I continue the Mexican Real Estate 101 series with a list below of some of the essential due diligence actions that should be performed before entering into a Mexican real estate transaction.   

Investors in Mexican real estate should always consult with a licensed Mexican real estate attorney before buying any property in Mexico.

1. Title Review.  The buyer’s Mexican counsel must review the chain of title by analyzing certified copies of the title deeds obtained from Public Registry of Property located in jurisdiction of the real estate.  Any liens and encumbrances on the property will appear in the property records obtained from the Public Registry.  The property records are kept in different books, which are page numbered and organized in volumes.  If possible, a recognized title insurance company in Mexico (such as Stewart Title, First American Title Insurance, Chicago Title, etc.) should perform a supplemental title review in addition to the review performed by local counsel.  If the title review indicates that the chain of title is unclear or interrupted, further research should be performed to determine if there is a serious title defect.  If the title defect involves corrections to the metes and bounds property description, the problem is generally solved by requesting that corrections be made at the Public Registry, provided that the modifications have been agreed to in writing by the owner of the adjacent land.  If such agreement cannot be obtained, judicial action may be necessary, which could be costly and protracted and the buyer may instead decide to terminate the transaction.
2. Title Insurance.  If possible, the buyer should obtain a commitment for title insurance from a recognized title insurance company in Mexico.  Stewart Title and First American offer owner and mortgagee policies adapted from the American Land Title Association (ALTA) policy forms.  Policies can be issued in either U.S. Dollars or Pesos and can be written to insure any recognized land interest in Mexico, including direct ownership, leasehold, trust, or beneficial ownership.  Among the risks insured are mortgages, mechanic’s and tax liens, easements, contractual obligations restricting the use of the property, and adverse possession.  Approximate cost for title insurance is .0065% of the total transaction amount.
3. Availability of Utilities. Buyer’s counsel should review and analyze availability of water, sewer, gas, electric and telephone services to the property provided by the applicable local authorities.  Water utilities are particularly important if the target property is located in a dry region and the proposed development includes a golf course or other feature that requires irrigation or significant water use.  Local counsel should review the arrangement between the property and the local water utility provider, which should have a National Water Commission (Comisión Nacional del Agua) concession.  Water provided under a water supply agreement with the local water utility company must derive from a federal NWC concession.  Buyer’s lawyer should confirm that the water supply agreements are in full force and effect and that they provide certainty to the buyer, both in terms of amounts of water required and for the time periods required.  If water is unavailable, other options (e.g., a well or desalination plant) should be considered.
4. Zoning/Use Restrictions; Condominium Regulations. Buyer’s counsel should confirm that the current and intended uses of the property do not violate zoning, development, and land use (uso de suelo) laws and regulations.  Each Mexican municipality of regional importance will have an urban development plan.  Buyer’s counsel should determine whether there are any limitations on construction of the target property.  Most urban development plans contain density limitations.  If an existing condominium is to be purchased, local counsel must review the condominium regulations regarding design and architectural restrictions and any review process required.
5. Survey/Legal Description of Property. Although surveys are not obtained in all real estate transactions in Mexico, it is strongly recommended that buyer obtain a real estate survey prepared by a qualified Mexican surveyor showing the boundaries and measurements of the property.  Surveyors in Mexico are now making use of GPS to create detailed surveys.  
6. Certificate of Encumbrances. Buyer’s counsel should request a certificate of encumbrances (Certificado de Gravámenes) from the Public Registry of Property.  This certificate will enable the Mexican Notary Public to assess whether the property has any liens, encumbrances or claims attached.  At a minimum, this document must contain the following information: (i) the time period covered by the certificate; (ii) the surface area of the property; (iii) a metes and bounds description of the property; (iv) the name of the property owner; (v) the classification the property (urban or rural); (vi) a legal description of the ownership of the property (e.g., whether held in trust, owned by several individuals, etc.); and (vii) the name and signature of the Public Registrar and the official seal of the Public Registry of Property.
7. Tax Certificate. Obtain a tax certificate from the Municipal Treasury Office showing that all property taxes are paid in full.  At a minimum, this certificate should contain the following information: (i) the property tax identification number (clave catastral); (ii) the tax appraisal value; (iii) the name of the owner; and (iii) the signature of the department head and seal of the Municipal Treasury Office.  It is not uncommon in Mexico for property owners to fail to pay taxes for several consecutive years.  In order to register the public deed in the Public Registry of Property after the sale has closed, the taxes must be paid in full.  In the State of Baja California and certain other Mexican states, the tax certificate must also state that there are no pending debts with local authorities such as the State Water Services Board.
8. Environmental Laws. Buyer should confirm that the property is in compliance with all environmental laws, preferably using well-qualified Mexican environmental auditors (of which there are few; Buyer should check background and experience before hiring).  If the real estate is acquired to develop a tourist or industrial activity, an environmental impact authorization may be required from the applicable environmental authorities.  Other specific studies may be necessary depending on type of development (e.g., geological studies if buildings are to be constructed on a hillside).
9. Appraisal. Obtain an appraisal (Avalúo) of the property from a certified appraiser.  An appraisal of the property is required in connection with any sale by Mexican real estate law.  A Mexican Notary Public will generally obtain the appraisal on behalf of the parties.
10. Federal Maritime Zone.  Beachfront property is likely to be located in the Federal Maritime Zone, which is the area located along the full length of the Mexican coast and twenty meters inland from the mean high tide line.  Land in the Federal Maritime Zone is public property, but the Mexican Government often grants 15-year concessions to landowners for exclusive use of the property.  Buyers of coastal property should confirm (1) that the payment of dues on the concession, if any, is current, (2) if the concession is soon to expire, whether it may be renewed, and (3) whether third parties may seek or maintain rights to the concession.
11. Labor Issues.  If the buyer seeks to acquire an existing hotel/resort development, factory, etc. that has employees, buyer’s Mexican labor and employment counsel should review all existing collective bargaining and individual labor agreements with unionized and other employees to confirm that the transaction will not violate the terms of those agreements and determine any obligations of seller or buyer in connection with the transaction (severance obligations, etc.).  A purchase of the assets of a Mexican entity invokes the concept of “employer substitution” under Mexican labor law, which renders the buyer liable jointly with the seller for all of the labor compensation and other labor obligations of the seller for six months from the date the employees or union are notified of the substitution.  After six months, only the new employer (buyer) is liable.  The buyer and the seller may agree in writing to limit such liability.

