News reports of millions of dollars being invested into projects such as airports, renewable energy sources and housing, commercial and industrial developments which later fail are increasingly common.
In determining the feasibility of a real estate project, an evaluation of the relevant financial and statistical analyses is not enough. Due to the complex and extensive legislative scope that developers now face, they must also consider the legal factors that will affect a project's implementation and operation.
This update focuses on four factors that must be carefully analysed to ensure the viability of a project from a real estate perspective.
Failing to comply with the authorised use of a property or the activities permitted to be undertaken there often contributes to the failure of real estate projects, as a failure to observe the urban regulations relating to land use and exploitation can have a severe impact on a project's functionality.
However, it is not enough to confirm that the property on which a project is to be developed can accommodate the project's technical requirements. It is also essential, before making any formal commitment, to verify the property's urban zoning, in accordance with the corresponding urban development programme, in order to clearly identify the authorised use of the property and the activities that can be carried out there.
A proper evaluation in this regard will reveal not only which activities can be carried out on a specific property, but also:
- various other elements that an investor should factor into its projections; and
- the rules and requirements that must be complied with when developing the property, including:
- the maximum size and storeys of a construction;
- whether any green areas are required; and
- the mandatory number of parking bays.
The authorised use of a property can be discovered by obtaining a zoning certificate, which will generally reflect the applicable zoning requirements, permitted activities, urban regulations and rules of use.
If a project does not comply with the authorised use of the property or the applicable urban regulations, this may result in administrative penalties, including economic fines or site closure.
Before obtaining the environmental permits required to start a real estate project (eg, those regarding the project's impact and environmental risk, as well as fixed emission sources and any change in the use of forestry land), developers must first determine a project's feasibility from an environmental zoning perspective.
Urban development programmes regulate the use of land in most states. As such, the "use of environmental soil" within a state's territory is regulated by the relevant territorial ecological management programme. These programmes aim to balance human activity with the natural resources of a specific site. They impose rules regarding the use of natural resources, limited or conditioned industrial activities, protection zones and nature reserves.
Therefore, in addition to verifying the authorised use of a property under the applicable urban development programme, it is essential to confirm a property's environmental zoning classification in order to determine a real estate project's viability from an ecological perspective.
The authorities in charge of issuing permits relating to the operation of real estate projects must consider the Ecological Planning Law in granting such permits. If a permit contravenes the applicable management programme, it will be invalid.
In order to validate the current ownership of a property, real estate developers should – in addition to applying for and reviewing the corresponding certificate regarding liens or other encumbrances registered against a property – perform a complete background check to confirm the logical chain of title up to the property's current owner and discover any potential background deficiencies or inconsistencies. In certain zones, special attention should be given to a property's agrarian properties or agrarian-related background and the formalities that must be followed regarding private ownership of such properties, which are often overlooked.
Under Article 2 of the Constitution, an 'indigenous community' constitutes a social, economic and cultural entity that:
- has settled in a territory; and
- recognises its own authorities in accordance with its own customs and traditions.
Indigenous consultation is a national and international right that provides the means to determine whether the rights of an indigenous community will be affected by a real estate project.
The Office of the UN High Commissioner for Human Rights (OACNUDH) has stated that the right to consultation is both a human collective right and an effective instrument for communities to exercise other fundamental rights. It is based on principles such as equity, self-determination, diversity, identity and respect of a community's land, territory and natural resources.(1)
Convention 169 of the International Labour Organisation states that governments must "consult the people involved, whenever legislative or administrative measures are likely to affect them directly". It also sets out guidelines on how indigenous and tribal consultations should be carried out, which include as follows:
- Consultations must be conducted in good faith and through the applicable community's representative institutions.
- The community involved must have the opportunity to freely participate at all levels in the formulation, implementation and evaluation of plans and programmes which may affect them directly.
- If an appropriate consultation process is not developed with indigenous or tribal institutions or organisations that actually represent their members, the consultations will not meet the Convention's requirements.
Despite the fact that the International Labour Organisation Convention 169 was ratified more than 15 years ago, indigenous consultation did not become relevant to the development of real estate projects until recently, following various legislative reforms. For example, following the enactment of new energy legislation (eg, the Hydrocarbon Law and the Energy Industry Law), energy investors must now carry out indigenous consultation. Thus, prior to a real estate project's implementation, it is essential to carry out investigations to confirm the presence of indigenous communities that may be affected and, if applicable, exhaust the consultation process.
A well-known case in Mexico which has implications for the real estate sector concerned the Independence Aqueduct in the state of Sonora. In January 2010 the local government announced the Sonora Sistema Integral project, under which several hydraulic works were proposed to supply water to various towns in the state, without informing or obtaining consent from the Yaqui community. Among the works contemplated, the local government proposed the Independence Aqueduct, which would move 75 million m3 of water annually from the Yaqui River within the Plutarco Elias Calles dam to the city of Hermosillo. The competent authority:
- assigned 50 million m3 of water for the aqueduct's construction;
- announced the bidding process for its construction; and
- submitted the environmental impact assessment for evaluation, which was successful.
Notably, none of these processes complied with the obligation to inform and obtain consent from the affected indigenous communities. The Yaqui community thus filed a petition for a declaration of amparo (ie, a violation of constitutional rights by an authority), which was granted in May 2012 and appealed by the federal authorities. Given the importance of the matters that were resolved in that trial, the Supreme Court of Justice decided to hear the case and resolved it in favour of the Yaqui community. The court granted the amparo requested against the environment impact authorisation issued by the Ministry of Environment and Natural Resources for the construction of the aqueduct and ordered the authorities to restore the process, including community consultation.
In view of the above, it is essential to get proper legal advice during the evaluation stage of a real estate project.
For further information on this topic please contact Andrea Cavazzani S at Santamarina y Steta by telephone (+52 81 8133 6000) or email (firstname.lastname@example.org). The Santamarina y Steta website can be accessed at www.s-s.mx.
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