Purchasing Beachfront Property in Mexico: How Americans Circumvent Mexico's Constitutional Prohibition

by Alicia Filter March 2 2006, 15:57

Because of the high-cost of real estate in the most desirable areas of the United States, especially southern California, many Americans are searching for a cheaper, less crowded alternative both for vacation homes and for primary residences.  With thousands of miles of undeveloped coastline, and beachfront property costs at a fraction of those in the United States, Mexico has recently become a hot market for Americans wanting a laid-back atmosphere and an affordable vacation home with warm weather throughout the year.  Though Mexico is the perfect place to build an affordable beachfront home, there is one slight problem for foreigners wishing to re-locate there:  Article 27 of the Mexican Constitution prohibits ownership of beachfront property by foreigners and foreign corporations.  Only persons born in Mexico or corporations established in Mexico can gain title to property within Mexico's "Restricted Zone."  [1] 

How do Americans get around this prohibition?  The answer is rather complex. 

Mexico's "restricted zone" encompasses any piece of land located 31 miles or less from the ocean and 62 miles or less from the border.  [2]  Forty percent of Mexico's total land area is located within the "restricted zone."  [3]  This essentially means that the only land foreigners may own in fee simple is the area in the middle of the country, and most people interested in Mexican property want that property to be as close to the beach as possible.  Luckily, in the past decade, Mexican law has created a favorable loophole for foreigners to circumvent the Constitutional limitation on the restricted zone which allows Americans to obtain land in the restricted zone for residential purposes.

Americans and other foreigners can obtain land in Mexico in the restricted zone but cannot gain title to that land.  [4]   Those foreigners wishing to obtain land in the restricted zone for residential purposes must establish what is called a Fideicomiso.  A Fideicomiso is a bank trust; by law in Mexico, only banks can act as trustees.  [5]  In a Fideicomiso, "the seller functions as the donor, the bank as the recipient, and the foreign buyer as the person unable to take."   [6] The way the purchase occurs is that a Mexican bank, acting on behalf of the foreign buyer, purchases the property and holds the title, and the buyer pays the bank the purchase price and in return becomes the beneficiary of the property.  [7]  This gives the buyer the unrestricted right to use property in the restricted zone for residential purposes, though the buyer does not hold title to the property.  Thus, the bank is the trustee and title holder, and the buyer is the beneficiary of the trust.  [8] 

In addition, the buyer's beneficiary rights are limited to a period of 50 years.  Trusts may be renewed one time only, and must be renewed before the expiration of the 50 year period, making the potential life of any given trust 100 years in total.  [9]  This means that if a foreign buyer wishes to purchase residential property in the restricted zone that was previously held in a trust, the potential life of the buyer's trust will be diminished by the period of time that the property was previously held in trust.  For example, if a buyer wishes to acquire beachfront residential property that was previously held in a trust for 15 years, the buyer will be able to establish a Fideicomiso for 50 years initially, but would then only be able to renew the trust one time for only 35 additional years.  No piece of property can be held for longer than 100 years, even if there are various beneficiaries and different foreign buyers along the line.  At the end of the 100 year period, the property will revert back to the Mexican government and no foreign buyer will be able to acquire the property through a Fideicomiso at that time.  However, Mexican property laws have been evolving in this area for the past 30 years, so by the time any of the 100 year trust limits are expired, the law may very well change and allow either an extension of the trust period, as has recently been the trend, or will potentially allow for new buyers to establish Fideicomisos and become beneficiaries.  [10]   

There are two additional requirements for foreign beneficiaries along with the establishment of the trust.  Beneficiaries have to agree to the "Calvo Clause," which requires that buyers consider themselves to be nationals of Mexico in respect to the property and also requires that foreigners not invoke the protection of their own governments in relation to the property, with the penalty for noncompliance being forfeiture of the property.  [11]  The final requirement is that the transaction must be approved by the Ministry of Foreign Affairs.  [12]  Approval is likely if the other requirements have been met, since the Mexican government want to encourage foreign investments. 

The Mexican government allows the creation of Fideicomisos because the economy of Mexico depends heavily on foreign investment and the government realizes that it can capitalize on the thousands of miles of beautiful beachfront property that foreigners wish to acquire.  [13]  Americans can easily become beneficiaries of this desirable property and get around the Mexican Constitution's prohibition by establishing a Fideicomiso and then using the property as they wish for the life of the trust.

For those who want to have the same benefits of having a beachfront vacation home in Mexico, without the capital required to establish a Fideicomiso and purchase the property, there is an easier alternative:  buy a timeshare.  The restricted zone only applies to residential ownership of property by foreigners, where "residential" is defined as owning or leasing property.  Mexican corporations, even those established in Mexico but fully owned by foreign entities, can purchase, and gain title to, property in the restricted zone so long as the property is not used for residential purposes.  [14]  Timeshares are considered to be commercial, or non-residential, uses of property in the restricted zone, and thus foreigners can easily purchase a timeshare property and vacation in Mexico without having to establish a trust and build a residence.  Thus, Americans who want to have beachfront vacation homes in Mexico may do so either through establishing a Fideicomiso or through a timeshare.          

Sources

[1] Manuel F. Pasero, Foreign Investment in Mexico's Real Estate:  An Introduction to Legal Aspects of Real Estate Transactions, 35 San Diego L. Rev. 783, 785 (1998).

[2] Juan F. Moreno, Buying Residential Lands in Mexico's "Restricted Zone", 38 Ariz. Att'y 30, 31 (2002).

[3] Michael Boreale, Beachfront Property in Arizona?:  Loosening Restrictions on Foreign Acquisition of Mexican Real Estate and the Implications for Arizona Investors, 22 Ariz. J. Int'l & Comp. L. 389, 391 (2005).

[4] Id. at 392.

[5] Moreno, supra note 2.

[6] Boreale, supra note 3.

[7] Moreno, supra note 2.

[8] Boreale, supra note 3, at 392.

[9] Moreno, supra note 2, at 33.

[10] Boreale, supra note 3at 400.

[11] Moreno, supra note 2, at 30.

[12] Id.

[13] John E. Rogers, Financing Commercial Transactions in Mexico and the United States: Panel Discussions on Personal and Real Property:  Secured Financing of Real Property in Mexico, 2 U.S.-Mex. L.J. 167, 168 (1994).

[14] Boreale, supra note 3at 405.

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