Sean Bork Group

Fee Simple Ownership of Mexico's Beaches is On The Horizon! 

By Raúl O'Farrill, Founding Partner of O’Farrill & Associates, P.A.

Most American's and Canadians who have visited Mexico have heard the term Restricted Zone, the

parts of Mexico where non-Mexicans can presently only own real estate through a bank trust.

The Restricted Zone is any real estate that is within 30.5 miles (50 kilometers) of Mexico's coast, or

61 miles (100 kilometers) of Mexico's border with any other nation. This law is quite old, and is

enshrined in Article 27 of the Mexican Constitution. Anywhere outside the Restricted Zone (for

example: Mexico City, Guadalajara, Puebla, Hermosillo, Alamos, etc.) anyone can buy property on

a Fee Simple basis, and it is both legal and common for non-Mexicans to own property in those

areas through Fee Simple ownership mechanisms.

To an American or Canadian these distances -- and even the existence of the law itself -- may

seem odd or arbitrary, but there is a rational basis that is rooted in Mexico's history. The Restricted

Zone was created to help protect Mexico from invasion. At the time of the Mexican Revolution and

the drafting of the modern Mexican Constitution (1917) the effective range of the largest artillery

was 25 kilometers, and the multiples of two and four times that distance were deemed a prudent

buffer against the possibility that nations could acquire land and pre-position troops and supplies in

advance of an invasion. While this may sound like a ridiculous scenario today, it is important to

remember that Mexico has experienced several invasions, wars, and tremendous losses of territory

in its history (for example; all of Central America including Guatemala, El Salvador, Honduras, and

Nicaragua, as well as Texas, New Mexico, Nevada, California, Oregon, and parts of Idaho,

Colorado and Utah! All of them in less than 50 years! Plus a United States invasion in 1914 that

occupied both Veracruz and Mexico City!). The Restricted Zone is really nothing more than a

legacy of this history.

Now, with nearly a century of peaceful relations with its neighbors (and the existence of powerful

long range weapons!) Mexico's Restricted Zone obviously doesn't have any security value, but --

like many outdated laws worldwide -- it remains on the books and in the patriotic hearts of the

population despite the fact that virtually no one even remembers why it was enacted in the first

place.

But change is in the wind. Sonoran Federal Senator Carlos Zatarian of the PRI party has submitted

a Constitutional amendment to Mexico's Senate that would rescind all of the existing bank trust

requirements and -- essentially -- abolish the Restricted Zone and allow Fee Simple ownership 

everywhere in Mexico!

This remarkable move has come about for one simple reason: there is a growing awareness within

the highest levels of Mexican government – which extends to our newly elected PAN party

President, Harvard-educated economist and free market advocate Felipe Calderon -- that even the

perception of "restriction" is a hindrance to the development of our majestic coasts.

Why do I say "perception"? The bank trust mechanism created by Mexico's Foreign Investment Law

was designed to facilitate the safe acquisition of coastal and border properties by non-Mexicans,

and specifically designed to protect foreign owners rights. For over 35 years these bank trusts have

proved themselves a secure ownership mechanism for the more than a million and a half

Americans and Canadians who are now enjoying the lifestyle and financial benefits of Mexican

property ownership. These trusts are also wonderful tools that offer sophisticated estate and tax

planning benefits -- as well as significant legal protections -- and are used by many Mexicans as

well. For example, my personal real estate holdings in Mexico are held in bank trusts, and I was born in Mexico City

and my family have been citizens of Mexico since 1849!

That being said, Fee Simple is  simple; appeals to some cash buyers who wish to make their

purchase as uncomplicated as possible; and very well may make financing of some Mexican real

estate purchases simpler as well, in that the ownership instruments will more closely resemble

those that American and Canadian lenders are familiar with.

As I have discussed this exciting possible change in the rules applying to coastal real estate

ownership with American and Canadian clients a number of questions seem to be on everyone's

mind.

Do you think that this Constitutional amendment will become law?

Yes.

How long do you think it will be before the Constitution is amended?

This is a more difficult question, and one that requires a bit of background on the process that will

be involved. Mexico's Constitution is designed -- much like that of the United States -- to require a

very high degree of consensus to amend. Specifically, it is necessary to garner 75% of the votes of

both the Senate and House of Representatives at the Federal level, and the same percentage of

every state congress -- 32 states in all. It is noteworthy that this is actually a higher degree of

consensus within the Federal Congress (75%) than required for a constitutional amendment in the

United States (2/3), and that this relative "rigidity" has been part of the strength of the modern

Mexican Federal Government.

While we at O'Farrill & Associates do not claim to be able to predict the future -- and while this

process will certainly take several years -- we believe that this important evolution of Mexico's

coastal real estate market will take place within Felipe Calderon's Presidency, effectively within the

next five years and 8 months. There is a substantial possibility that this change could occur well

within that time frame, as the economic benefits to Mexico are becoming widely understood.

I own coastal real estate now. What will happen to my bank trust?

Nothing. Your existing bank trusts -- like my own -- will remain exactly as they are, and you will

continue to receive the benefits that were designed into them.

Will I still be able to acquire coastal property through a bank trust after the constitution is amended?

Absolutely. The bank trust mechanism will remain available not only along the coasts and borders,

but everywhere in Mexico, exactly as is the case today. This constitutional amendment is entirely

about broadening ownership options for non-Mexicans. We further believe that -- particularly in the

Rocky Point market -- our unique asset-protection mechanism, Guarantee Trust, will remain the

favored vehicle for United States-based lenders operating in Mexico because of the rock-solid

security that it provides both buyers and sellers. Beyond transaction security, bank trusts and

associated ownership mechanisms offer a number are useful and adaptable tools for estate

planning, asset protection, and financial opportunities like refinancing and the use -- either by

individuals or groups -- of self-directed IRA funds for the purpose of acquiring Mexican real estate.

Where Fee Simple ownership is offered today, is the difference between ownership through a bank

trust or on a Fee Simple basis the central choice that a non-Mexican makes about ownership of Mexican real estate?