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Column 041210 Thompson

Monday, April 12, 2010

Mexico and Direct Foreign Ownership of Coastal Property

By Barnard R. Thompson

Just a little more than a year ago Mario López Valdez, a Mexican senator who represented the state of Sinaloa, proposed an amendment to Article 27, fraction 1 of the Political Constitution of the United Mexican States, an initiative that sought to ultimately allow full-fledged ownership by foreign nationals of land in Mexico's so-called "restricted zone."  That would include coastline properties within the 50 kilometer [31 miles] strip inland, and 100 kilometer [62 miles] inward land from its northern and southern international borders.[1]

 

Beyond those restricted areas, Mexican law already permits foreigners to own property outright as long as certain conditions, that do not trouble many people, are met.

 

The bill submitted by López, while being a beginning was in fact too narrow in scope, and next it went to the senate's Constitutional Issues, and Legislative Studies, committees, where thereafter it seemed to wither on the vine.  And it appeared dead when Senator López (who is popularly known by the acronym "Malova") stepped down from his seat last month, to run for the governorship of Sinaloa.

 

Sidebar to the land ownership question, Malova asked for the requisite leave of absence from the Senate in order to run for governor.  However not as the candidate of his party, the Institutional Revolutionary Party (PRI) [2], for he resigned from the PRI and was promptly drafted to be the National Action Party's (PAN) candidate, in a deal obviously struck beforehand with party bosses.  Yet at this writing many of the PAN faithful in the state are rallying against the party naming "a PRI candidate," and a voto nulo campaign (a call to mark ballots in a blank square and thus they become nulo — null and void) has been developing ever since Malova began his pre-candidate campaign on March 27.  PAN members in Sinaloa will elect their gubernatorial candidate on April 18, and the state elections will take place on July 4.

 

However, getting back to property ownership matters, a new and far more comprehensive initiative was introduced in the senate on March 9, 2010, cosponsored this time by eight senators (six from the PAN; one PRI; and one Convergence).  Three of the Panistas are from Baja California, with the other three representing Sonora, Sinaloa, and Veracruz; the Priista is from Nuevo León; and the Convergencia member hails from Oaxaca.

 

And this bill, that seeks to end the constitutional prohibition on direct foreign ownership of property within the restricted zones, cuts straight to the chase, saying in its preamble: "The proposal is to eliminate the restricted zone and make it possible for foreigners and foreign companies to acquire direct control over lands and waters without more restrictions than those indicated in the legislation that may become applicable, and in compliance with the terms of the respective contracts.  …"

 

Fundamental to any change is the need to first amend the Mexican Constitution, specifically the aforementioned Article 27, along with several other laws and regulations.  And such actions always bring about arguments regarding sovereignty, foreign intervention and national security.

 

Speaking on behalf of the eight who introduced this latest initiative, Senator Javier Castelo Parada (PAN, Sonora) said that to abolish the prohibition on foreigners owning land in the restricted zone would "in no way harm sovereignty and national territory, [or] legal properties it may protect, and [its] justification is no longer valid."

 

Article 27 of the Mexican Constitution, which deals with ownership of lands and waters inside Mexico's borders, states in the relevant first paragraph of fraction 1: "Only Mexicans by birth or naturalization and Mexican companies have the right to acquire ownership of lands, waters, and their appurtenances, or to obtain concessions for the exploitation of mines or waters.  The State may grant the same right to foreigners, provided they agree before the Ministry of Foreign Relations to be considered as nationals with respect to said properties, and not to invoke for that reason the protection of their governments in matters relating to the former; under penalty, in case of noncompliance with the contract, of losing to the Nation the properties that they might have acquired in virtue of the same.  Under no circumstances will foreigners be able to acquire direct ownership of lands or waters within a zone of one hundred kilometers the length of the borders and fifty kilometers on the coasts."

