FIDEICOMISO TRUST FEES

By David W. Connell, Abogado/Attorney
Licensed to Practice in Mexico

Watch out for the boilerplate trust agreements.

            Over the years I have been contacted by many foreigners who are frustrated with the fees they have to pay to the bank acting as their trustee. Unfortunately, upon reviewing their trust agreements (escrituras) I have to inform them that when their trust was set up they agreed to pay the fees the bank charges and also authorized the bank to be able to unilaterally modify these fees. By the time people contact me they are already so angry with their bank they want nothing further to do with them. In these cases the only way out is to transfer the property to a new trust, which means paying expensive closing costs and taxes. How do you avoid this? If you have a trust already set up, you may want to renegotiate its terms. If you are just setting up your trust, then you need to watch out for the boilerplate agreements.

              The procedure for purchasing property in Mexico is very foreign to what most Americans and Canadians are used to. People who are not familiar with a real estate transaction in Mexico usually try and stay on top of what is going on so that their purchase does not become one of the many horror stories they have heard of. They get wrapped up in the details of “closing” on the property and often fail to really understand the trust agreement that they are entering into with the bank. The foreigner gets wrapped up in checking to see if the title to the property is clear, if the property taxes are paid, if the electrical, phone and water bills have been paid up to date, if they have their finances in order to make a cash purchase, what will their annual expenses be, does the property have any structural, plumbing or electrical problems, can title insurance be acquired and just basically trying to understand a foreign way of transferring title to real property. On top of all this, throw in a foreign language and you have a lot bases to cover to make sure title gets transferred correctly into your name.

  Once you get all of the above in order, you move to closing. Documents are signed, payments are made and the parties extend congratulations on the purchase and sale. You have just closed on your new vacation dream home or property, congratulations! Oh but wait, what you have also just done is agreed to the banks boilerplate agreement and this agreement was designed by some very experiences attorneys that work for the bank. As you can imagine, this agreement is written extremely in favor of the bank. This bank now holds title to your property and this boilerplate agreements set down the rules and regulations governing your relationship with your trustee/bank.

I have worked with most of the banks that set up trusts for acquiring property in Mexico restricted zone. Some of the things that you will find in all of their boilerplate agreements are the following:

  1.- The bank has the authority to modify, whenever it deems necessary, the annual fees it charges for the administration of your trust. Annual fees are paid either based on a percentage of the value of the property or a fixed dollar amount. If your annual fees are set as a percentage of the value of the property, the bank authorizes itself to re-appraise your property whenever it see fit and adjust your annual fees accordingly. I recommend that you make sure your trust does not use the percentage method to determine the annual administrative fees.

  Make sure your annual administration is set in dollars and that it can only increase if 1) You are in agreement, or 2) In accordance with inflation of the United States of America. Many times banks will want to set the fees in dollars and then establish that they can increase in accordance with inflation of Mexico. Do not let them get away with this. If you are using dollars, the inflation should be set to United States inflation. If they want to use the inflation of Mexico, well than they should set the annual administration fees in pesos. Most banks will not want to set fees in pesos because if the pesos devaluates, which it often does, they lose big.

  2.- The bank can charges late interest or fines for not paying your administration fees on time. I have seen agreements that charge late interest as high as 3% a month, that is 36% a year!!! What is worse is the bank has no obligation to notify you when payments are due and where they should be paid. Often times you will go to your bank to make your administration payment and the teller or bank manager has no idea what you want to pay or how to do it. This means that you spend your vacation time in banks and on the phone. To avoid this make sure the account information where you have to deposit the fees is clear. Also make sure you know the dates when you have to make payments and most important, make sure that the bank charges NO LATE INTEREST OR FINES unless they notify you fees are overdue and where you can deposit them in order to avoid interest and fines.

  3.-The bank will set fees for signing powers of attorney and the sale of the property. These fees usually seem responsible, however what many people don’t see is that the bank has the authority to charge more for what they consider “unusual circumstances”. From my experience it seems that the bank finds “unusual circumstances” in just about every sale of property or power of attorney they have to sign. An example of this was a power of attorney a client of mine recently needed to defend  himself against a legal claim made by the environmental protection agency. The trust document said that the bank could charge $ 300 dollars for granting powers of attorney. The bank charged $ 650 dollars and stated that there were “unusual circumstance”. If my client did not pay the $ 650 dollars the bank would not sign the power of attorney and he would loose the legal battle with the environmental protection agency by default. You need to make sure the amounts the bank can charge for signing powers of attorney or the sale of the property are clearly established.

