of Foreign Affairs is about to expire, the trustee that administers it must request the extension to its duration through the trustee delegate. For this, only an application must be submitted to the Ministry of Foreign Affairs to obtain a new 50-year permit. In this application, the primary beneficiaries must be the same, since if they wanted to change the foreign beneficiaries, that is, those who want to use the property in a restricted area, this would imply a modification to the Trust, which has a higher cost than the extension of validity.
In any type of real estate acquisition in Mexico, foreign acquirers must request prior authorization and always register their participation before the Ministry of Foreign Affairs and especially when it comes to properties in the Restricted Zone. This according to what is known as the Calvo Clause.
In conclusion, if a foreigner wishes to have a property near the Mexican beaches, he must obtain it through a trust, which will allow him to fully enjoy and use the property. It should be noted that this requires procedures before various Mexican authorities, so it is of utmost importance that foreign investors seek for specialized legal professionals that explain them the risks or obstacles that may exist, as well as to efficiently carry out the procedure in each one of the instances, and thus the foreign investor can confidently exploit his investment appropriately.
The implementation of trusts in the Mexican legal system, has been of great success and well received by financial institutions and foreigners who wish to acquire real estate in Mexican territory.
According to statistics from the Ministry of Foreign Affairs, 1,970 permits were issued in year 2000 to establish trusts in restricted areas. In 2004 the figure rose to 3,720 and in 2007 the figure reached 7,000 permits obtained. These figures demonstrate that trusts are the most reliable legal tool that foreigners have to acquire properties legally and with all the rights that a Mexican citizen has, and even more if they do it in a legal firm with expertise in this area like ours.
Trusts in the restrictive zone