Pre-Construction Sale Agreements

Up until the third quarter of 2022, the inventory makeup in Los Cabos was 970 properties, where pre-construction inventory (554 units) on MLS exceeds physical inventory (416 units). Source: Dean Short, October 11, 2022, 2022 Q3 Real Estate Market Report, www.caborealestateservices.com

So with more pre-construction inventory in the area, the legal revision of pre-construction sale agreements is becoming a trend.

Whereas the Mexican legislation is fairly adequate for this type of real estate transactions from the civil and commercial standpoint, as of September 22, 2022 a new executive regulation became effective to protect customers of pre-construction projects.

The new executive regulation NOM-247-SE-2021 encompasses the latest guidelines for pre-construction transactions, as a result of an ongoing effort to protect customers since the Customer’s Protection Law was issued in 1992.

Unfortunately, most of the real estate developers in Los Cabos do not follow the customer’s protection guidelines for pre-construction projects, which lead clients to search for legal advice in the revision of their pre-construction purchase contracts.

These are the 5 most common legal highlights I have come across in the revision of multiple pre-construction agreements, from the customer’s protection perspective:

1. Completion Date for the Unit and the Project.

Once the initial deposit has been paid, in my opinion the best payment structure for the remaining balance in a pre-construction deal, are subsequent payment installments condition to specific and verifiable completion stages of building, such as: breaking ground, foundation, roof, floor, carpentry, etc. and a final payment prior to closing.

This allows buyers to verify the seller’s performance and contribute accordingly, or hold payment in case of delays in the construction calendar. Final payment prior to closing is an important incentive to ensure seller transfers ownership title to the buyer, according to the agreed terms.

Normally, the pre-construction contract will include as an exhibit the plot plan of the unit under construction. However, most of the times buyers and sellers do not include the description of the amenities and common areas of the project in the pre-construction agreement.

This could lead to confusions and misrepresentations in the future if the finished project is not consistent with the renders or brochures. The legal suggestion is to include a detailed description of the common areas and amenities featured in the project, including specific completion dates according to what is been offered by the sales team.

• Completion Date for the Condominium Regime

The condominium regime is processed by the developer before the City and includes a detailed description of the project, including surface, measures and boundaries of each individual unit, common areas of the project, such as: gym, pool, club house, green areas, etc. and the Rules and Regulations that will govern the community with important provisions for HOA assemblies, assessments, homeowner’s rights and restrictions, among others.

The incorporation of the condo regime is essential to begin with the closing process and transfer title to the buyer, so it is important to establish a specific completion date for the seller in the pre-construction agreement.

• Customized Features and Upgrades

“If it’s not in writing, it does not exist”. Any customized feature and/or upgrade agreed with the seller must be included in the pre-construction agreement in writing. Developers normally offer furniture, appliances or upgrade packages to the buyers that will be included as an exhibit to the pre-construction agreement.

If the purchase price includes a parking lot, garage, storage room or any additional element in or outside the Unit, it is important to include it in the pre-construction agreement.

• Guarantee for the Unit and fixtures

Normally the pre-construction agreement will include a one year guarantee as of the delivery date of the Unit to the buyer, for construction works, hydraulic, sanitary and electrical facilities, and there is no room with the seller for negotiation in these type of clauses.

However, it is important to know that according to the Customer’s Protection Law, buyers are entitled to a 5 year guarantee for structure deficiencies of the Unit; 3 year guarantee for waterproof; and, 1 year for any other issue in the Unit. This rule applies even if the developer does not want to include it in the pre-construction agreement and it cannot be waived by the parties.

• Penalties in case of default

Usually, the pre-construction agreement will include a penalty of 20% of the total purchase price in case of buyer’s default, amount that will be retained by the seller and any remaining balance returned to the buyer. However, in case of seller’s default, pre-construction agreements normally only provide that the seller must return all amounts paid by the buyer and without any interest.