  4.- The bank has the authority to determine what fees will be charged for any other types of activities they have to be involved in, such as reviewing documents, authorizing federal zone permits, authorizing mortgages, etc. Do not give this power to the bank. Set a fixed price for reviewing and signing documents other than powers of attorney or the sale of the property. I usually establish a charge of $ 300 dollars.

  5.- The bank can refrain from signing documents if fees and fines or late interest are not paid. This type of disposition goes completely against the concept of having a fiduciary or trustee responsibility, however it is in just about every boilerplate agreement and the bank always uses this type of policy. This type of disposition should only be allowed regarding the sale of the property held in trust, other than that, it should be taken out of the agreement.

  When you close on a property you do so before a notary. The notary charges fees to set up the trust and have it registered. In almost all cases the notary will use a boilerplate agreement given to him by the bank acting as trustee and his fees do not include negotiating with the bank the necessary modifications to the banks boilerplate agreement. To make modification to the boilerplate, you either need to do it yourself or hire someone to do it for you. Spending a little before you sign the agreement will save you a lot in the future. You may also want to ask the notary what extra fees he will charge you to handle this negotiation (he may not even charge you). Make sure you get in writing the modifications that will be made.

  If you have already signed the trust agreement before a notary and are unhappy about what the bank is charging, you need to determine whether negotiating modifications to the existing agreement are feasible. You need to either personally contact the bank or have an attorney contact the bank and determine what needs to be done to modify the agreement. You also need to determine if the cost of the negotiation and modifications will be more than they are worth in the long run. I recommend that you pay an attorney or someone familiar with trusts to contact the bank and determine, 1) The possibility of modifying the trust and 2) An accurate estimate of costs to make the modifications. Make sure you get the estimate in writing and that it covers all costs and fees. Modifications to existing trusts are difficult but not impossible. These modifications need to be dealt with on an individual basis and only after having read and understood the terms of the existing agreement.

The bank has a fiduciary responsibility with you and they charge for these services. Do not let them give you a boilerplate agreement which authorizes them to determine, at their own free will what these fees will be. If you have already signed an agreement which does allow them to charge whatever they see fit, you may want to negotiate a modification and put a stop to increasing fees.

All right reserved 2002 Ó

David William Connell
 

CAN I BUY “EJIDO” LAND?

By David W. Connell , Attorney

Tel. In Zihuatanejo

(755) 554-7957 or 554-2035

            A very large part of Mexican real estate is classified as ejido land. Ejido land is not private property and cannot be bought and sold as if it were. However, since the constitutional reforms of 1992 ejido land now can be converted into private property and sold to third parties, including foreigners. The present article will briefly describe what an ejido is and how ejido land is classified as well as talk about the ways in which ejido land can be converted into private property.

  WHAT IS AN EJIDO?

  In general terms, an ejido is a collective group of people that live and work on a determined piece of property as a community. While the concept of the ejido in Mexico is prehispanic, most of the fundamental ideas and concepts that created what an ejido is today stem from the theories of democratic communism. Understanding this is very important when dealing with ejidos. Most people reading this article have grown up in a society based on democratic capitalism in which the individual and not the community determines what he or she is going to do. In a communistic society the community determines what it is going to do, including agreeing upon how the land they hold is to be used.

Taking into consideration the above, it is not hard to imagine the confusions that could exist when discussing ownership of ejido land. Most foreigners associate the word “ownership” with words such as “fee simple”, “private property” “Adam Smith”, while the ejidatarios idea would be more on the lines of “community rights”, “right to use and enjoy”, “governmental concession”.

  Until ejido land is converted to private property, foreigners cannot acquire “ownership” of ejido land in accordance with their understanding of the word “ownership”.

Please remember:

  1.- Ejido land cannot be sold to non-ejido members until it is converted into private property. There are exceptions where non-ejido members can acquire “posessionary” rights to ejido land, however the rules governing posessionary rights are not very secure, especially for foreigners.

  2.- Foreigners cannot legally become ejidatarios.

  3.- What an ejidatario understands as ownership is often times different than your understanding of ownership.

  CAN EJIDO LAND BE CONVERTED INTO PRIVATE PROPERTY?

              There are two principal ways in which ejido land can be converted into private property and they are as follows:

  1.- By filing a suit based on prescriptive rights (adverse possession). This suit will only be productive when the person wanting to acquire title to ejido land can prove that he or she has possessed the land in good faith for 5 years or in bad faith for 10 years. Many professionals argue that this rule does not apply to foreigners. This article does not focus on converting ejido land into private property in this manner, however it should not be dismissed as a viable option.

