The WHAT of Fideicomisos - Part 1
By: Cheryl MIller, Broker, Baja Realty and investment
Ok, you hear it all of the time…Fideicomiso, Fidoo, Fidu? Say what?
Fideicomiso, translated means “trust”. In fact, it comes from the Roman, “Fides” meaning “trust” and “comissum” meaning “to commit”. It is a part of general Mexican law derived from Roman, German and Anglo Saxon law which predominantly became in favor and use in the early 1900’s in Mexico. It’s first uses date back to 1905, where foreign companies wanted to make investments in Mexico, such as rail lines, banks or public works projects, but needed assurances for their investments. In 1924, Mexico finally recognized the legal basis for “trusts”. Prior to this time, per the 1917 Constitution, the land , water and mineral rights belonged solely to the Mexican people; i.e., the government, and foreigners had no legal method of legally “owning” land in Mexico. In fact, private ownership, in Mexico, even by its citizens is a relatively new concept that has centuries of arduous history, but that is a subject for another article!
The use of Fideicomisos, as far as foreign “ownership” of property under the Mexican Constitution is concerned, was first established by the Constitutional Amendment of 1971. This concept and law enables foreigner’s to “own” residential land in the Restricted Zone under a “trust”. (The Restricted Zone is defined as 50 (30 miles) kms from ANY coastline in the Mexican nation and 100 kms (60 miles) from ANY border.) Please note, that although amended, this vehicle for foreign “ownership” is now 46 years old, with millions of trusts in place. And a Constitutional Amendment is not easy to do. It requires both the majority of the Senate and the Representatives to approve it, and then each of the 31 Mexican states and the Federal District to ratify it. Not at all simple! So it is a tried and true safe way for foreigners to purchase property in Mexico in the restricted zone.
Understand, that legally, the bank is the owner. But, under the legally recognized, constitutionally approved use of a Trust, YOU are the beneficiary of all rights of use and enjoyment. You can sell, will, improve, profit from the use of the property (as long as you follow the conditions of the trust and follow the law. i.e. – get caught dealing drug from the property- you lose it. Same as the U.S. Get caught trafficking arms- same thing. Fail to pay your property taxes or trust fees- same thing. Not much different than the U.S.!)
In 1973, an amendment was passed requiring foreigner owners to sign and commit to the “Calvo Clause”. The “Calvo Clause”, or “Long Arm Clause”, as it is commonly referred to, states, that the foreigner having interest in Mexican land or property will commit to consider himself Mexican with respect to the property, maintaining his citizenship or his home country, but committing to the laws of the nation, and to not invoke nor to request assistance from his home country with respect to the property located in Mexico. This was done to close a loophole that has been borne out in Mexican History (Part 2 of this article). The penalty for doing so, is the loss of the property rights and cancellation of the trust. (It makes sense that you cannot go to a Mexican court for a dispute regarding land you own in Colorado, right?) It also established that the foreigner needed to pay for the fideicomiso process with an approved trust bank. It also added that the trust could be renewed.
1989, established the term of a “trust” for 30 years. And established that foreign owned Mexican Corporation may own non-residential property. Residential being defined as a dwelling (single family or multi-family), and Non-residential defined as anything else: tourism/hospitality, agriculture, commercial, industrial, etc.
1993 brought new amendments meant to bring more investment capital to Mexican shores. It increased the term from 30 years to 50 years, renewable. Renewing MUST be done however, with secondary beneficiaries living at the time of the secondary beneficiaries being named. This was done to avoid unborn children or heirs from automatically being named, and an unregulated renewal process. (Should a beneficiary die during the term of the fideicomiso, a new one may be named, and the primary beneficiary may change the secondary beneficiary at any time, as well, but, they must be living.)
In 1996 and 1998, amendments were adopted that allowed foreign investors “outside of a Mexican corporation to acquire title to land in the restricted zone for non-residential purposes,” in other word an individual. However, all foreigners holding property regardless of the type of property MUST sign the “Calvo Clause”.
It has been strongly argued that the Mexican nation is highly isolationist, xenophobic and nationalistic to the point of deterring foreign investment. It has been further argued that had the 1993-1998 amendments done away with restrictions on direct foreign ownership in the Restricted Zones instead of making it possible through trusts, that the investment capital during the golden years of the 1990s for the United States would have directly affected the growth and economy of Mexico itself. Please note, that property may be held fee simple in areas of Mexico, outside of the Restricted Zone. So if you want a property in Mexico City or Guadalajara, THAT, as a foreigner, you may own in a simple “escritura”, or deed. The Calvo Clause is a requirement, and Registry with Foreign Affairs, but in my opinion, it makes sense anyway.
But, Part 2 of this article will help you to understand WHY Mexico is so reticent to open its coast lines and borders to fee simple ownership. Even if you don’t agree.
Back to the fideicomiso. Since 2000, there have been many calls to eliminate the Restricted Zone from the Constitution and pave the way for true foreign ownership and much more
foreign investment. The latest attempt was in 2013. It passed one of the Houses of Legislature but failed to pass the second house. In short, it went nowhere. Under the current government, it is unlikely that another attempt will be possible. However, the changes in the Constitution were for residential land only, not non-residential property. And the Calvo Clause was still to be required. Perhaps in the future, a call to lift residential land restriction will come to pass, but for now, foreigners must use the “trust” (fideicomiso) system. If that should come to fruition, holders of fideicomsios will have the option to cancel their current fideicomiso and put their title in an escritura (fee simple deed) or to continue with a fideicomiso.
On the bright side however, let me note the benefits of a fideicomiso, which are GREAT. So do not despair. Did you know that many wealthy Mexican hold title to their property in Fideicomisos? Why? There are many reasons. One, your heirs are directly spelled out in a Fideicomiso. Although there are fees applicable to the heirs to assume the primary rights (bank fees and an inheritance tax), it is far simpler than probate court in Mexico, which can be lengthy, complicated and expensive. Second, the owner on title is the bank. No one can lien the property for debts you personally owe, without permission of the bank. THAT’S A BIG ONE. Third, trusts are governed by Federal, not State or Municipal law, so legal disputes are much faster and easier than disputes in local court systems. So don’t despair…there is always a silver lining to every cloud!
By Cheryl T. Miller, Broker of Baja Realty and Investment, 624-122-2690 or firstname.lastname@example.org