What is a Bank Trust?
A bank trust is an instrument used by non-Mexicans to purchase coastal property and other land in Mexico’s ‘restricted zones.’ This bank trust is known as a fideicomiso. When talking about Mexican real estate in English, most people use the term “bank trust” because it is easier to pronounce than fideicomiso, but when involved in a Mexican real estate transaction, you should expect to hear and use the term “fideicomiso.”
Mexican Bank trusts must be used by foreigners to acquire property in Mexico’s restricted zones, usually the most desirable areas amongst buyers. These zones consist of coastal land between 60 feet from the mean high-tide line, up to 31 miles inland from the ocean, as well as land within 62 miles of Mexico’s borders. This land is restricted, because Mexico’s Constitution has reserved it. In 1973, Mexico changed its foreign investment laws to encourage foreign investment in both real estate and corporations by instituting the use of Mexican bank trusts.
Mexican Nationals have the option of using either a bank trust or an escritura publica (a type of deed) to acquire real estate in restricted zones. Non-Mexicans however, must purchase Mexican restricted zone real estate using a Mexican bank trust. This means the property’s deed is held by a Mexican bank that has been certified to manage bank trusts. There are three parties that all play a part in the creation of a Mexican bank trust: the Buyer/Beneficiary, the Seller, and the Mexican Bank.
The buyer becomes the beneficiary of the bank trust. The buyer can be a person, a husband and wife or family, any group of people or a stateside limited liability company (LLC). This buyer/beneficiary will receive all the rights that go with the property.
The seller is the grantor. They sell the real estate involved and relinquish all the rights that go along with the property.
A Mexican bank serves as the trustee and has a fiduciary relationship with the buyer. The bank holds naked title to the property, but may only carry out duties related to the property as ordered by the buyer/beneficiary. Naked title means that while the property’s deed is held at the bank, they cannot count it as an asset on their books, sell it or depreciate it, or receive any benefits from the property because they don’t have control of the property.
It is the buyer/beneficiary who has control of the property, with the rights to occupy it, enjoy it, lease it, improve it, depreciate it, 1031 exchange it, finance it with their IRA, borrow money against it, bequeath/will it, add beneficiaries to avoid Mexican probate, lease-option it, sell it, and anything else that can be done with Mexican real estate.
The Mexican bank trust is also fully transferable, which makes it an asset. Also by having a bank trust, you have a broader market to sell to, both Mexican and international buyers. The legal life of the trust is 50 years, and only needs a renewal fee paid in order to continue for another 50 years. If the managing bank goes bankrupt, the trust is transferred to another Mexican bank to continue serving on behalf of the beneficiary.
Can your property be taken away?
Non-Mexicans often worry that their property may be taken away by the Mexican government. Under the North American Free Trade Agreement (NAFTA), Mexico cannot, directly or indirectly, dispossess someone’s property. The only exception is when the government needs the land for public works (example: road construction) and only through legal condemnation is this possible. In the rare case that it is necessary to expropriate land, the Mexican government will pay the the current price with interest to the owner (bank trust beneficiary). This is known as Eminent Domain in the US, Compulsory Purchase in the UK or Expropriation in Canada.
If you have heard one of those stories of people buying property that was taken by the Mexican government, it is because the unfortunate person bought “Ejido” land. This is land without title and only a Mexican citizen is authorized to buy it. To avoid this situation, it is always recommended that foreigners utilize a licensed real estate agent to ensure you are purchasing property with a transferable title.