According to the Customer’s Protection regulations, the conventional penalty in case of default of any of the parties must be “reciprocal and equivalent”, meaning that if 20% of the purchase price applies to the buyer, same should apply to the seller. In reality, there is very little room for negotiation in these type of provisions, due to the fact that the seller usually encounters multiple challenges during the construction of the project that could result in his default.

Even if the pre-construction agreement does not include a conventional penalty in case of seller’s default, the Mexican Customer’s Protection Agency has the authority to award the buyer with a compensation of up to 30% of the purchase price in case of seller’s default, which ultimately allows to balance the relationship between buyers and developers of pre-construction projects.

A great tool to verify online the reputation of a seller is to consult the bureau of customer’s claims at: https://burocomercial.profeco.gob.mx/ with the seller’s name.

If you need legal advice in the revision of a pre-construction agreement or legal representation in case of seller’s default, please contact me at jorge@calaw.com.mx or www.calaw.com.mx

Taxes on Rentals (Long-term and Vacational)

If you are planning to invest in real estate property or you already own a property in Mexico, you should know that there are different types of taxes that apply related to real estate rentals:

1. Capital Gains Tax. Capital Gains Tax (CGT) is a federal tax applicable on all income received and arising from any source, including rental income. CGT on rentals for non-residents is 25% of the property’s income, without deductions. CGT on rentals for Mexican residents can be up to 35% depending on the property’s income, with the possibility of deducting certain expenses or a blind deduction of 35% might be applicable at owner’s election (individuals). CGT is paid directly by the owner every month together with the corresponding filings.

• Value Added Tax. Value Added Tax (VAT) is a federal tax applicable to the lease of a house or a condo with furniture and appliances based on a 16% tax rate over the rent. If the house or condo is leased without furniture, this tax does not apply. VAT is paid by the tenant with the rent and reported every month by the owner together with the corresponding filings.

• Lodging Tax. Lodging Tax is a state tax applicable to the lease of a house or a condo on vacation rentals based on a 3% tax rate over the rent. Vacation rentals are for tourist purposes only, meaning people traveling temporarily out of their primary residence with recreational or any other purpose. Vacation rentals always include furniture and utilities (water, gas, electricity, Wi-Fi, among others). Lodging Tax is paid by the guest with the rent and reported every month by the owner together with the corresponding filings. Some online platforms, such as Airbnb and Vrbo collect and pay the Lodging Tax on behalf of the hosts at the time of booking.

If you own a real estate property in Baja California Sur and you wish to obtain a profit from it, you have two options to pay your taxes: A) Appoint a personal representative, who will issue receipts, pay taxes and present the corresponding filings on your behalf; or, B) Change your immigration status to a Mexican resident and request a taxpayer number, to comply with your tax obligations and contribute with Country’s development.

Ejido Land in a Nutshell. 7 Basic things to understand before investing:

A vast majority of beaches and country side land around urban areas of Baja California Sur are “Ejido” land. If you are looking to invest in one or more of these properties, here are 7 basic things you must know about “Ejido” land:

1. The “Ejido” is a legal entity.
2. Mexico’s Federal Government is allowed to transfer Real Estate property to “Ejidos”, with the ultimate goal of achieving the people’s and Country Agricultural development.
3. The “Ejidatarios” are rightful members of the “Ejido”, with use and voting rights over the “Ejido” land and its water.
4. Only Mexican Citizens are allowed to become “Ejidatarios”.
5. The “Ejido” land is not private property and it cannot be sold while it remains under the “Ejido’s” domain.
6. Only a democratic resolution from the “Ejido” members can authorize the disincorporation of a parcel or portion of the “Ejido” land, in favor of an individual “Ejidatario” to own it as private property.
7. “Ejidatarios” are allowed to transfer title of a parcel subject to certain legal requirements, such as the right of first refusal “derecho del tanto” of the family members and the “Ejido”.

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When purchasing properties coming from “Ejido” land, only after the “Ejido” requirements have been met according to the Agrarian Law, a regular closing process must be completed to obtain title to the property by means of a Trust “Fideicomiso”, Mexican Corporation or any other legal vehicle to own property according to the purchaser’s needs.