The legal institutions of “prescriptive rights” or “adverse possession” are the methods of acquiring complete ownership rights to property, against the owner and other third parties, through possession of the property for an uninterrupted period of time. This time will be interrupted if the possession of the property is left or if the legal owner or a third party makes legal claims to the land. This method cannot be used if a contract exists between the owner and the person in possession of the property. Under the new Agrarian Law “prescriptive rights” can be used to acquire ownership to property. The “good faith”, 5 year possession rule, in general terms, means that you have to possess the property for 5 years, be recognized locally as the owner, pay your property taxes and not know who the true owner is. The “bad faith” 10 year possession rule, in general terms, means that you have to possess the property for 10 years and you may or may not know who the owner is.

  2.- By having the ejido agree to “certify” the rights of each person who owns or possesses land in the ejido and then convert the certificates to private property titles. In order to accomplish this the ejido must agree to enter and complete the following two procedures:

A.- PROCEDE.- PROCEDE or “Program of Certification of Ejido Rights” is a government procedure by means of which the government, upon the approval of the ejido, certifies the agrarian rights to land within the ejido. This is not an obligatory procedure and will only begin when the majority of the ejido agrees to enter into the procedure and the ejido does not have any legal conflicts that prohibit it from entering into the program.

Some of the more common types of conflicts that inhibit an ejido from entering PROCEDE include: conflicting ejido boundaries, internal conflicts, pending litigation and determination of actual number of ejido members.

Once the ejido has agreed to enter into PROCEDE, the government at no expense to the ejido, will study the documents of the ejido and begin the often time long procedure of surveying the entire ejido. The surveying procedure often takes a long time due to the fact that each individual lot, parcel and common use land needs to be surveyed. These surveys are based on radiolocation points and GPS and the maps are registered with the corresponding governmental agencies.

Once the entire ejido is measured, an ejido meeting or “Asamblea” is called to assign each parcel and lot to the person the ejido recognizes as the owner. If there are areas in the ejido in conflict or that have not yet been assigned to a specific person, the ejido can agree to leave such area to be assigned at a later date. Once the land of the ejido has been assigned, the government will issue the certificates or titles that correspond to the land in questions. Certificates and titles are not synonyms and different rules apply to each one. One thing that must be understood is the fact that in accordance with laws governing ejidos there are three basic types of ejido land. These three types are land are classified as follows:

  1.- “Solores” or lots and which are converted to private property through the PROCEDE procedure and do not require the “Dominio Pleno” procedure to be converted into private property titles.

2.- “Parcelas” or parcels. Through PROCEDE parcels are given “certificados parcelarios” or parcel certificates and which are governed by agrarian or ejido law until converted to private property titles through the “Dominio Pleno” procedure.

3.- “Uso Comun” or common use land. Common use land cannot be converted directly into private property titles but can be converted into either “Solares” or “Parcels”.

              As soon as the government has issued the majority of the ejido titles or certificates the second procedure which is called “Dominio Pleno” can begin and by means of which each individual ejidatario can convert his parcel certificate into a private property title.

  B.- Domino Pleno.-

The Dominion Pleno procedure is much less involved than the PROCEDE procedure. Once the ejido legally can enter into Dominio Pleno, an ejido meeting has to be called and the members of the ejido have to agree that each individual ejido member can, from the date of the agreement, convert their parcel certificates into private property. This does not mean that from this moment on all the land in the ejido is now private property. The only thing that the approval of Dominio Pleno means is that each individual ejido member, whenever he or she feels it is convenient, can convert his or her parcel certificate into a private property title.

Once the parcel certificate is converted to a private property title and dully registered, the ejido member can sell to persons outside of the ejido, including foreigners, observing certain third party legal rights.

  Please understand, even though the Dominio Pleno procedure is much less involved than the PROCEDE procedure, there are many formalities that must be observed. If these formalities are not observed the transfer of the corresponding property title could be declared null and void.

The fact that vast tracts of ejido land can now be converted into private property, coupled with the fact that recent reforms in Mexican legislation now allow foreigners to secure tile to land much easier add up to huge investment possibilities for people looking for security through real estate investment with the probability  of large returns. Please contact me if you have any questions regarding the above or are interested in acquiring ejido property.

  All right reserved 1998 ©  David William Connell, Abogado


If you have questions on any of these items and want to discuss them with a U.S. attorney and CPA who is familiar with Mexican real estate law call Don D. Nelson at (949) 481-4094 or email at dondnelson@yahoo.com  Mr. Nelson will work with Mr. Connell to help you find answers and resolve your problems.