Real estate trusts for foreigners: How do they work?
In recent years, real estate trusts have become popular. It is a viable and safe option for foreigners seeking to invest in real estate in Mexico. This is due to the advantages it represents.
A real estate trust is a legal and secure tool used to help foreigners acquire property. On the other hand, it also helps Foreign Direct Investment (FDI) to grow.
Let’s get to know real estate trusts in detail.
What is a real estate trust?
A real estate trust is a contract whereby a person transfers the ownership or title to real estate or its rights to another person, whether an individual or legal entity, with the fulfillment of an obligation by the latter. It is important to mention that such contract contemplates that the property will be used for lawful purposes. Also that the transfer is made by means of a public deed or title deed.
What is the purpose of real estate trusts?
Real estate trusts are a tool that allows the development of real estate activities that meet the needs of all parties. It provides legal certainty and at the same time ensures that the real estate assets of the person transferring the property are delivered in the manner agreed within the trust.
Real estate trusts are composed of three parties: settlor, trustee and trustee. The first one transfers the property, the second one is usually a financial institution and the last one is the one who receives the rights or benefits. Let’s look at each figure in detail:
What is a trustor?
The settlor is the individual or entity that owns the property and decides to transfer it or its rights to another person or entity, the trustee. In other words, it is the owner who signs a contract with a trustee to manage the property.
What is a trustee?
The trustee is in charge of managing the assets transferred by the settlor for the benefit of a third party. It is he who receives the legal transfer of ownership and who will manage the assets.
What are the trustees?
The trustees are those who legally guarantee compliance with the contract or trust and the fulfillment of its conditions. They are individuals or legal entities that are designated by the trustor to receive the benefit or ownership of a real estate property.
In brief:
- Real estate trusts are contracts
- With real estate trusts the domain or ownership of a real estate property is transferred.
- The settlor is the one who transfers the domain (client or foreign investor for the utility of this article).
- The trustee is an entity or figure authorized by law to acquire real estate or rights.
- The trustee becomes the owner and uses the real estate for purposes that were stipulated in the trust, with the approval of the settlor.
- The trustee is a natural or legal person who receives the benefit detailed in the trust.
Importance in the real estate industry
In a sector that represented in 2022 a total expenditure of 511 billion pesos, real estate trusts become more important as an investment tool. Specifically, during 2022, investment by real estate segments represented:
- Hotels: 48,075 million pesos (9.4%)
- Traditional housing: 269,844 million pesos (52%)
- Vacation housing: 90,143 million pesos (17.6%)
- Industrial real estate segment: 42,494 million pesos (8.3%)
- Commercial segment: 46,572 million pesos (9.1%)
It is important to mention that the real estate segment that has grown rapidly is vacation housing. In 2022, it represented US$3 billion in sales and is expected to reach US$7 billion by 2030. Part of its growth is due to the facilities provided by real estate trusts.
Foreign direct investment (FDI)
More and more, businessmen and foreigners are choosing this form of real estate investment. Especially in states with high rates of Foreign Direct Investment (FDI) such as Quintana Roo and Yucatan. According to El Economista with data from the Ministry of Economy, in 2022, FDI was the highest in the last 7 years. A total of 35,292 million dollars was achieved with an inter-annual increase of 12%.
Of the FDI registered during 2022, 5,739 million dollars were registered in trust contracts. Of the total FDI in 2022, 4% corresponds to Temporary Housing.
According to the Government of Mexico, Foreign Direct Investment (FDI) aims to “create a lasting link with long-term economic and business purposes, by a foreign investor in the host country”. Thanks to FDI, it can be achieved:
- Attraction of foreign exchange
- Employment generation
- Increasing development
Legal framework
Within the management of trusts in Mexico, there is a legal framework. We will mainly focus on the payment of domain transfer taxes.
Article 14 of the Federal Tax Code states that the payment of transfer of ownership taxes will not be paid when the settlor reserves the right to reacquire real estate.
