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What are the typical providers of real estate financing in your jurisdiction? Are there any restrictions on who may provide financing?
No; there are no restriction on who may provide financing for real estate developments.
The most common financing providers are banks, Mexican pension funds (AFORES), real estate investment trusts (FIBRAS) and real estate funds, which may also act as investors on real estate projects.
What are the most common structures used to secure real estate financing and how are these security interests perfected?
The most common structures to secure financing are:
- mortgages over real estate; and
- guaranty trust agreements, which may include not only the real estate, but also funds from the project, licences, contracts and insurance policies.
Guaranty trusts agreements are also used in the financing of offices, retail stores and industrial parks, since the trust is a perfect vehicle to capture lease agreements executed with tenants and the cash flow resulting therefrom.
What covenants are typically made in financing agreements?
Some common covenants included in financing agreements are:
- performance by the borrower;
- use of funds and proceeds resulting from the sale of units in the development;
- warranty of title to the real estate;
- minimum conditions for the sale or lease of units in the development;
- insurance requirements;
- care and use of the property;
- restrictions in relation to creating liens and encumbrances over the property; and
- covenants designed to maintain the financial independence of the financed project from other projects being constructed by the developer.
Enforcement of security
How are security interests enforced in the event of default?
The procedure to foreclose on collateral depends on the type of security. The enforcement of a mortgage begins when the lender files a claim before a court demanding payment of the indebtedness and requesting the foreclosure of the mortgaged property to satisfy the defaulted obligations. If the borrower cannot satisfy the defaulted obligations or make a payment, the court will order the mortgaged property to be auctioned. Most state statutes provide for special mortgage foreclosure procedures which tend to be quicker than ordinary civil procedures.
Foreclosure procedures are also one of the main reasons why guaranty trusts are commonly used in Mexico: guaranty trusts provide for private (non-judicial) foreclosure procedures. Non-judicial foreclosure procedures are agreed on in the trust agreement and, in order to be enforceable, they must meet certain minimum requirements, such as granting the borrower the ability to pay the amounts due before the foreclosure starts. The procedures are usually conducted by the trustee, who may seek the assistance of an appraiser and real estate agents.
What is the typical timeframe for the enforcement of security?
The timeframe for foreclosure of collateral also depends on the type of security interest. For example, enforcement of a mortgage typically takes between eight and 24 months. The timeframe for the foreclosure of a trust depends on the procedure agreed on in the trust, but because of its extrajudicial nature, it is customarily quicker than the foreclosure of a mortgage.
What is the general climate of real estate investment in your jurisdiction?
Despite the volatility of the macroeconomic environment regarding international commerce and monetary indicators and the fact that Mexico’s economic growth did not reach the expected levels due to several factors (eg, insecurity, corruption and low oil prices), Mexico’s real estate climate is perceived as a favourable one and international investment has continued to be seen in real estate developments.
Who are the most common investors in real estate?
Mexican pension funds (AFORES), real estate investment trusts (FIBRAS), real estate developers and local and international real estate private equity funds.
Are there any restrictions on foreign investment in real estate?
There is no restriction on foreigners investing in Mexican real estate if the real estate is held through a Mexican entity or trust.
Foreigners may directly invest in real estate before obtaining the corresponding permit from the Ministry of Foreign Affairs or a record from the ministry that the corresponding notice was provided before its acquisition, as provided by the Foreign Investment Law.
Further, foreign ownership of real estate is limited to land outside the designated restricted zone – that is, any area within 100 kilometres of any neighbouring border or 50 kilometres of any coast. However, the Foreign Investment Law provides that foreigners may acquire interests in real estate located in the restricted zone through a trust, provided that:
- a permit is obtained from the Ministry of Foreign Affairs; and
- the trust has a maximum duration of 50 years, which may be renewed for another 50 years.
What structures are typically used to invest in real estate and what are the advantages and disadvantages of each (including tax implications)?
The feature that singles out Mexico in comparison to other jurisdictions is the common use of trust agreements for the development of real estate projects. Trust agreements may act as transparent tax entities or tax contributors.
Particular advantages and disadvantages of a given structure depend mainly on:
- the type of real estate being developed;
- whether the resulting project is destined for the sale or lease of real estate;
- access to bank financing; and
- the particular tax regime of the investors (whether they are Mexican individuals or entities or foreign individuals or entities).
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