CA’A Conde, Alvarez & Asociados, Attorneys at Law.  www.calaw.com.mx

State Law for Real Estate Professionals

By Jorge M. Conde, Esq.

If you are entering the real estate market, the first thing you will encounter while trying to find help for buying, selling or renting a property is a Real Estate Professional; yet only 17 out of the 32 states in Mexico regulate the services of Real Estate Professionals.

The state of Baja California Sur has recently joined the list. On June 27^th, 2017 the local Congress approved the “Law to Regulate Real Estate Professionals in Baja California Sur”, which requires all Real Estate Professionals to obtain a License and register before the local Registry of Real Estate Professionals, to provide brokerage services to the public.

To obtain a License, legal entities (brokers) and individuals (agents) shall submit among other documents, legal documentation evidencing their existence/identity, Tax Registry Number (RFC), a certificate of criminal background check and most important, evidence their professional qualifications (exceptions apply during 2019). Legal entities with a License bears responsibility for the actions of the real estate agents or advisors working under its supervision, who should also suffice the same adequate training as the licensed individuals.

Buying a Timeshare? Five red flags to watch for

What is a Timeshare? Timeshare also known as “Vacation Ownership” is basically where you buy the right to spend a certain period of time (typically a week or more) at a specific hotel resort in exchange for an initial buy-in amount plus an annual maintenance fee .

The sale of timeshare in Mexico is well regulated as the Federal Consumer Law requires for specific provisions to be included in all timeshare agreements which protect the consumer. To ensure the above, all timeshare providers must register their timeshare agreement before the Federal Consumer Agency (PROFECO) and prove that they can provide said services. When buying a timeshare ALWAYS LOOK FOR THE REGISTRATION NUMBER ON THE TIMESHARE CONTRACT.

Despite the efforts to regulate the timeshare industry, there are many unregulated “timeshare providers” operating in Los Cabos, looking to make a quick buck by defrauding their clients. Here are 5 red flags to watch out for before purchasing a timeshare.

Landscape and Ocean View Protection

By Jorge M. Conde, Esq.

The Municipality of Los Cabos has an extension of 119 miles of coastline between the Migriño area (at the Pacific Ocean) and the Buena Vista area (at the Gulf of California).

With approximately 15,000 hotel rooms and 2,500 more currently under development, Los Cabos is one of the tourist sites most preferred by visitors to Mexico by foreign tourist and also at the national level. This nature sanctuary has stunning natural landscapes and impressive biodiversity that combines the ocean and the desert like few places in the world, as well as offering unsurpassed weather conditions irresistible to the visitors.

Despite the benefits that provide the protection of landscape in environmental, social and economic levels, the growth of the local economy is accelerating the transformation of various landscapes, in some cases degrading, with the corresponding consequences to the community. Therefore, the landscape has become an important element of protection embraced in the human right to a healthy environment, health, culture and identity.

What to expect when buying real estate in Baja

By Jorge M. Conde, Esq.

Mexican real estate transactions are not carried out in the same manner as United States real estate transactions.

The Mexican Federal Constitution declares that foreigners are not allowed to hold direct title to real estate property within the restricted zone. The restricted zone encompasses all land located within 50 kilometers (about 31 miles) of any Mexican coastline inland and 100 kilometers (about 62 miles) of any border. We are talking about most of the territory of Baja California and Baja California Sur. This limitation comes from historical reasons of military protection.

Nonetheless, under Mexican law, Foreigners are entitled to acquire real estate property within the restricted zone through a “Fideicomiso”. Fideicomiso is a Mexican type of contract. There are three main parties involved in the Fideicomiso for real estate acquisitions for foreigners: (i) The seller, which is called: “Fideicomitente”; (ii) a Mexican Bank, called “Fiduciario”; and (iii) the foreigner purchaser called: “Fideicomisario” or beneficiary.