In the wake of TSD Loreto Partners, S. en C. por A. de C.V.’s June 6, 2009 announcement that it had suspended all operating and construction activities on the Loreto Bay project, I decided to perform an informal internet-based investigation on the companies involved in the development of the project.

At the top level appears to be The Trust for Sustainable Development, a Canadian non-profit corporation.  According to its website, the Trust first identifies and provides seed financing for sustainable projects.  It then creates a for-profit company to develop each project.  The Trust has developed (or commenced the development of) projects in Canada, the U.S., and, of course, Loreto Bay, Mexico.  We did not investigate the projects the website says were developed in connection with the Trust.

The Trust created several affiliated for-profit entities to develop the Loreto Bay project.  TSD Loreto Partners, S. en C. por A. de C.V., a Mexican partnership, is the principal Mexican development entity.

The Loreto Bay Company, an Arizona corporation, appears to have initially been the principal U.S. sales and marketing arm for the project.  Based on public records obtained from the Arizona Secretary of State, Mr. David Butterfield (who is discussed below) served as Chairman of the Board of the Loreto Bay Company, Mr. James Grogan served as Director and President & CEO, and Mr. David J. Shreene served as Senior Vice President and Secretary.

In January 2007, the Loreto Bay Company was merged into Baja Developments, LLC, a New York limited liability company, the Manager of which is The Trust for Sustainable Development.  Upon the merger, Baja Developments, LLC likely became the principal U.S. sales and marketing entity for the Loreto Bay project.

Another entity indirectly involved in the project was a British Columbia entity named Baja Developments Limited Partnership, which was probably Mr. Butterfield’s holding company for his investment in TSD Loreto Partners and/or Baja Developments, LLC.

One or more of Baja Developments, LLC, Baja Developments Limited Partnership, and the Loreto Bay Company likely controls a portion of TSD Loreto Partners, but there is no public document by which we could confirm the ownership structure of TSD.  The formation documents of TSD filed in the Public Registry of Commerce in Mexico located in its state of organization would show only the initial partners of TSD and not any subsequent changes in ownership structure (we have not sought to obtain copies of TSD’s Public Registry documents).

Based on the press release discussing the formation of a joint venture between the Loreto Bay Company and Citi Property Investors to develop the Loreto Bay project, we speculate that the remaining portion of TSD is owned by Citi and other persons.  However, we would have expected that Citi would have preferred to make its equity investment in the Loreto Bay project through a U.S. joint venture entity, such as Baja Developments, LLC, in order to avoid the difficulty of enforcing joint venture obligations under Mexican law.

The Trust for Sustainable Development is led by Mr. Butterfield, whose LinkedIn profile is available here.  The profile indicates that Mr. Butterfield is a Director at Arizona State University’s Global Institute of Sustainability and the President of ICC Power, Inc., which the profile says was formerly International Composting Corporation.  The Institute’s website no longer names Mr. Butterfield as a Director and ICC Power, Inc.’s website is under construction.  International Composting Corporation has a website, which may or may not be the same International Composting Corporation that Mr. Butterfield is referencing on his LinkedIn profile, but we did not find any mention of Mr. Butterfield on that site.  Mr. Butterfield probably has not recently updated his LinkedIn profile.

(Note: Loreto Bay’s developers have taken down the original project website, which may now be viewed via the Wayback Machine.)

In a July 24, 2008 post, Mexico Law Blog questioned the viability of the ambitious 6,000-unit Loreto Bay tourist development project called Loreto Bay, located on around 8,000 acres adjacent to the hamlet of Loreto on the east coast of the Baja peninsula.  Although the project, particularly its goal of self-sustainability, is impressive, its timing is unfortunate.