Types of trusts
Below we will detail the different types of trusts that exist and their characteristics:
Management trusts
Administration trusts are those that allow the owner to have a trustee appointed by him. That is to say, it is a trust in which the settlor transmits and delivers the assets or securities to the trustee for the purpose of management by the trustee.
Guarantee trust
This is the most popular type of trust. Its purpose is to guarantee the rights and obligations of those involved in a transaction. In short, the guaranty trust refers to an obligation acquired by the trustee in favor of the settlor for the fulfillment of an obligation and preference in payment.
Investment trusts
Investment trusts are used for business activities such as the acquisition, reclamation or management of assets, resources and securities. Their main purpose is the investment of a trust estate that is entrusted for the purposes to the trustee.
Real estate trusts
The real estate trust is a type of trust that allows the transfer of real estate from one person to another. It is commonly used by foreigners looking to buy property in Mexico.
The advantages of real estate trusts are many, since they serve as a guarantee and provide legal security.
Main differences
In a traditional sale, the transfer of ownership of the property occurs through a public deed. This requires the presence of an authorized notary public who will register the sale in the Public Registry of Property. In addition, this process involves additional costs such as taxes, legal fees, etc.
In contrast, with a real estate trust the property is transferred by means of a trust contract. In addition, it allows for greater flexibility, since the parties can agree on certain conditions that are more advantageous to them. In addition, this option provides legal certainty and protection, as it is regulated by specific laws.
Finally, foreign investors have the guarantee that their investment is safe and that the property will not be subject to any claim or irregularity.
Why are they recommended for a foreigner?
Real estate trusts are highly recommended for foreigners wishing to enter the Mexican real estate market. They provide legal certainty and guarantee that the transaction is carried out correctly, since they are regulated by Mexican law. They are also contracts signed before a notary public.
In addition, real estate trusts facilitate the transfer of property from one person to another and provide a much simpler process than buying in cash or through a bank loan.
On the other hand:
- There is confidentiality of the owner of the real estate.
- The trustee adheres to the terms established in the contract.
- The real estate cannot be seized
What is required?
In order to carry out a real estate trust, a relationship between settlor and trustee must first be established. Then, in order to carry out the transfer of the real estate, a contract must be established before a notary public. The notary public will assist in the drafting (if necessary) as well as the notarization of the deed or constitutive policy.
Another essential point is to authorize the use of the corporate name and the registration before the Tax Administration Service and before the Public Registry of Commerce.
How does a real estate agency do this?
In order for a foreigner to acquire property in Mexico through a real estate trust, the assistance of a real estate agency is highly recommended. This will ensure that the entire process is carried out in accordance with Mexican laws and regulations.
The first step is for the prospective buyer to contact a reputable real estate agency. The agency’s experienced team will be able to advise on the best option for each specific case.
The agency will then draft a trust contract to be signed by both parties before a notary public, and register the deed with the Public Registry of Commerce and its registration with the SAT. They will also take care of all the necessary paperwork, such as certificates of non-liability, and ensure that taxes are paid correctly.
Finally, they will manage communication with all parties involved in the transaction, thus ensuring that it runs smoothly and without delays.
Real estate trusts are highly recommended for foreigners wishing to purchase property in Mexico. Real estate agencies are essential to ensure a safe and legal transaction. They will provide personalized advice and take care of the necessary paperwork and communications, helping the process.
With Dreambuilt your dream of owning a property in Mexico as a foreigner is very close. Contact us to learn more about our service and the benefits you will get.
Keys for the contract
In order to create a valid real estate trust contract, there are certain elements that must be met. These include:
- Having clear clauses and endorsed by a notary public.
- The contract is consensual between its parties
- It must be formal and in writing
- It must comply with legal requirements
- The trustee receives remuneration
- The settlor must have legal capacity to sign the contract
- The trustee must be legally authorized by the government to act as a trustee
- Is confidential, by law
- Involves a transfer of real estate
In conclusion, real estate trusts are an attractive option for foreigners looking to invest in property in Mexico. They offer legal protection, greater flexibility and security in their investments. In this way, investors can be sure that they have made the right decision.
