The Dilema of the Bank trust

by Lic. Gamill Arreola Leal, Notario 32



THE DILEMMA OF THE RESTRICTED ZONE: FOREIGN INVESTMENT AND REAL ESTATE DEVELOPMENT OR NATIONAL SECURITY?  
For historic reasons of national security (To prevent any invasion by foreign troops in our Mexican territories), Article 27, Section I of the Constitution of the Republic of Mexico, was set up, what is known as, a Restricted Zone (formerly called Prohibited Zone): This Zone consists of a strip of land 100 kilometers along any border and 50 kilometers along any coastline.  Article 27, Section 1 states that it is forbidden for foreigners to acquire direct ownership over land and water, allowing them only the use and development of real estate in this area for residential purposes (defined as homes, rooms, or livable spaces like condos) through a trust agreement with a maximum duration of 50 years, such as allowed by the Foreign Investment Law and General Law of Securities and Operations of Credit Notes. 

In case the property acquired in the restricted zone is intended for purposes other than residential (industrial, commercial, agricultural, etc.), this land can be purchased through a Mexican Company with foreign investment, without a trust. 

Outside the restricted zone, foreigners in Mexico can acquire any property, regardless of whether it is for residential use or not, in a direct ownership title. 

In our Federal Congress, both the Chamber of Deputies and the Chamber of Senators, have been presented several initiatives aimed at reforming the above-mentioned Fraction I of the Constitution- Article 27 (the legal basis for the requirement for fideicomisos in the Restricted Zone), in order to allow foreigners to acquire direct ownership of real estate for residential purposes located in the restricted zone, without the need for a trust or Mexican Corporation. 

Such initiatives are Constitutional changes, and to this day they have not been successful, mainly because there still exists large segments of the population and their arguments aimed at not losing their historical memory of our country (The history is Mexico is fraught with many attempts and successful invasions from the U.S., Spain, France, Argentina, and many more- Editor’s Note).  Some lawmakers have expressed, “Who has no respect to history, are doomed to repeat it”.  While, at the same time, other lawmakers and sectors of the population support the initiative for Constitutional Reform have stated, “That in our current modern times, openness to trade and globalization, our country needs foreign investment as a vehicle for national development.” It is worth mentioning, that all trust fiduciary institutions (Bank) are the owners of the property set in trust, and at present in our country, the vast majority of banks, are backed by foreign capital. There are also hotels and tourism developments built in the restricted area, which are owned by foreign companies. 

It is important to point out, that while the proposed Constitutional Reform has already had several attempts to be ratified, in my opinion, this reform should continue being analyzed, always with the intent to benefit the general interest of the Mexican Nation, and especially for the residents of the restricted zone itself, taking into consideration the times - weapons used then and now and new military strategies, as well as, any cited historic constitutional reasons for the ban. 

In order for the case of eliminating the Restricted Zone to be adopted as a Constitutional Reform, after any Reform, we must preserve and require to have present in every act of foreign investment and in any real estate transaction within the restricted zone, the CALVO Clause, also known as the “Long Arm Clause”.  This Clause states that every foreigner is obligated, before the Mexican Government to be considered national, with respect to your investment and is committed to not invoke the protection of the Government of their country of origin, otherwise, you will lose all of your rights to the Mexican nation. (Editor’s note: Basically you cannot sue in the United States about property held in Mexico. This makes sense. You cannot sue in Mexico about U.S. real estate either!)

There are opinions about our current reality, a reality that has largely benefitted the banks, who charge commissions and fees for trusts and who have made thousands of trusts related to real estate located in the restricted areas of our country. There are also voices who have noted the existence of simulation of legal acts through strawmen involved as representatives of foreigners (Editor’s note: Simulation is tantamount to fraud). 

Real estate agencies and real estate developers, support such constitutional reform, arguing that this would cause a greater foreign investment and real estate development in the coastal areas of our country. 

The notary, as also the public corridor, as provided by the Law of Foreign Investment, in coordination with the Federal Authority, is responsible for intervening in the formalization of Constitution of Companies, transferring of rights of a trust, and in case the notary, in the Constitution of Trusts, guaranteeing in this way and in such operations, the establishment of the CALVO Clause mentioned above.

As we can see, there is a dilemma: foreign investment and real estate development or national sovereignty and respect for our history

By Lic. Gamill Arreola Leal, NOTARIA PUBLICA 32 and CORREDURIA PÚBLICA 4, Mariano Abasolo 650 entre 20 de Noviembre y Revolución, Cabo San Lucas, Baja California Sur. México.,Tel (624) 688-1378, arreolagamill@gmail.com