The San Diego Times has reported that the project developer, TSD Loreto Partners, S. En C. por A. (”TSD“), has sold fewer than 800 units and suspended construction and operations.  The report also said that Fonatur, Mexico’s tourism development agency, was asking for “custody” of the project so that it could reopen a golf course and a hotel while TSD searches for a buyer.  The principal lender for the project is Citigroup Property Investors.  Whether TSD has breached its loan covenants is unknown, but highly probable. 

StarkSilverCreek.com reports that TSD is subject to a lawsuit in Arizona, in which Baja Developments, LLC, a New York limited liability company, alleges breach by TSD of a services agreement and seeks damages in excess of $7,000,000.  According to a detailed article about the Loreto Bay project in the Phoenix Business Journal, Baja Developments, LLC was a company formed by The Trust For Sustainable Development (note the “TSD” initials), a Canadian non-profit, federally chartered land and community development corporation, that arranged financing for the Loreto Bay project.

Carlos Slim’s industrial conglomerate, Grupo Carso, S.A. de C.V. (MXK: GCARSOA1), plans to spin off its real estate assets into a new company that would trade on the Mexican stock market, according to a Reuters report.  The company would likely include Carso’s mall construction operations, the report said.

Carso, which recently announced a US$800 million multi-use real estate project near Mexico City, has industrial, retail, infrastructure and construction businesses.

Carlos Slim’s conglomerate Grupo Carso announced that it will invest US$800 million in the construction of a multi-use real estate complex in the Irrigacion neighborhood located in northwest Mexico City to be named Plaza Carso, which will include retail and office space, residential apartments, and a contemporary art museum and movie theatre, according to a Sentido Comun report.

The shopping center, which will offer 45,000 square meters of retail space, will be housed in an old General Tire plant and include as anchor tenants Sears, Sanborns, Mixup and Banco Inbursa.  Three separate towers will house 430 residential apartments and a separate corporate office building will hold office space.  Museo Soumaya will run the musuem, which will hold the magnificent Jumex Collection of contemporary art.  The real estate complext is expected to be completed in 2010.

An interesting piece of Quintana Roo island property has been put on the market for US$5,000,000. 

The island, called Cayo Culebra (Snake Key), appears to be privately owned by one Maria Vasquez Rubio, and consists of approximately 89 acres (36 hectares) of island land in the beautiful Mayan Riviera.  The catch is that the only human use of the property permitted is scientific ecological research; the construction of permanent structures is prohibited.

The listing agent is the LandRod Law Firm and Real Estate Office (in Mexico, a law firm is permitted to act as a real estate brokerage and a law firm notwithstanding the potential conflicts), which also has several other nice looking coastal properties listed for sale.

Starwood Hotels & Resorts (NYSE: HOT) announced on November 7, 2008 the debut of its St. Regis brand in Latin America with the opening of the St. Regis Punta Mita Resort, a joint venture between Starwood Hotels & Resorts and Ideurban Consultores, which constructed the project, according to a company press release. 

The resort is located in Bahia de Banderas, in the Riviera Nayarit, just north of Puerto Vallarta.

The land on which the resort is located is owned by Grupo 1818, S.A. de C.V., a company owned by a group of undisclosed Mexican real estate investors.

Mexican real estate development company Consorcio Ara, S.A.B. de C.V. (MXK: ARA) has commenced work on a major real estate development project called Citara on land located north of Mexico City in Huehuetoca, state of Mexico, according to a Mexbiznews.com report.  The report said that the project was expected to include 26,000 housing units, 25 schools (kindergarten through secondary school), green spaces, and commercial and industrial facilities.

Consorcio Ara warned on October 22, 2008 that it did not expect revenue growth in in 2008 compared with the previous year because of choppy markets and delay in new residential construction.

Mexican billionaire Carlos Slim Helu’s real estate holding company, Inmobiliaria Carso, S.A. de C.V., has acquired a 7.64% stake in Edmond, Oklahoma-based Bronco Drilling Company, Inc. (NASDAQ: BRNC), which has a contract to drill three wells for Pemex, according to an October 22, 2008 Schedule 13G SEC filing by Bronco.

All of the outstanding voting shares of Inmobiliaria Carso are controlled by a Mexican trust, the beneficiaries of which are Carlos Slim Helu and family members Carlos Slim Domit, Marco Antonio Slim Domit, Patrick Slim Domit, Maria Soumaya Slim Domit, Vanessa Paola Slim Domit and Johanna Monique Slim Domit. 

Inmobiliaria Carso purchased 2.2 million shares of Bronco on October 15, 2008 for approximately US$15 million, based on the company’s share price at the time of acquisition.

Grupo Aeroportuario del Sureste (Asur), S.A.B. de C.V. (NYSE: ASR) has acquired approximately 321 acres of land in Huatulco Bay, Oaxaca state, for approximately US$21.6 million, according to a report in Business News Americas (BNA).

Asur acquired the land on October 20, 2008 from Mexico’s National Trust for Tourism Development (FONATUR).  The Mexican government has sought to make Huatulco a new pacific coast tourist hub.

The terms of the acquisition require Asur to build 1,300 hotel rooms on the property over a four-year period, the BNA report said.