THE IMPORTANCE OF CHOOSING the RIGHT BANK FOR YOUR REAL ESTATE TRUST (FIDEICOMISO) IN MEXICO

THE IMPORTANCE OF CHOOSING the RIGHT BANK FOR YOUR REAL ESTATE TRUST (FIDEICOMISO) IN MEXICO

 What is a FIDEICOMISO and what does it have to do with a Bank?

 FIDEICOMISOS (Real Estate trusts) are the only 100% legal way in which a foreigner can have property in the restricted zone of Mexico (located within a 100km band from the geographical borders of the Country and a 50km band along the coasts, which includes the whole State of Baja California Sur).

The Mexican Constitution forbids foreigners to acquire property in the restricted zone. It is by means of this fideicomiso that foreigners are allowed to purchase property within the restricted area for residential purposes.

A Fideicomiso is a contract similar to an American Trust. By this legal document the foreign acquires the “propiedad Fiduciaria” or Fiduciary rights of real estate.

The foreigner cannot gain the title to that land, but he would have instead the unrestricted right to use the property. In compliance with the Foreign Investment Law (Ley de Inversion Extranjera) the Minister of Foreign Affairs gives authorization to the credit institutions (fiduciaries) to acquire real estate property in this area and designate a foreigner as fideicomisario.

 Parties to a Trust

 Three are the parties involved in this transaction; the fideicomitente, the fiduciario, and the beneficiary or fideicomisario.

 1)  Settlor (Fideicomitente): is the person that creates the Trust and must be legally capable. The Fideicomitente is usually the seller in a real estate transaction. Once the creation of the Trust has taken place, the settlor has no further role in the Trust. The settlor cannot interfere in the Trust once it has been created, unless he has reserved for himself a specific authority as trustee or as a beneficiary.

 2) Trustee (The Bank or fiduciario): The Mexican bank acts as the fiduciario. The fuduciario is the person to whom the property is conveyed to be held in trust for the beneficiaries. The Mexican bank acting on behalf of the foreigner purchases the property and holds the title of the property; the buyer pays the bank the purchase price agreed with the seller and in return, becomes the beneficiary of the property.

Even though the trustee is the legal owner of the property, the trust property (or funds) is deemed to be separate from the trustee’s personal property. The trustee represents and acts on behalf of the Trust and has fiduciary and good management obligations to comply with, in order to protect the beneficiaries’ rights under the Trust. The trustee has to do what is best for the beneficiaries.

The buyer’s beneficiary rights are limited to a period of time of 50 years, which can be renewed for the same period.

The bank is responsible for getting the trust permit from the Ministry of Foreign Affairs to establish the real estate trust for the benefit of a foreigner.

Article 385 Ley de Instituciones de Credito (bank Law) establishes that only credit institutions are allowed to act as fiduciaries.

 3) Beneficiary (ies): Usually the foreign buyer. As the beneficiary or fideicomisario the person or persons for whose benefit the property is held in Trust, and who have an equitable interest in the trust fund. The law establishes no restrictions as of who can be a beneficiary to a Trust.

The beneficiaries have rights in rem, which means they have rights on the trust property and rights in personam; or in other words, they have rights against the trustee in case he commits a breach of Trust.

 Why is it important to choose the right bank for your trust (fideicomiso)?

In the years I have been working with Fideicomisos I have found that most buyers do not really realize the importance of choosing right when it comes to choosing a bank (trustee), this could be for one of the following reasons:

 1. Most real estate companies usually have agreements with a certain closing company who in turn has some kind of arrangement with a particular bank. Under this situation, the clients are never informed of the different options so they go with the bank they are told.

       At the paper chase we have worked with all the banks that offer Fideicomiso service in the State of Baja California Sur. There are banks that have except customer service and the lowest fees; there are some that have the most expensive fees and truly faulty customer service; some banks only have an office in Mexico City; other banks do not allow partial assignments of fideicomiso rights, some do; some banks subcontract their own closing companies; some banks have representatives that are very well informed about Fideicomiso contracts and speak English fluently, most banks don’t, etc, etc.

      Usually it is the buyer that pays the closing cost; if the buyer is paying for these services, it is in his interest to hire his own closing agent; it is preferable that the buyer has a Mexican attorney (or a closing agent) to make sure his interests are really represented.

 2. Most buyers do not want to deal with the paperwork involved so they don’t bother with this leaving it for the Real Estate Agent to handle.

      First of all, the Fideicomiso contract will be valid for 50 years (subject to be renews past that time), this means once you have signed with a certain bank you are “stuck” with it, unless you g through the process of changing banks which means additional expenses and paperwork. This is costly, time consuming and redundant so why not choose right from the beginning?

 A buyer should get a clear idea of all the alternatives when choosing a bank. It is the buyer who has to deal with the bank in the future.

 Two types of situations can be found when you buy real Estate in the restricted zone:

 1) Property is already in a trust:

If this is the case If, you should ask all the important questions before signing; ask how much the annual fee is, how much is fee for assignment of rights, how complicate it is to deal with the bank, if the bank’s representative speaks English (you will have to deal with him once a year at least), where the bank’s office is located, etc. In my years of practice I have seen clients walk away from a purchase just because they did not want to deal with the trustee!),

 2) No existing trust:

If you are buying property which is not in an existing Fideicomiso ask your closing coordinator what the differences is in price and service of the different banks and choose the one that better fits your needs, not the sellers or the Real Estate agents needs, after all you will be the one who would have to deal with that bank once the closing is finished.

 Here is comparison chart of costs for the different banks:

*FIC: FOREIGN INVESTMENT COMMISSION, **PRICES IN US DOLLARS,  BANK FEES ARE SUBJECT TO CHANGE  DEPENDING ON PROPERTY SIZE AND TRANSACTION VALUE. THESE ARE 2012 FEES.

 Hope you find this information useful .

ALBA WALKER

ATTORNEY AT LAW

THE PAPER CHASE