The Mexican Constitution establishes that foreign investors may not purchase land in areas known as restricted zones, which correspond to an area of 100 kilometers along Mexico’s borders and 50 kilometers along its coasts. Historically, foreign investors have been able to circumvent this restriction through a solution introduced in Mexico’s Foreign Investment Law in 1993, which states that a foreigner or foreign corporation can obtain all the rights of ownership through a bank trust, known locally as a fideicomiso.
For practical reasons, even in unrestricted zones, many foreigners and Mexican nationals prefer to hold their property under a fideicomiso. But all this could be about to change, thanks to a reform to Article 27 of the Mexican Constitution, currently awaiting passage by Mexico’s Senate.
To better understand the nature and scope of this reform, we approached David Connell of Connell & Associates, a local law firm specializing in providing foreigners proven expertise on real estate-related tax and legal issues, to share some insight on the reform.
Earlier in 2013, Mexico’s House of Representatives passed a reform to Article 27 regarding the ability of foreigners to acquire direct title to land in Mexico’s restricted zone. If this reform passes through Mexico’s Senate, foreigners would be able to have land deeded in their own name, without a bank trust or having to register the property under somebody else’s name.
For real estate professionals in town, this is a sign of good things to come, as more foreign investors are likely to become interested in purchasing land in Mexico’s restricted zone. In addition, present land owners with a trust will want to modify their current paperwork and put their property in their own name.
Connell warns of a caveat, however. The reform, as submitted by Mexico’s House of Representatives, clearly states that foreign investors can, indeed, place the properties under their own name, but only if they will use the land for residential purposes. Commercial purposes are not allowed under the reform. “We need to wait and see what the Senate says about the reform, and how secondary laws are consequently modified,” says Connell. In other words, if you are or would be considering renting out your property in Mexico, you may not be eligible and would have to continue using the real estate trust or establish a Mexican company to provide this service.
According to the original schedule, the reform to Article 27 was expected to pass through Mexico’s Senate in October 2013. However, Mexico’s President Enrique Peña Nieto has introduced drastic tax reforms, along with the equally thorough energy reform affecting the privatization of PEMEX, putting an end to months of speculation over the rumor that Mexico’s state-owned oil company would transfer to private investors. These initiatives put Article 27 on the back burner, but not for long, according to Connell. Mexican law professionals are watching closely and expect that the modifications will move through the Senate by the end of 2013.
So, if this is passed into law, what will it mean for the real estate market in Mexico? Perhaps, a boom once again for coastal regions of Mexico, reminiscent of that experienced by Puerto Vallarta and Riviera Nayarit between 2003 and 2008, the local real estate MLS
seeing a 300% increase in real estate sales between 2002 and 2003. Mexico continues to be an excellent choice for American and Canadian retirees because of its climate, culture and cost of living. When you factor in its proximity to both countries, especially compared to other popular retirement choices such as Hawaii, Costa Rica and Panama, Mexico comes out well ahead.
Although the concept of having to put your property into a trust was a difficult hurdle for real estate agents to overcome in years past, today it is rarely a concern; there have been no problems arising from the trust system with regard to buying and selling real estate. However, if passed into law, it would provide another level of comfort for homeowners, knowing that the property is actually in their name. As this story unfolds, we will continue to provide more information here and on the MLSVallarta.com