The latest draft initiative, to amend Article 27 of the Mexican Constitution, changes fraction 1 (first paragraph) to read as follows: "Any person has the right to acquire ownership of lands, waters and their appurtenances, or to obtain concessions for the exploitation of mines or waters, in the terms of applicable secondary legislation."

The introductory portion of the bill goes into historical details, noting that restricted zone stipulations were included in the 1917 Mexican Constitution based on worries of new colonialization attempts by foreigners, and due to military concerns regarding strategic defense.  These and other factors related to sovereignty and national security are said to be obsolete and unnecessary today.

It also discusses the fideicomiso, Mexico's bank trust instrument that in one form or another has been in place since 1937.  After real estate is put in a fideicomiso, today the trust holders can use the property as if it were their own.

In 1971, during the first year of the presidency of Luis Echeverría Álvarez, fideicomisos went through a major change that authorized the Foreign Ministry to grant banks and credit institutions authority to acquire trust real estate in the border or coastal zones for industrial and tourism use.  And they were authorized to grant permits to foreigners for the exploitation and use of those properties through the issuance of a 30-year trust.

Since then, and for the most part to encourage foreign investment, the fideicomiso rules and regulations have been extended to allow beneficiaries a 50-year trust, which can be renewed by the interested party.

Furthermore, modern day fideicomisos, for homes, tourism developments, maquiladoras, industrial parks and other uses, have proven to be not only popular but too profitable, and the trust holders have demonstrated they are good "citizens."  This to the degree to debunk negative claims and concerns regarding sovereignty, foreign intervention and such, insofar as restricted zone properties have virtually been in the hands of foreigners for years.

Regarding property ownership in the restricted zone, amendments will also have to be made in other laws, codes and decrees, such as the Foreign Investment Law of 1993 (and its Regulation) that, in part, parrots the Constitution in Articles 10 and 10A.  These reforms are addressed in the draft initiative.

Also considered is the need to eliminate the "Calvo Clause," with respect to property ownership in the current restricted zones, in those documents and contracts where it may appear.  The Calvo Clause is a provision under which foreign investors waive their rights to be protected by their national laws and accept the jurisdiction of the courts of the host country.  In the case of Mexico, when the Calvo Clause is in force foreigners agree to consider themselves Mexican nationals with respect to their rights and obligations in Mexico, and they consent not to call upon their home governments to intervene on their behalf.

One legal chapter that quite probably will not be changed is Title Four, Article 119, of the General National Properties Law that governs Mexico's Federal Maritime Land Zone.  While this is not of great consequence, it is important to know that shoreline and beach property up to 20 meters inland from the mean high tide line is federal property.  And while concessions can be obtained for use of the land adjacent to property owned (or held through a fideicomiso) by an individual or company, this 20-meter Federal Maritime Land Zone is public domain.

Finally, as to restricted zone trusts currently held by foreign investors, and Mexican companies with an admission of foreigners clause in their trust agreements, a closing provisional clause in the bill notes that they will be able to acquire ownership of their properties when this decree goes into effect, in accordance with the terms of the new and applicable legislation.

All of these issues are discussed and contemplated in the draft legislation now before the two committees of the Mexican Senate, and the broadened sponsorship of the bill suggests that this time the legislation might move forward.  Still, in Mexico almost everything takes longer than one was told to expect.

 

As for Senator Castelo, he said that approval of this initiative to allow foreigners ownership of land in today's "restricted zone" would bring in investment that creates much needed jobs, plus it would promote Mexico's competitiveness.  These positives plus shots in the arm for tourism, economic development, and maybe even optimistic publicity.



[2] "Wrongdoing Claims Surface Quickly in Mexican Campaign," by Barnard R. Thompson, MexiData.info, January 25, 2010

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Barnard Thompson, editor of MexiData.info, has spent 50 years in Mexico and Latin America, providing multinational clients with actionable intelligence; country and political risk reporting and analysis; and business, lobbying, and problem resolution services.

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