|Look at it as a blind trust…You give me your money and I will administer it!
Mexico has always been on edge about foreign usurpers coming in and taking their land. Everybody knows the story of The Alamo and how Mexico lost Texas to Americans who moved into Mexican territory and took over. And Mexico lost the Southwest to the US in the Mexican-American War of 1846 – 1848. Less known is that Mexico used to extend all the way down to what is now Costa Rica. Mexico lost all that too. Guatemala, El Salvador, Nicaragua, Costa Rica, and Honduras were once a part of Mexico. Mexico is not even one-half of its original size.
When Mexico wrote its new constitution, after the Mexican Revolution, it placed restrictions on foreign ownership of Mexican lands. Up until 1973, any land located within 50 kilometers of the coast, and within 100 kilometers of the border, was a “restricted zone.” Only Mexican citizens could own land in the restricted zone.
In 1973, the Mexican Constitution was changed to allow a form of quasi-foreign ownership in the restricted zones through a vehicle known as a “fideicomiso.” Fideicomiso translates into English as “trust,” but as we will see in a moment it is NOT a trust. The original law allowed a fideicomiso for a period of 30-years. This was then extended to 50-years through a blanket modification in 1994. All 30-year fideicomisos then in existence where extended to a 50-year period, upon application by the owner. In other words, an additional 20-years was added to the fidecomisio when it’s 30-year term expired. Mexico did not extend the 30-year period out of the goodness of its heart. It was a requirement placed on Mexico by the US and Canada in order to push through the NAFTA agreement.
The Two Big Lies
Just about every advertisement for Mexican real estate I have ever seen contains two big lies:
1. A fideicomiso is a trust.
2. A fideicomiso has a 50-year term which can be renewed forever.
There is no such thing as a trust in Mexico. A trust is an entity well-established in English common law countries, like the United States. A legal trust has three parties: a trustor, a trustee and a beneficiary. The trustor is the person who establishes the trust and who transfers his assets to the trust. The trustee is the person who administers the trust. The beneficiary is the person who gets to use or benefit from the assets of the trust. Under English common law, a trust is recognized as a separate person. It owns the assets and it has standing to sue in court. If the trustor goes bankrupt, his creditors cannot go after the assets he placed in the trust (in the absence of some kind of fraud.) [In Lesson #7, we will learn that the IRS has ruled that a Mexican fideicomiso is a Foreign Trust for income tax reporting purposes. This should not be confused with a determination that it is a real trust.]
In Mexico, a fideicomiso in nothing more than a two-party contract between a bank and the person who is “buying” the property. The bank takes legal title to the property and the contract dictates what the bank can do with it. In the usual case, the fideicomiso instrument says the bank is to do what the “buyer” tells it to do. Not being a legal person, a fideicomiso has no standing to sue in a Mexican court. Contracts cannot sue. People sue. There are laws in Mexico that protect the property the bank holds in a fideicomiso from the general creditors of the bank.
The law that determines how long a fideicomiso on property owned by a foreigner can last and under what terms it can be renewed can be found in Articles 13 and 14 of the Law of Foreign Investment. The rules are so short, that I will just reprint them here for you:
LEY DE INVERSIÓN EXTRANJERA
ARTÍCULO 13.- La duración de los fideicomisos a que este capítulo se refiere, será por un periodo máximo de cincuenta años, mismo que podrá prorrogarse a solicitud del interesado. La Secretaría de Relaciones Exteriores podrá verificar en cualquier tiempo el cumplimiento de las condiciones bajo las cuales se otorguen los permisos previstos en el presente Título, así como la presentación y veracidad del contenido de los avisos dispuestos en el mismo. Párrafo reformado DOF 24-12-1996
ARTÍCULO 14.- La Secretaría de Relaciones Exteriores resolverá sobre los permisos a que se refiere el presente capítulo, considerando el beneficio económico y social que la realización de estas operaciones implique para la Nación.
Without laboriously translating that word-for-word, let me give you the meat of it. It says, “The duration of the fideicomisos to which this Chapter applies shall be for a maximum period of 50-years, which MAY be extended upon request.” I added the emphasis to the word MAY here as it is the crux of the matter. It does not say it SHALL BE extended, it does not say it MUST BE extended.
This becomes clearer when I translate the next part, in Article 14: “The Secretary of Foreign Relations shall decide on the permits referred to in this chapter, considering the economic and social benefits that these activities imply for the Nation.”
That means the Mexican government gets to look at you, look at your house, look at your pocketbook, look at anything and everything — or nothing — before deciding if it will renew the fideicomiso. Renewal of a fideicomiso is not mandatory under the law. The first fideicomiso to expire will be around 2024. Even the most expert Mexican lawyers cannot say what will happen then.
The Calvo Clause
Under Mexican law, every fideicomiso in Mexico has a Calvo Clause. A foreign investor in Mexico, when obtaining a fideicomiso, is agreeing to the Calvo Clause, which is based on an Argentinian lawyer called Dr. Carlos Calvo. This clause basically states that the foreigner will not attempt to utilize their home country law or government to settle disputes regarding their Mexico property. Instead, they will consider themselves as Mexicans and utilize the Mexican law in any such matters.
Why is this an issue? Mexican real estate agents, especially those who are working for transnational brokerage firms with familiar sounding names well known in the US, are touting to their customers that they are US real estate brokers, who use US title companies and escrow companies. This gives the false impression that there will be US legal remedies if issues arise with their Mexican real estate purchases.